How institutional independence allowed the central bank to indulge in gross mismanagement and incompetence
THE LAST WORD | ANDREW M. MWENDA | Last week was the most shameful for Bank of Uganda. During hearings before the parliamentary committee on Commissions, Statutory Authorities and State Enterprises (COSASE) it was exposed that BoU sold the assets and liabilities of the now defunct Crane Bank Limited (CBL) irregularly in blatant violation of the law.
First, a caveat: I am biased when it comes to issues of CBL. Its former owner, Sudhir Ruparelia, is my friend. I was a customer of CBL as were all businesses I am associated with. In this capacity, I experienced the high quality of service CBL extended to their customers and which was tailor-made to address the specific characteristics of our society. Therefore, my personal bias and interest should not blind the reader to the issues I raise.
BoU took over statutory management of CBL on October 20, 2016. It then, on November 30, 2016, entered an agreement with DFCU Bank to buy CBL’s assets and liabilities and gave DFCU unlimited access to CBL records.
Clearly BOU had no intention or desire whatsoever to stabilise CBL; its intention was to liquidate. On December 9, 2016, BOU asked DFCU to submit a bid to buy the assets and liabilities of CBL.
The first draft forensic audit report by PricewaterhouseCoopers (PWC) on CBL came out on January 13, 2017. So, essentially, BoU had invited DFCU to buy CBL assets and liabilities before it had an inventory of these assets and liabilities. How can you sell what you do not know? Secondly, BoU did all this without a forensic report showing the present value of the assets it was selling. Without a reserve price BoU simply asked DFCU to pay whatever it wished.
Now we must remember that the Financial Institutions Act (FIA), clearly states that: “In determining the amount of assets which is likely to be realised from the financial institutions assets, the receiver shall a) evaluate the alternatives on the present value basis, using a realistic discount rate; or b) document the evaluation and assumptions on which the evaluation is based, including any assumptions with regard to interest rates, asset recovery rates, inflation, asset holding and other costs.” BoU disregarded these provisions completely.
DFCU grossly undervalued CBL assets knowingly and paid peanuts. Hence, a month after buying them, it re-valued them at prices five times higher. For example, CBL had valued its branches at Shs90 billion. DFCU valued them at Shs10 billion and paid stamp duty at that price. It re-valued them at Shs48 billion immediately after. Is this not tax fraud?
Why did BOU act with such recklessness and DFCU accept to go along with this blatant violation of the law if the two were not colluding to defraud the shareholders of Crane Bank and the taxman? For two decades, BOU has adopted a policy where, whenever a commercial bank is in distress, their only solution is to liquidate. They make no consideration of any alternative; like how they can rescue a bank. Over the years, I have realised that this is a result of four factors in order of their importance: ideology, impunity, incompetence, and corruption.
Ideologically there is hostility to local ownership of banks. We assume that bankers do insider lending and other practices that undermine the viability of a bank. This bias is not pulled out of thin air. It is the response to this that matters. The lesson we get from such mistakes is criminal prosecution of the culprits, which silences them. BoU then hands over the local bank to those it wishes in sweetheart deals that suggest collusion between BoU and the buyers.
A business, like a person, grows from infancy to maturity. In infancy, it will make many mistakes and suffer the problems of incompetence, mismanagement, and even fraud. In practically every enterprise, these mistakes should be opportunities for learning, correcting mistakes, and improving on performance. Every person, organisation, business or country grows through such feats and starts.
The ideological problem in Uganda is that where local firms are involved, such mistakes become the excuse and the justification for shutting them down.
To kill a business because of these mistakes is like punishing a child of one year because it pees and plays in its own pee. This has led us to a situation where the commanding heights of our economy are owned by foreign firms. Ugandans only work in them as employees. Hence profit repatriation, transfer pricing and other illegal remittances by multinational firms are sucking the country dry.
BoU officials have defined their role narrowly i.e. to achieve financial stability. This is helped by the FIA. In pursuit of this narrow objective, BoU officials abuse their independence by acting with impunity, intimidating, and blackmailing owners of distressed banks with criminal prosecution to unfairly dispossess them. In cases involving local owners they had also jailed some of them. This suppressed any challenge to the criminal and fraudulent way BoU acts.
Previously no one questioned whether BoU followed the law or whether their claims against any given failing bank were true. Indeed, no one asked whether the only option available to the central bank was to liquidate a bank in distress. Because everyone respected their independence and believed they were doing the right thing, the people at BoU felt omnipotent. Thanks to Sudhir, he was the only dispossessed bank owner who decided to fight back; a factor that has exposed BoU incompetence, impunity, and criminality.
I personally experienced this impunity and blackmail. During a meeting to resolve the problems of CBL at the ministry of Finance, Justine Bagyenda, then Executive Director Bank Supervision, told me point blank: “we are the state and were going to destroy Sudhir and take all his property, including that private home he is very proud of if he does not play ball.” Today I feel proud that I live in a country with strong institutions to check this kind of impunity. As we know, it is BOU managers like Bagyenda not Sudhir, who are in the dock.
Here was the crisis at BoU: Bagyenda lacked basic intellectual ability to understand the macro economic challenges of Uganda, and how to resolve banks in distress with strategic foresight. This was compounded by that fact that, while intellectually astute, Deputy Governor Louis Kasekende approaches bank issues through highly technical and theoretical lenses. To make a bad situation worse, Governor Tumusiime Mutebile was too ill to add anything valuable.