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.
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amwenda@independent.co.ug
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