How the central bank’s handling of the problems of Crane Bank showed lack of imagination and strategy
THE LAST WORD |Andrew M. Mwenda| I have always had high respect for Bank of Uganda (BOU) because of its management competences. Since the collapse of Uganda Commercial Bank in 1999, BOU has kept our banking industry stable hence its impressive and sustained growth. For instance, nonperforming loans as a percentage of total loans fell from 40% in 1995 to 5% in 2015. Since 1995, commercial bank assets have grown from Shs700 billion (Shs4 trillion in 2016 prices) to Shs24 trillion; deposits from Shs383 billion (Shs2.2 trillion in 2016 prices) to Shs16 trillion. All other indicators – profits, wages, branches, accounts, have grown exponentially over the same period.
These achievements were only possible because of effective regulation by BOU. However, the banking sector has grown in size and complexity and BOU seems ill equipped to handle this. Indeed a lot of the competences the state in Uganda acquired during recovery, especially in the field of economic management, are tactical not strategic. They ensure efficient resource allocation but fall far short of what is needed to transform our country from a poor, agrarian society to a modern industrial economy.
When Crane Bank’s nonperforming loans eroded its capital adequacy, BOU asked its shareholders to recapitalise it with Shs165 billion within one month. The main shareholder, Sudhir Ruparelia, said he didn’t have that cash and asked the central bank to lend it to him. He offered his shares in companies on the stock exchange and his real estate holdings as collateral. BOU refused.
Crane Bank was the fourth largest bank in the country with Shs1.8 trillion in assets and Shs1.4 trillion in deposits. It was owned by a Ugandan who had grown it from scratch in a market dominated by multinational banks like Standard Bank, Standard Chattered Bank, Barclays Bank, etc. This was a sign that Crane understood the needs to local borrowers better than foreign banks whose lending rules are set in Johannesburg, Dubai, and London.
Yet Crane had made many mistakes. The strategic challenge for BOU was to balance the Crane’s internal mistakes against the benefits it brought to Uganda’s economy generally. To be fair to BOU officials, there were some efforts to do this but they were half-hearted. Also BOU officials tended to confuse Sudhir with Crane. When he acted in a manner they felt was arrogant, they got angry and sought to use the law to whip him into line, thereby missing sight of Crane’s strategic role/value in the wider economy.
Since 2000, BOU had faced some commercial bank failures. But the banks involved were small with deposits of not more than Shs20 billion. These banks did not pause systemic risk to the banking sector. So BOU could shut them down and pay their liabilities off her balance sheet without any significant harm to the economy. The problem was that if Crane Bank failed, BOU’s balance sheet could not pay for its failure and the wider economy would suffer. This is why handling Crane required both strategy and imagination.