About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic



Thursday, April 14, 2011

LESSONS FOR UGANDA FROM THE INTERNATIONAL FINANCIAL CRISIS.

he 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.

amwenda@independent.co.ug
www.andrewmwendasblog.blogspott.com

1 comment:

autolinkpk said...

Fantastic post - Great explainations and thinking.I'm looking forward to what you have for us next..!
Used Kato cranes Pakistan