7 May 2008
opinion
Banks are cracking the whip against delinquent lenders; is this a bad signal for the entire economy? The major restructuring of the banking sector after the fiascoes that led to the closure of Greenland Bank and International Credit Bank between 1998 and 2001 and forced sale of majority stakes in a number of indigenous commercial banks brought some measure of stability in the financial sector.
For the most part government made healthy bets: UCB did not turn out to be a disaster in foreign hands and Stanbic's IPO left many Ugandans millionaires in shilling terms, the first successful large cap float on the domestic bourse.
The tight economic times after the Congo war were mitigated by donor subsidized lines of credit first administered through the Central Bank that were transferred to private commercial banks. Most of the commercial banks today are foreign owned with an implicit guarantee that their foreign owners would not allow them to fail.
For their foreign parents, these out of town mini-operations are a good cover to fortify their balance sheets being able to generate credit easily at interest rates that wipe out the premium for good due diligence and time spent understanding the fundamentals of their clients. Bank fraud, improper securing of land titles coupled with influence peddling have left commercial banks' billions of shillings in the red drying up sources of further lending.
The Central Bank requires banks to make incremental provisions for bad loans which favour heavily capitalised banks over the weaker smaller ones with a smaller share capital. An asset is less significant for a larger bank even though shoddy lending practices among larger lenders distort competition in the credit markets.
And so far large businessmen have successfully fended off banks in lengthy litigation taking advantage of omissions and errors by banking officers.
However news that some of the larger portfolios in credit market like the properties owned by Joseph and Goodra Behakanira including Avemar Shopping Mall and the tank of a complex in Bwebajja, a Kampala suburb, are failing are a price for allowing earlier loans to fail without much of an adjustment.
The Behakaniras' loans amount to Shs32 billion; sixteen times the size of Mr Hassan Basajjabalaba's original default of Shs2 billion on an Apex facility in 2003 owed by Basajjabalaba Hides and Skins later rolled into a Shs 7 billion loan that ended up as a Shs21 billion default in 2006.
Today, Hassan B as he is popularly known is into other cash flow businesses like the popular Kampala University without any financial watchdog overseeing or regulating the use of tuition fees for non university related businesses.
It will be a magic of wonder that Mr Behakanira's complex grew to chew up a hill and a road reserve [at such an environmental and safety risk] without a published name of the licensed professionals on the street behind it telling us who the architects, engineers and quality surveyors were.
The lucrative education sector that has made enterprising teachers wealthy is another area of concern. Many private schools are tottering on the brink of insolvency.
Barclays Bank here again made a lousy bet on the fortunes of 2 teachers associated with Buddo advancing another loan to a school in which embattled Budo Junior head-teacher William Kayongo, a former third grade teacher, is being hassled for Shs 1.7 billion.
The booming real estate market that is red hot in some areas has some not too hot testimonials in others. Many buildings in Kampala deposited as securities with commercial banks are under-occupied because of structural problems or very poor shape because of poor maintenance. Some construction sites have been open for decades.
The hotel business post CHOGM is grappling with occupancy rates as low as 25%. These numbers portend losses for businessmen who accessed credit at astronomical interest rates trying to compete with a cabal of businessmen who have used tax credits given to the hotel industry to create mini-trading empires in consumer and durable goods like imported furniture, electronics, domestic accessories imported for use in hotels that end up on the black market.
For the banks, one hopes they receive help relatively quickly. As the US has shown, mistakes are not the preserve of small time operations like Sembule, ICB or Greenland. The big boys fail as well and the economy's gate keepers must stay on high alert.
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