Wednesday July 19 2017

IMF wants Bank of Uganda to strengthen supervision

With strict supervision, the IMF points out

With strict supervision, the IMF points out that the Crane Bank situation could have been avoided. MONITOR PHOTO 

By Mark Keith Muhumuza

KAMPALA. Last week, the International Monetary Fund (IMF) provided details on why it wants Bank of Uganda (BoU) to strengthen the supervision of commercial banks, in order to avoid the Crane Bank-like scenario.

In a detailed 2017 Article IV Consultation and Eighth Review Staff Report, the IMF notes that BoU needed to interrogate more financial reporting by banks in order to avoid instances where banks fail the compliance test.

Specifically, the Fund points out that the Crane Bank situation could have been avoided.
“Staff also notes that the quality of banks’ reporting is a risk to the validity of the stress test results, as the Crane Bank episode has illustrated. The authorities agree that the experience calls for more intrusive supervision, and explained that they are also focusing on banks’ risk management frameworks,” the staff report reads, in part.

Crane Bank takeover
In October 2016, BoU took over the operations of Crane Bank after the capital of Shs220b had been eroded due to high levels of Non-performing Loans (NPLs).
Crane Bank faced liquidity problems and was struggling to meet demands of depositors and could not access funds lend. The IMF, after interactions with BoU, found out that Crane Bank had been underreporting in its financial statements.

“Crane Bank had underreported its NPLs, and there were other problems with its financial reporting. Facing a steady deposit outflow, the bank was close to being illiquid, with signs of asset stripping. The ensuing corrections to the financial statements contributed to the worsening of financial soundness indicators of the banking sector,” the report further reads.

Subsequently, BoU carried out a forensic audit and has since sued Mr Sudhir Ruparelia - founder and shareholder of Crane Bank - and Meera Investments to recover about Shs400b. He is accused of fraudulently extracting money from Crane Bank.
On June 20, 2017, in a letter written to IMF managing director Christine Lagarde, Finance minister, Matia Kasaija and BoU Governor Emmanuel Tumusiime-Mutebile made commitments to improving the supervision of banks.

“We will also continue strengthening our oversight and supervisory frameworks through consolidated supervision, setting up a contagion matrix to monitor risk, and adopting Basel III among others, and will continue to monitor developments in the financial sector closely,” the letter attached to the IMF staff report reads.

Ever since BoU’s lawsuit against Sudhir went public, questions have been raised about BoU’s supervisory role and how since 2006, the stress tests and supervision did not detect the fraud.

The IMF in its report, however, indicated that despite the risks of misreporting by commercial banks, the sector remains stable since the toxic NPLs of Crane Bank had been taken out.

“The authorities note that the banking sector is well-capitalised overall and liquid, notwithstanding the recent failure of Crane Bank. Most banks meet or exceed Basel III capital requirements and already comply with the liquidity coverage ratio which the authorities expect to make binding by end-2017,” the report goes on to read.

Stress tests

On a quarterly basis, Bank of Uganda carries out stress tests on commercial banks in order to determine whether they are able to withstand shocks. The tests range from liquidity and credit value. For instance in the tests to March 2017, if the single largest borrower defaulted in each bank, three banks would break the minimum capital requirement.[email protected]