ANALYSIS: Lessons from Crane bank woes

Manufacturers to suffer

Meanwhile, Sebaggala Kigozi, the Executive Director of Uganda Manufacturers Association likens the situation with what happened to Greenland Bank in 1999. He says that there was a destabilisation of the manufacturing sector that could happen again.

“If you have been servicing a loan and the people who have been handling you are now no longer the same, you get destabilized because the new management cannot handle you the same way the others were handling you,” he says, “the previous bank knows your problem and you had your own personal agreed terms and they tolerated you accordingly but now that he is also in a tricky situation then you are bound to have problems.”.

Sebaggala says Crane Bank often offered instant overdrafts to manufactures.

“That is going to be a problem because not so many banks operate this way meaning many businesses will be destabilized,” he predicts.

Gideon Badagawa, the Managing Director of Private Sector Foundation Uganda, PSFU, says that the reasons that non-performing loans have escalated to alarming levels are both internal and external. The business environment has been harsh; the cost of operations is high for both the private sector and the government. He says that was one of the reasons why some people were asking for bailouts from the government.

“People were not asking that their loans be paid by government but that government to pay up on what they supplied it and then people would be able to pay up their loans,” he said.

He says with the indication of two other banks giving some signals that they may go down, banks need to strengthen their regulations.

“I think banks need to understand and do critical analysis and strengthen their supervision of these loans, I think they should have a duty as banks to know who they are lending to and what these loans are going to do,” he explains.

He says one of the reasons people default is because banks do not follow up on the borrowers as long as the collateral they have placed with them is twice or thrice the amount of loan given. He feels this is wrong because that’s not playing a developmental role.

“When a business or an individual comes to you and you are the lender you need to take interest to understand how the loan management is going to be by this individual. So the bank itself using their risk advisers or loan/credit officers they should be able to follow these businesses because when they succeed they also succeed,” he adds.

He feels that the banks need to sensitize the population; especially small business owners, on financial matters especially when it comes to loans in order to avoid Non-performing Loans which are the leading cause of receiverships.

He says the reason interest rates are high is mainly because of government borrowing from the commercial banks and advises the government work to reduce the cost of money and the cost of borrowing.

“One way to do this is for the government to get out of the borrowing markets from the commercial banks because it crowds out the private sector,” he says, “The central government should not be the biggest borrower from the commercial banks such that the private sector is not crowded out. With available funds in the commercial banks at least they can be borrowed at reasonable rates.”

He says the government should instead mobilise money by expanding and deepening the tax base.  One way is to create a good business environment in terms of tax regimes and institutions that can help businesses to establish themselves and become sustainable.

“Then we can grow our tax base and government can mobilise money from the secondary market instead in the commercial banks on short term loans,” Badagawa says.

He says the government can borrow from the NSSF and capital markets since they are long term.

“There is money that can be mobilized internationally at 0.5%, 1% and 2% instead of borrowing from commercial banks at 17%,” he adds.

Government in denial

Fred Muhumuza, an economist agrees with Badagawa on the tax expansion idea. He says that the government needs to create an effective taxation system. According to him, the problem facing Crane bank and other banks is an indication of a sick economy.

“The banking sector are the first feelers when something is not right with the economy , I always compare the bankers  with the bulb of the thermometer because anything that happens out there in the economy reflects on the banks because there are fewer depositors and borrowers,” he explains.

He says that one mistake the banks did when they saw the borrowing going down was marketing aggressively ,with calls to customers to take free loans and instant loans, yet there was no money in the economy. He says there is a need to rethink strategy and that government should stop being in denial.

“We are still singing the song of we are ok, we are still growing but we were growing at 8% ten years ago and now growing at 4% is certainly not good and moreover when you have more problems than before you need to be growing higher and higher,” he states.

He also agrees with KACITA and PSFU on the issue of the government borrowing from the financial sector. He says that this does not only raise the costs of capital but also quantitatively removes the money.

“When government borrows it doesn’t bring back the principal because it doesn’t have to, it only pays back the interest yet when an individual borrows they pay back interest and the principal,” he explains.

So when government borrows, a quantum in the basket goes down, the interest rate goes up because there is very little resource and the one who is offering the highest returns takes it. That’s why banks can’t lower interest rates when money is very scarce, he says.

He is skeptical on Crane Bank coming back to the market. He says even if the bank gets a new investor, the sectors in the market that are supposed to bring money to the bank are no longer making money. He points at the real estate, finance, and trading sectors.

“Another challenge that Crane Bank will face is that people are pulling out their money, he says, “you might reach a level that within one month what was the country’s 3rd largest bank is now the 17th so you are no longer talking about potential buyers for a big bank a buyer for a very small bank, it might come back but much smaller.”

But he says Bank of Uganda’s takeover of Crane Bank was good thing.

“It protects people’s deposits and depositors will still get their money,” he says. That is a view shared by Kayondo and Badagawa. They, however, want Bank of Uganda to handle the other banks “with a lot of care”. If another take over takes place, people will lose trust on the entire banking system, they warn.

“The fact that the Bank of Uganda takeover of Crane Bank did not give confidence to the depositors because most of them have withdrawn their money, must tell Bank of Uganda not to take over another bank,” says Muhumuza.

“It is best to negotiate and merge an ailing bank with another bank so that we change that image,” Muhumuza adds.

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editor@independent.co.ug