Cosase probe: misstatements, vested interests

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dfcu officials appearing before Cosase

Parliament’s Committee on Commissions, Statutory Authorities and State Enterprises (Cosase) this week interfaced with former shareholders of defunct banks like Crane Bank Limited [CBL] and National Bank of Commerce [NBC].

On Wednesday and Thursday, Cosase interviewed dfcu bank officials led by CEO Mathias Katamba included Juma Kisaame, William Sekabembe (Chief Commercial Officer), Agnes T. Isharaza (Chief Legal Officer), Kate Kiiza (Chief Financial Officer) and Agnes Mayanja (Chief Risk Officer).

During the two sessions, accounting misstatements and the 2014 overstatement of fixed assets surfaced, becoming a subject of debate.

A review of CBL audited financial results going back ten years (2005 to 2015) suggests that the Bank had been performing extremely well recording impressive growth and was highly profitable.

However, certain trends which suggested that the Bank may have misrepresented its performance surfaced.

These include:

The increase in impairment provisions from UGX 0.84B in 2012 to UGX 44.0B in 2013. The low provisions in 2012 resulted in high profitability in 2012 (UGX 80B profits after tax) that then allowed the Bank to issue a share bonus issue worth UGX 110B.

The high percentage of interest income over total advances where before 2015, the interest income as a percentage of total advances was almost 30% at a time when average interest rates on commercial loans in Uganda were at 21%.

A UGX 200B spike in the value of buildings in 2014 where the value of land and buildings rose from UGX 81B to UGX 281B within the year.

The work done under this phase does indeed support the suspicion that there was a systematic scheme to overstate profits over the years.

This overstatement allowed the concealment of irregular expenses, irregular payment of dividends and the issue of bonus shares on the back of misleading retained earnings.

False accounting?

The false accounting was partly achieved by crediting income with entries from off-book accrued interest receivables accounts and by keeping some liabilities (fixed deposits and borrowings from other financial institutions) off the books.

From the preliminary work done, it would appear that the profits in 2009 were overstated by at least UGX 11B and those in 2012 by at least UGX 18B consequently overstating the retained earnings.

This was achieved by crediting income with entries from the off-book assets. These two years are significant as they are the years whose profits supported the issuance of two of the biggest bonus share issues (UGX 50B in 2010 and UGX 110B in 2013).

Cash extraction through fraudulent IT payments

CBL has over the years made payments to Technology Associates (“TA”), for the provision of various IT hardware and services.

In 2013, USD 9.3M was paid to TA purportedly for licenses in respect of two core banking systems (“CBS”).

CBL had however paid for and received these services from different entities {(Temenos Africa (PTY) Limited (“Temenos”) & Misys International Banking Systems (“Misys”)}.

Cosase vice chairperson, Hon. Anita Amongi said the due diligence by dfcu showed situation in Crane Bank was grave.

CBL’s net asset position was negative meaning that the liabilities far exceeded the assets (UGX (589) billion as at 20 December 2016).

CBL had faced significant liquidity challenges during the course of 2016 and had obtained liquidity support from BoU in excess of UGX 350 billion.

A significant part of the deposits equivalent to UGX 441 billion was in fixed deposits (62%) at an average interest rate of 8% and 17% per annum in USD and UGX respectively which was far above the market rate.

Kasaija admits weaknesses

Finance Minister Matia Kasaija while appearing before Cosase Friday thanked the committee chairperson Hon Abdu Katuntu for “showing us our weaknesses on how we have been managing the financial sector”.

Kasaija agreed they have never had a deep study to investigate what is not going well in the financial sector.

Kasaija said he has never seen reports even on Crane Bank saying he would task BoU to provide the reports.

Kasaija says the Deposit and Protection Fund will ensure separation of functions of BoU. Kasaija will submit to COSASE reports of the said fund on Monday 11th Feb 2019.

Kasaijja who was appearing together with BoU Governor Tumusiime Mutebile, Deputy Governor Louis Kasekende and the BoU Board, revealed that CBL management was aware of its “fire situation” but were unconcerned by the millions of lives who would be impacted by its demise, thus showing total disregard for both customers and staff.

This revelation leaves us waiting for what the COSASE report will report and how it will play an influence in our finance sector.

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