The current financial crisis in the West has exposed many
myths that have informed Uganda’s banking policies over the last decade. One
such myth was that international banks are well managed; that they cannot
suffer a meltdown. This myth has made the governor of Bank of Uganda, Emmanuel
Tumusiime-Mutebile, resist increasing local ownership of banks arguing that it
would put the financial sector in jeopardy.
Today, Uganda’s commercial banking industry is dominated by
Western banks ‘ Stanbic, Standard Chartered, Barclays and Citi Group, Baroda,
Orient, Eco, KCB, Equity, etc. Only Crane, Centenary and the National Bank of
Commerce are locally owned out of 18 banks. More than 85 percent of the banking
assets are in foreign hands.
Under colonial rule, Ugandans were excluded from the banking
sector. The banking rules and requirements treated the African with a lot of
suspicion. When we got independence, government sought to increase local
participation in the banking sector through state ownership of banks. Thus, was
born Uganda Commercial Bank and the Cooperative Bank. These were supposed to
create a banking sector that was responsive to the needs of Ugandan businessmen
and women.
Later in the late 1980s and early 1990s, there was an
attempt to establish local privately owned banks. Crane, Sembule, Nile Bank and
International Credit Bank (ICB) came to life. Together with state owned banks,
they controlled over 80 percent of total banking in the country. However, there
were a series of bank failures ‘ largely involving locally owned banks in
Uganda and other African countries in the mid 1990s.
Similar bank failures had caused the Asian financial
meltdown in 1996. Many commentators, especially in the West, said this was
because of ‘crony capitalism.’ In one of its World Economic Reports, the World
Bank argued, not without justification, that the major source of these bank
failures was weak supervision capacity by central banks in Africa. This, added
the Bank, created vent for insider lending, poor risk assessment of borrowers,
cronyism and political patronage.
The World Bank argued that to rebuild confidence in the
banking system in Africa, it should be its policy to influence our governments
to deliberately and systematically eliminate local banks. The report argued
that the Bank should encourage governments in Africa to facilitate the entry of
multinational banks reasoning that given the experience and reputation,
multinational banks would be more effective in supervising their local
subsidiaries in Africa than local central banks.
This position found widespread support in Uganda. Within
government, it was supported by Mutebile, then Permanent Secretary in the
Ministry of Finance. Partly out of ignorance and out of opportunism, President
Yoweri Museveni joined the choir. In the press, it was supported by the Editor
of The Monitor, Charles Onyango-Obbo and Frank Katusiime, his colleague on
Capital Gang programme of Capital FM.
The argument that locally owned banks were suffering from
crony capitalism reflected the desire of multinational capital to re-enter
Third World markets by displacing local capital. It succeeded because the
intellectual pillars of our countries ‘ naively ‘ sided with their argument.
Thus, when it was shown that Greenland and ICB financial problems were caused
by the involvement of key politicians, a national consensus developed overnight
that they should be allowed to go under.
Although I recognised their personal failings at the time, I
also understood that it was strategically important to retain a strong local
ownership of the banking industry. But in the charged atmosphere of the time, supporting
strong local ownership of the banking sector sounded like accepting the wrongs
of Patrick Kato and Sullaiman Kigundu. (I faced a similar situation last year
when I argued that we should separate the personal/political failings of Amama
Mbabazi and Ezra Suruma from the objective substance of NSSF investment in
Temangalo land).
Be that as it may, we are now full circle to 1998. The
world’s leading banks like Citi Group, JP Morgan, Bank of America, Barclays
Bank, to mention but a few are literally bankrupt. They have all collapsed
under the weight of mountains of nonperforming assets. The solution by their
governments is not to let them go under. On the contrary, governments are
pouring trillions of dollars of taxpayers’ money to prop them up.
The lesson is simple but powerful: left alone without
effective regulation, the banking market, like all other markets, can cause
catastrophic collective harm. This is not limited to Africa but is a shared
human trait. In the US, for example, there is a case of a Mexican berry picker
in California who could not even speak English. The man was earning US$ 14,000
per year but was given a mortgage worth US$ 720,000.
Yet in spite of these gross failures, people in the West are
not arguing that because banks violated rules and are now bankrupt, they should
be left to go under. Instead, the main thrust of the economic recovery plan is
to save their banks. One hopes that African elites learn not to despise their
own people and disregard their potential for self correction. International
banks are just as likely as local ones to indulge in cronyism and other forms
of risky lending. Bad practices are not a monopoly of Africans.
Foreign banks impose rules here in Uganda that hinder most
of our people from getting the necessary banking services. Many business people
in Kikubo do not use banks in their transactions because of insurmountable
obstacles. Many will tell you that if it were not for Crane Bank, they would
never deal with banks in Uganda. This is because foreign banks employ rules in
Africa that are designed with a strong bias against Africans. I know this
because I have an account with Barclays Bank in London, Wells Fargo in San
Francisco, and Chase in New York and the rules there are lax.
The lesson, again, is simple but powerful: banking rules ‘
like all rules ‘ need to evolve organically from within the society. Otherwise,
they can be extremely unrealistic and therefore unhelpful. It is important to
learn and borrow good practices from others. But it is equally important to
recognise that every society has its particular idiosyncrasies, its norms and
habits that should inform its institutional design.
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