By Muhereza Kyamutetera
In the Daily Monitor of Tuesday, May 8, I read Joseph S. Kitamirike’s article titled: Crane Bank: What is all this noise? In his article, Kitamirike unsuccessfully seeks to assign winners and losers in the takeover and rushed sale of Crane Bank’s assets and liabilities by Bank of Uganda to DFCU Bank.
He tries to justify Bank of Uganda’s sale of Crane Bank below its real value because, according to him, “in most deals done under the hammer of a regulator, there will be winners and losers” because “the regulator’s intention is not to maximise value for any party in the deal, but the pursuit of broader sector goals.”
I find these reasons wanting and see it as an attempt to hide behind “pursuit of broader sector goals” so as to cover up for the failures and inefficiencies of Uganda’s financial system and its regulators – a system that Kitamirike, a former chief executive officer Uganda Securities Exchange Limited and now a financial services and securities exchange advisor, is part of.
These attempts may be interpreted as an ill-timed cover-up for what now many have come to believe as the Central Bank’s heavy, rushed and sometimes non-strategic hand in the closure of banks- an issue that is now being investigated by the Office of Auditor General, at the instigation of Parliament.
I hope he has not forgotten that the former Director, Banking Supervision, Ms Justine Bagyenda, is also being investigated by both the Inspectorate of Government as well as the Financial Intelligence Authority over unexplained wealth and suspected money laundering.
Major questions also linger as to why the Central Bank was in a rush to sell the assets and liabilities of Crane Bank.
Another issue that perhaps the investigations by the AG will put to rest is, if indeed it is true that Crane Bank was too insolvent and its loans too toxic, how come dfcu Bank registered a 101 per cent jump in total income from Shs257.3 billion in 2016 to Shs517.3 billion in 2017, leading to a 134.4 per cent growth in after-tax profit from Shs45.3 billion to Shs106.2 billion?
Kitamirike goes on to introduce another bizarre theory that since Sudhir, as a shareholder in the bank, could have accessed bank resources to build and consolidate his real estate and hospitality businesses, “by letting the bank collapse and not diverting capital from his other businesses,” to recapitalise Crane Bank, Sudhir was the first winner in the closure and summary sale of Crane Bank.
To back up his theory, he attempts to blame Crane Bank for being the bad-boy of the industry, whose closure single-handedly reduced industry Non-Performing Loans (NPLs) to gross loans ratios from 10.5 per cent in 2016 to 5.6 per cent in 2017.
This is not true because, first of all, according to a forensic audit by PWC on behalf of BoU in December 2016, Crane Bank as of March 2016, only accounted for 20 per cent of the entire industry NPLs. By comparison, in 2014, Standard Chartered Bank had Shs200.8 billion in bad loans – which accounted for more than 42 per cent of the entire banking industry’s NPLs (Shs477 billion). The previous year (2013), they again had 29.2 per cent of industry bad loans of Shs120.1 billion out of a total of Shs411.5b in bad loans.
In both years, Standard Chartered’s bad loans were more than six times bigger than Crane Bank’s bad loans – but Standard Chart Bank was never closed.
Truth is the issue of NPLs cannot be blamed on a single individual or issue, but rather a systemic failure, which if not handled, threatens to crumble the whole economy.
Crane Bank’s biggest undoing seems to be the fact that in 2016 when most banks whose fingers had been burnt, were holding back on lending, Crane Bank, who until 2015 had modest NPLs, loosened their loan taps a little bit more.
Because of other issues in the economy such as high interest rates, high government domestic arrears and a weak Shilling, most businesses defaulted big time.
For example, some of Crane Bank’s biggest defaulters, including businessmen, are both owed big money by government. For anyone who has closely followed the banking industry over the last eight to 10 years, you will realise the failure by the central bank and or government to tame high interest rates, is the bedrock for the high NPLs and is even having wider disastrous effects on the economy as a whole. On average, interest rates between 2010 and 2018
have been at 22.6 per cent. This is also the period in which there has been a record decline in Private Sector Credit growth from annual growths of 34.1 per cent in 2010 to a mere 6.2 per cent in 2017. Again during this period, we saw, NPLs to gross loans grow by more than 5 times from 2.1 per cent in 2010 to 10.5 per cent in 2016. Although this eased to 5.59 per cent by end of 2017, this is still the 3rd highest rate in 14 years!
I have previously argued that the sooner everyone accepted that the economy is in problems and we got down to finding real solutions, the better. I have also argued that even with Crane Bank out of the picture, at 5.59 per cent, NPLs for 2017 are still very high- nearly three times higher than the pre-2008 financial crisis levels of 2.12 per cent.
In the just released results, Stanbic Bank, the country’s biggest lender, reported that NPLs have worsened from 1.5 per cent in 2015 to 3.2 per cent in 2016 and more than doubled in 2017 to above industry figures of 6.8 per cent.
Centenary Bank, one of the other big banks, also reported Shs80 billion in NPLs. And the banks are reacting by not lending despite having the money.
For example, in their 2017 results, Stanbic reported that their gross loans to total deposit ratios- the ratio that measures what percentage of a bank’s deposits are actually being lent out, had reduced from 82.7 per cent in 2013 to 60.7 per cent in 2017 while dfcu’s ratios have reduced from 88 per cent to 67 per cent in the same period.
If at all Kitamirike and the central bank are genuinely interested in macro-economic stability, we should be discussing widening of private sector credit, getting government to pay all their creditors on time, etc, because what kind of stability is it when you are closing down your largest banks?
Mr Kyamutetera is the Executive Editor, the CEO East Africa Magazine.