How the central bank’s handling of the problems of Crane Bank showed lack of imagination and strategy
I have always had high respect for Bank of Uganda (BOU) because of its management competences. Since the collapse of Uganda Commercial Bank in 1999, BOU has kept our banking industry stable hence its impressive and sustained growth. For instance, nonperforming loans as a percentage of total loans fell from 40% in 1995 to 5% in 2015. Since 1995, commercial bank assets have grown from Shs700 billion (Shs4 trillion in 2016 prices) to Shs24 trillion; deposits from Shs383 billion (Shs2.2 trillion in 2016 prices) to Shs16 trillion. All other indicators – profits, wages, branches, accounts, have grown exponentially over the same period.
These achievements were only possible because of effective regulation by BOU. However, the banking sector has grown in size and complexity and BOU seems ill equipped to handle this. Indeed a lot of the competences the state in Uganda acquired during recovery, especially in the field of economic management, are tactical not strategic. They ensure efficient resource allocation but fall far short of what is needed to transform our country from a poor, agrarian society to a modern industrial economy.
When Crane Bank’s nonperforming loans eroded its capital adequacy, BOU asked its shareholders to recapitalise it with Shs165 billion within one month. The main shareholder, Sudhir Ruparelia, said he didn’t have that cash and asked the central bank to lend it to him. He offered his shares in companies on the stock exchange and his real estate holdings as collateral. BOU refused.
Crane Bank was the fourth largest bank in the country with Shs1.8 trillion in assets and Shs1.4 trillion in deposits. It was owned by a Ugandan who had grown it from scratch in a market dominated by multinational banks like Standard Bank, Standard Chattered Bank, Barclays Bank, etc. This was a sign that Crane understood the needs to local borrowers better than foreign banks whose lending rules are set in Johannesburg, Dubai, and London.
Yet Crane had made many mistakes. The strategic challenge for BOU was to balance the Crane’s internal mistakes against the benefits it brought to Uganda’s economy generally. To be fair to BOU officials, there were some efforts to do this but they were half-hearted. Also BOU officials tended to confuse Sudhir with Crane. When he acted in a manner they felt was arrogant, they got angry and sought to use the law to whip him into line, thereby missing sight of Crane’s strategic role/value in the wider economy.
Since 2000, BOU had faced some commercial bank failures. But the banks involved were small with deposits of not more than Shs20 billion. These banks did not pause systemic risk to the banking sector. So BOU could shut them down and pay their liabilities off her balance sheet without any significant harm to the economy. The problem was that if Crane Bank failed, BOU’s balance sheet could not pay for its failure and the wider economy would suffer. This is why handling Crane required both strategy and imagination.
From July 2016 to February 2017 (when BOU sold Crane DFCU) I got deeply involved. One reason was my friendship with Sudhir. The other was my belief that Uganda is better when citizens own a big share of its economy. The third was that I have good personal relations with the top officials of BOU – Governor Emmanuel Tumusiime-Mutebile, his deputy, Louis Kasekende and executive director for bank supervision, Justine Bagyenda. Finally, the Minister of Finance, Matia Kasaija, and President Yoweri Museveni asked me to sit in some of the meetings between BOU and Crane as a citizen with some ideas.
It is through these informal and formal engagements that I realised the strategic deficits at BOU. I draw most of my ideas on strategy from war where the first principle of command is “selection and maintenance of the aim.” What was the main aim of BOU in handling Crane Bank? In my many discussions with BOU officials, I felt they saw their role narrowly, as regulation by enforcing the law. This was largely because BOU relied heavily on its lawyers for advice. So it treated Crane’s issue as a legal rather than a business problem.
Thus, instead of focusing regulatory action towards facilitating Crane to survive and thrive as a business, BOU acted as a policeman enforcing adherence to the law. Without a strategic goal, BOU engaged in a blind and mechanical enforcement of the law thereby harming the business. At the height of Crane’s liquidity crisis in September 2016, I went to Mutebile’s home with a documentary on how the U.S. Federal Reserve and Treasury resolved the crisis of their banks in 2008 – by arranging mergers, even lending money to some banks to buy others. We watched it together.
Thus, while Crane should bear a lot of blame for internal mistakes in the bank, BOU is equally culpable. It had many ways and opportunities of resolving Crane Bank issues without causing the harm they eventually did. They could, as lender of last resort, have loaned Sudhir the Shs165 billion to recapitalise the bank. This would have given Sudhir time (at BOU insistence) to find an equity investor – a solid foreign bank (since BOU does not trust locals) or force a merger with another bank. And there were many interested in the deal. Such a move would have brought in capital, new management skills and better internal controls.
The second problem was a lack of imagination. BOU asked Sudhir to recapitalise Crane within a month, which was unreasonable. To force him to do so quickly, they also stopped Crane from giving out new loans, overdrafts, bid bonds, letters of credit, performance guarantees etc. i.e. from doing any new business. These restrictions added fuel to a burning inferno as customers who could not be served began taking their money out of the bank. Crane ran out of cash to meet the day-to-day demands of her depositors. Hence what began as a capital adequacy problem caused by internal weaknesses of Crane Bank management quickly became a liquidity crisis precipitated by BOU action.
What are the lessons? BOU has managed the growth of our financial sector impressively well. However, the sector has now grown in size and complexity. To grow it further, BOU needs to change how it views its role. For now they see themselves as law enforcers. They need to begin to see themselves as business facilitators.