11 November 2012

Uganda: Bank Rates Stay Up As Lenders Pounce On Borrowers' Property

With each passing day, more houses are put up for auction around the country leaving a sour taste in the mouths of many commercial bank borrowers.

Fred Balinda, had five large commercial properties in the upmarket areas of Munyonyo, Bukesa Hill, and Namirembe in addition to one residential house in the posh city suburb of Kasubi all potentially worth billions of shillings placed on auction at the end of October.

His tale is shared by many.

Betty, a business woman says commercial bank interest rates went up faster than the returns from her business for much 2011. The high inflation for most of last year did not help matters.

The level of non-performing loans has risen to 4.9% of all bank loans in the year 2012 from 2.1% at the start of the year 2011 after the Central Bank increased its benchmark Central Bank Rate (CBR) to curb high headline inflation.

Despite reductions in the CBR to 12.5% from highs of 23%, commercial bank loan rates have remained above 20%, hurting many borrowers.

"It is unfair for the banks to auction off properties we have worked so hard to acquire over the years. Payments delayed and it was obvious that loan repayments would be harder after loan interest rates shot up suddenly last year," she explains.

Mugume, an auctioneer with Bemug Strict Auctioneers and Court Bailiffs reveals that the weight of loan repayments has been too heavy for many Ugandans and more property could hit the markets.

Most times, it's a semi-detached house in a posh suburb, a nice bungalow, or a large tract of undeveloped land around the city suburbs and a good day it could be a commercial complex or a warehouse on a busy street.

"The properties are mostly put up for sale by commercial banks, and sometimes a few individuals will approach us to sell their behalf especially when the property has a legal requirement to advertise," says Anthony with Armstrong Auctioneers.

A quick scan of the Newspapers reveals that over eight residential premises and 14 commercial properties have been auctioned in the recent two weeks. The list of owners is even more telling as it includes many high profile individuals.

Anatoli Kamugisha, the Akright Projects boss has also suffered at the hands of property auctioneers and commercial banks when his residential properties in Kakungulu estate where put up for auction.

He maintains that his properties where placed on the market while he was abroad and unable to give side in the matter and inspite of the fact that the loan was jointly held with another individual.

"The banks are cheating people left and right. At this rate they are going to kill some people. A loan was taken in my names and my properties used as collateral," Kamugisha said.

Anthony Kituuka, the KCB bank head of corporate banking says that auctioning of clients property is always if the last option and is not the core business of commercial banks.

"By the time we put a property on the market, we have spent up to a year trying to reschedule the loan and failed thereby putting the property on auction to recover unpaid loan balances," he explains.

"Of course there are special cases when borrowers stop depositing with the bank and stop meeting loan repayment deadlines for over 3 months we usually have to act quickly to recover our money," he adds.

Kituuka explains that financial regulations dictate that loans be categorized as doubtful and then take serious action if the status quo does not change after 6 months.

At this point the bank calls up the client and incase their issues that hindered the non-repayment of the loan such as cargo being held up somewhere in transit, a loan client can have their principal repayments stayed for a while and their payments are then rescheduled.

When that fails, Kituuka says that a client's property will then be auctioned to repay the loan and the proceeds are regarded as disposal of property incomes in the bank's financial books.

"We always ask the client to find a buyer. If they can't, we appoint a court bailiff and a broker who auctions the property to the highest bidder with the reserve price being the balance of the loan and associated costs,

"If the loan balance is sh300m that will be reserve price inclusive of fines, legal fees and fees to the court brokers any balances are deposited on the client's account," he explains.

It clear that at this point the client becomes second or third priority as the bank moves to cut its losses and end a bad deal.

The situation is slightly different across the border in Kenya where property has to be sold at the highest possible price such that original owners interests are take first priority.

Jan Tibamwenda, the Bank of Uganda director for communications, says there are general legal requirements that govern the sale of property and there no specific central bank tenets.

"The Central Bank cannot issue other guidelines that contrary to the existing law. Ugandans have got to read the loan agreements before they sign them even in those moments of desperation before they receive the loan money," he points out.

The agreement that the borrower signs with the commercial bank will either empower or condemn them.

Close to sh4trillion has been lent out between January and September 2012, a default rate of 4.9%, some sh196b could go unpaid.

Most borrowers are required to pay mandatory loan insurance at the start of the repayment. However, this insurance protects the bank and not the premium payer - the loan client.

Kaddunabi Lubega, the Insurance Regulatory Authority (IRA) boss noted in a recent interview that is important that borrowers secure an additional insurance policy that will protect their interests.

"Ideally the premium payer who is the loan client should be the one to benefit but sadly, it the banks that benefit and this needs to change," says Mariam Nalunkuuma the IRA publicist.

"We are set to hold talks with the Central Bank to correct this, the banks are having an unfair advantage over their clients," she added.

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