Mwenda dives deeper into central bank rot

Andrew Mwenda

Senior journalist Andrew M. Mwenda says for decades, the Bank of Uganda (BOU) has been beyond scrutiny until it purchased Shs125m pens for a single event.

“We have always believed the central bank is managed by competent people. But the failure of Crane Bank has exposed, if not the ignorance and sheer incompetence of BOU, then its corruption,” Mwenda writes.

For example, BOU spent Shs 125 billion to manage Crane Bank for the three months when they were in charge. Yet for the whole of 2015, Crane Bank’s total operational expenses were Shs 96 billion.

He said now BOU owes Ugandans an explanation for this unusual expenditure.

The reason BOU messed up Crane Bank, according to him, is because it relied heavily on lawyers to advise it on problems that were largely business matters. Consequently BOU behaved like a policeman enforcing law rather than a regulator seeking to solve a business problem.

Victoria University

The lawyers were all too happy with their hatchet job because they stood to earn billions of shillings in legal fees – regardless of what happened to Crane Bank, the financial sector and the wider economy.

“BOU lawyers had serious ethical problems. The lead person advising BOU on the resolution of the problems of Crane Bank was and still is Timothy Kanyerezi Masembe, a lawyer and partner in MAAKS law firm.”

He is the chairman of the board of directors of NC Bank, a commercial bank that was competing in the same market as Crane Bank.

This is Mwenda’s full analysis:

First there should be a problem with a chairman of a bank being supervised by BOU being a lawyer to BOU.

Second, it is an obvious conflict of interest when the chairman of a commercial bank is lawyer of the central bank in matters concerning another commercial bank. How can he be expected not to undermine his competitor in advising BOU?

Third, Masembe had been a lawyer for Crane Bank for 20 years up to the day it was taken over. Legal ethics require that a lawyer cannot work for another client against his former client until after two years since he last served that client. BOU and Masembe ignored this.

Fourth, the same Masembe became the transaction advisor of BOU to sell Crane Bank assets to DFCU. After that his law firm was hired by DFCU to collect Crane Bank’s bad loans.

While that was going on, he was BOU’s lawyer who negotiated the agreement to protect Sudir from prosecution so that he can pay BOU a ransom of $60m.

The disregard for basic ethics by BOU is blinding.

Rape of Crane Bank

Bank of Uganda acted in the most rush way in its resolution of Crane Bank issues which makes it suspicious.

First when it claimed Crane Bank was in distress, it should have given Sudir time to find an investor to inject new capital into the bank. Many banks were actually in negotiations with Crane to buy it.

Instead BOU hamstrung Crane by stopping it from doing any new business like issuing new loans, overdrafts, bid bonds, performance guarantees, letters or credit etc. Crane was a bank for the business community. Stopping it from doing anything for three months was a disaster.

It forced its customers who could not get a service to pull their money and business out of Crane to other banks and thereby transformed a capital adequacy problem into a liquidity crisis.

By the time BoU took over, the liquidity crisis created by their initial mistake forced the central bank to pump on Shs 450 billion to keep bank operations running. Was this a mere mistake or deliberate plan to destroy Crane!?

Second, even after BOU took over of Crane in October last year, many investors from around the world wanted to buy Crane Bank as a business.

And the reasons were obvious: Crane Bank had a good and wide branch network, a huge customer base, a great brand and $40m (Shs 144 billion) in tax assets. Its deposits had fallen from Shs 1.4 trillion to Shs 1.0 trillion because of BOU restrictions that caused a run on Crane. But these could easily be rebuilt.

Crane also had assets worth Shs 1.8 trillion of which (according to BOU) only Shs 550 billion were bad. But even then, most of these bad loans were backed by good collateral. This was a good business which BOU raped and then began selling its pieces.

In December, BOU gave interested buyers exactly eight days during the Christmas season to put it their bids. How can one bid to buy a large bank worth hundreds of billions in assets within seven days? Selling a bank is not like selling tomatoes.

This was totally unreasonable and now one can suspect why: it seems BOU had concluded on how to sell it (as assets and not as a going concern) and to whom to sell it. Could this collusion have been due to fraud or incompetence? This three away the $40m (Shs 144 billion) worth of a tax asset.

Secondly, there are other institutions that were interested in buying the Shs 550 billion worth of bad loans – at a discount of course. BOU refused this suggestion out of hand and therefore lost an opportunity to get a good deal.

Instead it sold all the good and bad assets to DFCU at only Shs 175 billion in an agreement it has not disclosed to Sudir (the owner of the bank) or to the public (in whose behalf BOU works).

BOU had injected Shs 450 billion of taxpayer money as liquidity into Crane Bank when it took over management. Under the sale agreement, DFCU is required to pay back this money to BOU over a period of three years without interest.

Yet Sudir had asked for a loan of only Shs 165 billion from BOU (as lender of last resort) at an interest rate of 5% to recapitalize the bank. So BOU would earn Shs 8.25 billion per year.

Instead BOU refused to play its legal role as lender of last resort to the fourth largest bank in the country which posed a systemic risk to the industry.

BOU instead said it could only lend Sudir at an exorbitant interest of 20%. Unbelievable! But even then it didn’t lend him, suggesting that it deliberately wanted Crane to fail.

If BOU asked DFCU to pay interest of 20% on the Shs 450 billion, Ugandans would earn Shs 90 billion in a year. Even if it accepted an interest of 5%, Ugandans would earn Shs 22.5 billion shillings, enough to train 500 doctors or build 500 classrooms.

Instead BOU indirectly lent DFCU Shs 450 billion free of interest for three years! Essentially BOU gave taxpayer funds for free to DFCU to buy the assets of Crane Bank and then use money collected from those assets to pay BOU!

In fact if BOU had used the Shs 450 billion to buy distressed assets of banks, it would have saved many businesses from companies from collapse and with them jobs for Ugandans, taxes to government and promoted a healthy economy.

And it would have earned interest of above 15% and made a huge profit. In fact this is what the USA government did in 2008 when its banks got into trouble. DFCU took public funds for free.

Why did BOU throw away every good deal and every opportunity on Crane Bank and instead went for the worst deal with DFCU? Well some individuals stood to benefits and we shall return with inside revelations on this tomorrow.



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