22 February 2019

Uganda: MPs Call for Reforms At Bank of Uganda

Kampala — A committee of Parliament has called for governance reforms at the Central Bank after finding flaws in the way it handled the liquidation and sale of insolvent banks.

A report by the committee on Commissions, Statutory Authorities and State Enterprises (Cosase) tabled in Parliament yesterday evening said Central Bank officials had made "questionable decisions" and flouted the law in closing and selling seven commercial banks.

The 64-page report, issued after months of public hearings, also invites the police to investigate whether there was loss of taxpayer money in the bailouts of stricken commercial banks or during their disposal.

Presenting the report to Parliament committee chairperson Abdu Katuntu (Bugweri, FDC) questioned "serious security laxity" at BoU and said bank officials who flouted relevant laws and regulations ought to be held personally responsible.

The committee's findings followed public hearings and a special audit by the Office of the Auditor General into the closure of seven commercial banks between 1993 and 2016.

The banks include Teefe Trust Bank, International Credit Bank, Cooperative Bank, Greenland Bank, Global Trust Bank Uganda, National Bank of Commerce and Crane Bank Limited.

The committee report noted several instances in which the central bank did not follow the Financial Institutions Act (FIA) and its own regulations on appointing auditors, taking inventories, managing confidential information, and reaching out to potential buyers of the failing banks.

The committee also found serious problems with the disposal of liquidated banks. For instance, it noted that Nile River Acquisition, a company tapped up to recover Shs145b in loans owed to ICB, Greenland and Co-operative banks was not registered and benefitted from "an incredibly outrageous" discount of 93 per cent.

The report also questions dealings with Octavian Advisors Plc, a firm that bought the loan book at $5.2m - less than an earlier offer of $10m - and which received a grant of exclusivity in the dealings.

"The committee concludes that the transaction between BoU and M/s Octavian Advisors Plc. and her agents lacked transparency and the officers involved should beheld responsible for commissions and omissions which resulted in marshalling the greatest amount from the assets of the distressed financial institutions," the report recommends.

It also called for the Inspector General of Police to immediately seize land titles and other securities from Mr Kakembo Katende of JN Kirkland and Associates and SIL Investments arising from the management of the loan portfolio Nile River apparently farmed down to them.

The MPs also asked the tax authorities to investigate the named firms' tax compliance statuses.

In its report, the committee directed the Bank of Uganda board of directors in consultation with the Minister of Finance to issue new regulations for managing stricken financial institutions within six months.

Other recommendations by the committee include amendments to the FIA to spell out timelines for resolution of stricken institutions, taking the role of resolving financial institutions in distress away from the commercial bank supervision function and a strengthening of the Central Bank's capacity to supervise financial institutions.

The committee also recommends widespread improvements in the management of the Central Bank's records, security and documentation of processes and meetings.

On the disputed sale of Crane Bank Limited to dfcu bank at Shs200b, the committee highlighted violation of the FIA, the absence of records and queried the valuation of the bank's assets and liabilities.

Way forward

"The committee finds that BoU's failure to observe principles of financial prudence and in the course breaching their statutory duties provided under FIA thereby financially disadvantaging CBL, it should make good the loss occasioned to the commercially fair extent of the value of the bad book," the report reads.

"The BoU, having failed to value the assets and liabilities of Global Trust Bank, National Bank of Commerce and Crane Bank Limited and considering the lapse of time and impossibility in revaluation of assets, should address the probable financial loss occasioned," the report recommends.

"All BoU officials who failed to properly execute their duties in accordance with the law should be held responsible for their commissions and or omissions."

Ms Charity Mugumya, the director of communications at BoU, yesterday said: "When BoU intervened in Crane Bank Limited by appointing a statutory manager it was found that there were a number of outstanding Letters of Credit, Telegraphic Transfers and RTGS requests that had not been honoured by Crane Bank because of their liquidity challenges. To date, there has not been any complaint from the remitters or beneficiaries regarding the transactions. In other words, those that requested these transactions have never complained that the intending beneficiaries have never received the funds."

Meanwhile, documents laid before the committee by Aruu MP Odonga Otto and his Kasilo counterpart Elijah Okupa during the committee hearings and which purported to show extensive properties and bank balances belonging to BoU deputy governor were found not to be accurate.

In a letter to Mr Kasekende yesterday, committee chair Mr Katuntu said 60 properties presented belonged to different people and the alleged bank statements had not been successfully authenticated.

Key Recommendations

Teefe Bank: There are no documents relating to the post closure and management of Teefe Trust Bank assets and liabilities. This complicates the process of winding up, including resolving claims and some securities still in possession of BoU.

International Credit Bank: No inventory report was availed in respect of ICB but a September 30, 2001 inception report for liquidation by the Liquidation Agent (KPMG). Without a proper inventory report, BoU did not know what it was taking over in terms of entirety of assets and value.

Co-operative Bank: The bank was closed on May 19,1999.Considering that a report was availed in June 1999, the committee observes that there was compliance with the requirements of the Financial Institutions Statute, 1993.

Greenland Bank: BoU acknowledged an error in its preparation of Greenland Bank's Statement of Affairs as at June 30, 2016, where full provision of Shs6.596b was made to write off funds due from foreign accounts despite recovering Shs2.6b from the court case which was credited due Greenland Bank. BoU should rectify the error on Greenland Bank's Statement of Affairs for proper financial reporting. BoU should expedite the disposal of the shares so as to realise the attendant value. Dr Louis Kasekende, the board member of the afreximbank, should expedite the process of disposal.

Global Trust Bank: The bank was closed and sold on the same day July 25, 2014.The auditors were appointed on August 22, 2014 and an inventory report was submitted in November 2014.The committee therefore observes that there was non-compliance with the requirements of Section 89(3) of the FIA.

National Bank of Commerce: The takeover and sale of the bank happened on the same day and was concluded within six hours in contravention of Section 99(1) and (2) of the FIA, 2004 which requires that the central bank can only intervene after making a winding up order and publishing it in newspapers for general circulation.

Crane Bank: Crane Bank had recovered from liquidity distress from mid-January 2017 to the time it was disposed of on January 25th January 2017.Infact,BoU had stopped injecting money on January 9, 2017.Therefore, the bank's liquidity position had stabilised.

BoU did not provide a plan or assessment detailing efforts to return the bank into compliance with prudential standards despite funding with Shs478b.

Bank of Uganda: The committee recommends that Article 161(4) be reviewed to separate the offices of the leadership of the Board and top management of BoU.

The bank strengthens its monitoring and observance of the security policy. All bank officials should strictly adhere to the security policy and anyone found in breach should be subjected to the disciplinary procedures of the bank.

The Deposit Protection Fund (DPF) should within one month refund Shs21.9b due to government, to the Consolidated Fund. Bank of Uganda should establish a mechanism of receiving and solving complaints, including against its liquidation.

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