Bank closures headaches continue pounding BOU

Twenty-five years since the onset of bank closures in Uganda, Bank of Uganda (BOU), is yet to come out of the quagmire that is weighing down on the closure of financial institutions, specifically commercial banks in the country.

From Teefe Trust bank closure in 1993, to Crane Bank Limited Ltd (CBL) in 2016, a total of seven banks have since been closed by Uganda’s central bank.

The seven banks are Teefe bank (1993), International Credit bank ltd (1998), Greenland bank (1999), the Cooperative bank (1999), National Bank of Commerce (2012), Global Trust bank (2014) and Crane bank ltd (2016). Bank of Uganda (BoU) is the central bank of the Republic of Uganda.

The primary purpose of the bank is to foster price stability and a sound financial system. Together with other institutions, it also plays a pivotal role as a centre of excellence in upholding macroeconomic stability. Whereas that is so, circumstances surrounding the closure of banks, hit the post office box with the recent closure of CBL by BOU, in exercise of its powers under Section 87(3), 88(1)(a) & (b) of the Financial Institutions Act 2004.

Bank of Uganda took over the management of Crane bank on October 20, 2016. BOU closed CBL saying it was insolvent. But what is it that is raising a lot of concern in the closure of banks? In most, if not all the commercial bank closures, one thing that seems to come up is BOU’s failure to present reports on the defunct bank’s liquidation.

Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. In his detailed report on the closure of Greenland bank, Dr Suleiman Kiggundu (late), who also served as governor of Bank of Uganda for four years, stated that the closure was punishment for some kind of wrongdoing, but not for financial reasons.

“All young institutions have teething problems. Greenland bank was no exception as inspection and audit reports have indicated. But the bank was correcting all weaknesses here and there over time. Certainly, the reasons for the bank’s closure were not because of these weaknesses,” Dr Kiggundu said in its report on “Why Greenland Bank Closed”.

“No inspection report or audit report at any one time ever suggested closure of the bank. The final report by Ernst and Young recommended a capital injection of Shs 12 billion, among other things. But Bank of Uganda decided to close the bank instead”.

“These actions underscored the sense of urgency of the decision that was supposedly made by the central bank although there is no evidence of any Bank of Uganda board meeting discussing any intervention in Greenland bank. It was not because of fraud, losses, non-performing loans, insider lending that the bank was closed,” the report said.

Greenland bank, which did not live to realise its immense potential, was closed on April 1, 1999. Appearing before the NTV’s Fourth Estate on September 12, 2018, a senior economist and former adviser to the minister of Finance, Dr Fred Muhumuza, and a leading researcher and economist, Dr Patrick Wakida, called for a review of BoU’s sovereignty, which they said was too wide and open to be abused in the present state.

“Whereas the independence of the central bank is supposed to be limited to only monetary policy, there had been a blanket interpretation and application to include commercial bank supervision. This too much independence had created complacency, ambiguity and room for being compromised,” Dr Muhumuza said.

Dr Muhumuza contends that the supervision of banks needs to be subjected to an independent audit process.

“There has been this debate whether commercial banks supervision should be under the central bank or a separate entity; so that the central bank focuses on its core mandate of monetary policy, and not bank supervisions. There are actually jurisdictions in the world where the two are separate,” Muhumuza stressed.

Dr Patrick Wakida, the chief executive Officer, Research World International, says BOU’s résistance of audits, was creating an aura of suspicion.

“The auditor general’s report actually makes it clear for us that contrary to what we think, that the central bank is okay, there are problems there. It says there is a possibility of fraud. So, the central bank should come forward and clear the air,” Dr Wakida said:. Dr Wakida, an economist too, said: “There is a lot of wrong things that could be happening at the central bank as evidenced by the ‘fights’ between the former executive Director, central bank supervision, Mrs. Justine Bagyenda, and the governor, Professor Emmanuel

Tumusiime-Mutebile, shortly before she was fired.” “The question that Ugandans want to know and you journalists haven’t helped us to investigate is what was causing the fight? Perhaps the cause of the fight is what we are seeing in this report,” he said, adding: “In an institution that is supposed to give confidence in the economy, you do not want to be hearing those kinds of statements.”

In an interview with Daily Monitor on August 1, 2017, BoU governor, Prof Mutebile, denied direct responsibility, but instead pointed fingers at Bagyenda as being responsible for this mess.

“It was Bank of Uganda staff, but not the entire BoU. BoU has an executive director in charge of supervision,” he told Daily Monitor, adding that, while he was responsible for what went wrong as the governor, he was not criminally culpable. Asked who was criminally culpable, he said: “Ask the executive director for supervision (Ms Justine Bagyenda).”

Bagyenda was later fired, in February 2018 and replaced with former Uganda Communications Commission (UCC) director, Industry Affairs and Content (Economic Affairs), Dr Tumubweine Twinemanzi. Bagyenda, who is already subject to a joint inquiry by the Inspector General of Government and the Financial Intelligence Authority, was supposed to first appear before the COSASE on November 23.

However, in a letter to the COSASE chairperson, Abdu Katuntu, Bagyenda said she was travelling out of the country. The embattled former BOU director, supervision is currently appearing before the COSASE since Monday December 3. Despite her apologies and pleas, parliament has confiscated her two passports as the probe continues.

Bank of Uganda is now facing a parliamentary probe, triggered by a 2017 forensic audit report by the auditor general, John Muwanga, on the irregular operations of the bank and the controversial closure and sale of the commercial banks. Despite attempts to stop the audit by BOU, the parliamentary committee on Commissions, Statutory Authorities and State Enterprises (COSASE) is currently probing the closure of seven defunct commercial banks starting with Teefe Trust bank, which was closed in 1993.

The audit, which met a lot of resistance from central bank officials, led by the deputy governor, Dr Louis Kasekende, was affected after the intervention of the speaker of parliament, Rebecca Kadaga, Dr Kasekende had argued that intervention would compromise the central bank’s independence and that the information needed by the auditor general would constitute subjudice since BoU and Crane bank were in court. However, Kadaga, insisted and allowed BOU to be audited.

The confidential special audit report on the closure of all commercial banks by the central bank made public in August 2018, exposed flaws on how the central bank handled the closure of the seven banks. The probe, was sparked off by the closure of Crane bank Limited (CBL), which was taken over by Bank of Uganda on October 20, 2016.

It was later sold to Dfcu bank. Crane bank shareholders and central bank employees petitioned the COSASE and demanded investigation into undisclosed BoU/dfcu deal and other issues in the closure of other banks. COSASE is chaired by Abdu Katuntu (Bugweri).

In one of the petitions, the former Crane bank shareholders allege that they were excluded in the negotiations of the bank’s sale contrary to provisions of the Financial Institutions Act. They also argued that the agreement did not state the value of liabilities or assets taken over by dfcu.

According to Bank of Uganda, Teefe bank, which is the first in the line of the parliamentary investigations, was dissolved due to liquidity crisis. In his remarks to COSASE on November 12, BOU governor, Mutebile said: “:The seven defunct banks in the auditor general’s report were put under resolution largely due to insolvency problems.

I would like to re-emphasize to this committee and the public that the principal objective of financial regulation is to maintain stability and soundness of the banking system. This would greatly be undermined if there is erosion of confidence in the key stakeholder i.e. the depositors” Mutebile said.

However, when MPs tasked BoU officials to present an inventory report that shows the assets and liabilities that they took over, the officials could not provide any.

“We have been unable to find any inventory reports on Teefe Trust bank. So, we don’t have the inventory reports,” BoU’s executive director of supervision, Dr Tumubweine Twinemanzi, said.

“This process [probe] can’t be useful when you don’t know what you took over because an inventory report shows what you took over; assets and liabilities,” Katuntu said.

As events continue unfolding, with just one ongoing investigation of Teefe bank closure, it is going to be an uphill task for BOU to prove itself right against the flaws from the AG report allegations that are being out pressed against it. The woes of the seven closed banks seen as Uganda’s seven wonders, are not yet done, until they are done.

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