In June 2016, several traders under the Kampala City Traders Association (Kacita) had gone on as usual to access banking services of Crane Bank. Their hope was to walk into the bank and access letters of credit that would be used to ease exportation of goods.
A letter of credit is issued by the bank to a buyer guaranteeing that the seller will receive prompt payment. In other words, the bank provides cover for the buyer in case they are unable to pay. Letters of credit are used by importers and are a key function of facilitating trade.
When the traders went to Crane Bank, to their surprise, they could not access the facility. Bank of Uganda (BoU) had issued a directive stopping Crane Bank from issuing letters of credit, bank guarantees, bid bonds and placed restrictions on new loans.
It was a directive the bank had to adhere to after BoU had identified that there was a continued and significant erosion of capital.
"We run our businesses on things like letters of credit, especially when importing goods from China. When we can no longer access these facilities our business slows," says Mr Samuel Muyomba, a trader in Kampala. The decision by Crane Bank to stop issuing new credit lines meant that several customers had to shift to other banks.
Then on October 20, 2016, BoU took over the management of Crane Bank because the bank was significantly undercapitalised and was deemed to pose a systemic risk to the banking sector. But several customers say it "it was always easy to get money" from Crane Bank than from other banksEconomy slows.
"The relationship was often different with the bank giving us less hard time like other commercial banks," one trader said. BoU statistics rank Crane Bank among the top three banks with the highest number of customers. Stanbic Bank and Centenary Bank are the other two.
It is these "special" arrangements with customers that have been noted to have contributed to the rise in Crane Bank's non-performing loans (NPLs) that were valued at Shs142b by end of December 2015.
BoU's action to place restrictions on lending was reportedly meant to prevent the situation from escalating. It did escalate, especially on the old loans. This was visible when several companies known to be distressed approached the government for a bailout. On that list, most of the liabilities were with Crane Bank. The lamentation from the business owners was that high interest rates had increased the possibility of them defaulting.
Crane Bank's failure has been widely attributed to the general challenges facing the economy. The disposable incomes of Ugandans had reduced with prices rising because of the depreciating Shilling. In fact, in the entire 2015, businesses had to revise expenditure plans because of the rather high cost of money and less consumer demand.
The Uganda Shilling depreciation was almost 20 percent in the entire 2015. Commercial Bank interest rates had also edged up to almost 30 per cent from an average of 21 per cent in a space of a year. At the same time, foreign direct investment in the country had declined. The estimate by end of June 2015 was a shortfall of about $200m according to the BoU.
More recently, the largest supermarket chain in East Africa, Nakumatt also finally admitted it was facing financial distress on high debt levels and lower demand in some of its outlets.
"Like any other business operating in this market, Nakumatt Holdings has faced a number of unforeseen business challenges. These challenges range from a depressed economy, higher operating costs and extraneous factors including risk management due to prevailing security threats, among others," the statement signed by managing director Atul Shah reads in part.
He reveals that due to these factors, they are faced with cash-flow problems, which has made suppliers to withhold their supplies. Nakumatt had invested heavily in its Uganda expansion but had underestimated warnings from the several analysts that the economy may not grow as fast as the expansion.
Much of the talk since the takeover of Crane Bank has been about instability in the banking sector. At one point Mr Emmanuel Tumusiime-Mutebile, the BoU Governor, hinted that two other banks were under watch but he later retracted the statement.
In his first remarks to journalists, he said: "Our financial sector is strong, vibrant and profitable, maybe one or two companies may need to be watched but there is no other financial sector company that Bank of Uganda is about to take over; that is rubbish."
Then later that evening, that statement was retracted.
"There has been negative reporting on the banking sector recently. The negative news and reports are unfortunate and utter rubbish. Take this as a categorical dismissal of those baseless rumours. Uganda's banking sector is stable, sound, and profitable," Mr Mutebile said. "There is no bank in our economy that is facing imminent closure."
Several banks in the country are witnessing unprecedented levels of non-performing loans (NPLs). According to the Uganda Bankers Association (UBA), NPLs in the sector had by August 2016 peaked at Shs900b.
Their projection is that almost Shs1.3 trillion is the likely level of NPLs by end of December 2015. These are unprecedented levels of NPLs, according to Mr Wilbrod Owor, the executive director UBA.
"Lending to the private sector has been largely subdued lately because there is caution in the wind. The higher level of NPLs keeps banks from lending with ease to customers," Mr Owor says.
A closer look at the 2015 performance of commercial banks indicates that NPLs in the sector rose by Shs100b; an increment of 26 per cent to Shs688b. Of the 26 commercial banks in the country, only nine banks did not record an increment in NPLs. BoU has often noted that NPLs are not the only measure used to determine the health of the banking sector.
The other measure, which BoU used as the reason for the Crane Bank takeover, is core capital. By end of 2015, all commercial banks were operating above the minimum capital of Shs25b.
Only Diamond Trust Bank, Ecobank, and Cairo International Bank had declines in their core capital but they were still operating above the threshold. DTB's capital was Shs85b, Ecobank at Shs41b and Cairo International Bank at Shs29.3b; all capital that is above the minimum requirement. That, in essence, shows the banking sector as healthy.
It is the same NPL levels that are being used to justify the rather high-interest rate environment that Uganda is experiencing. The banks have also slowed or even reduced lending.
"If Ugandan companies and individuals are not borrowing to grow their businesses, then where will the growth come from?" says Dr Fred Muhumuza, an economist.
According to Prof Waswa Balunywa, the Makerere University Business School (MUBS) principal, Crane Bank might have had management problems that contributed to its demise.
"The financial sector is very healthy. The Ugandan economy has a whole 26 banks. The economy is too small for all those banks to become profitable. What we expect in the banking sector are more mergers, acquisitions, and exits. Those are the dynamics of markets. What I can say is the Crane Bank problems were a management failure and not the economy," he says.
Even with these troubles in the economy, the working theory is that Crane Bank suffered a setback that some of their customers were facing. "Uganda's economy is in some kind of recession. It is not a bad thing. It is a cycle that every country goes through. For the 18 months before the elections, there were fewer investments in the economy. This could change in the first quarter of 2017."
The skeptics of the banking sector, however, do point out that if Crane Bank had as of December 2015 capital of Shs210b, where did it all go in a space of six months?
Bad bank or poor regulation?
According to Prof Erisa Ochieng, an economist and consultant at International Development Consultants, the financial services sector is closely linked to the economy because it holds one of the most valuable tools used in the exchange of goods and services, money.
That is why BoU could not let Crane Bank fail because of the potential impact on the banking sector since it is a Domestic Systemically Important Banks (DSIB) in the country. Only three banks are considered to be DSIB's. If they collapsed the ripple effects in the economy would lead to a near crisis.
The 1990s bank failures in Uganda largely affected indigenous bank owners. Crane Bank is an indigenous bank founded by Sudhir Ruparelia and his family.
There were common characteristics of the failing banks, some market related such undercapitalisation and others as a result of unregulated insider lending and outright fraud.
Dr Ezra Suruma, former Finance minister and presidential adviser on economics, refuses to directly make any comments on Crane Bank, specifically but insists that it could have been either due to market forces or internal failings within the bank that led to its problems.
"Financial reform in Uganda has improved banking in Uganda, however, structural and regulatory issues remain," Dr Suruma pointed out recently at the 7th Annual MUBS Forum.
He prefers a historical perspective to addressing the matter of bank failures in Uganda. He identifies internal structures for being the main source of bank failures.
"Bad ethics particularly insider lending, widespread theft, fraud are the main source of bank failure," he adds.The takeover of Crane Bank has raised more questions about the economy but the consensus from most economists is that the two are related.
The bank failed because of the weak economy. However, they question how the capital of a bank slumped from Shs200b in a space of only six months. They also seem to agree that as long as the perception about the sector continues to exist, then potential savers and borrowers will also slowdown.
Non-performing loans. A closer look at the 2015 performance of commercial banks indicates that NPLs in the sector rose by Shs100b.
Out of hand?
Unprecedented. Several banks in the country are witnessing unprecedented levels of non-performing loans (NPLs). According to the Uganda Bankers Association (UBA), NPLs in the sector had by August 2016 peaked at Shs900b. Their projection is that almost Shs1.3 trillion is the likely level of NPLs by end of December 2015. These are unprecedented levels of NPLs, according to Mr Wilbrod Owor, the executive director UBA.
Analysts.Nakumatt had invested heavily in its Uganda expansion but had underestimated warnings from the several analysts that the economy may not grow as fast as the expansion.
Bad bank or poor regulation? According to Prof Erisa Ochieng, an economist and consultant at International Development Consultants, the financial services sector is closely linked to the economy because it holds one of the most valuable tools used in the exchange of goods and services, money. That is why BoU wanted could not let Crane Bank fail because of the potential impact on the banking sector since it is a Domestic Systemically Important Banks (DSIB) in the country. Only three banks are considered to be DSIB's. If they collapsed the ripple effects in the economy would lead to a near crisis.