Fresh queries over BoU sale of Global Trust Bank
The defunct Global Trust Bank. It was closed in 2014 on account of accumulated losses to a tune of Shs60b. Courtesy photo
Kampala- The Bank of Uganda on July 25, 2014 revoked Global Trust Bank (U) Ltd (GTBU) licence allegedly due to poor performance and took over its management before selling some of its assets and liabilities to dfcu bank.
Mr Emmanuel Tumusiime-Mutebile, the BoU governor, blamed the closure of GTBU on ‘undercapitalisation’ and ‘corporate governance weaknesses’, among other reasons, but did not disclose the moot details of a liquidation deal Central Bank signed with dfcu bank.
The Auditor General (AG), Mr John Muwanga, in a confidential special audit report to Parliament has poked holes in the Purchase of Assets and Assumption of Liabilities Agreement BoU signed with dfcu bank and exposed glaring weaknesses at the Central Bank.
The details also point to what the lawmakers called mismanagement of the failed banks and abuse of procedures.
Global Trust Bank was a commercial bank in Uganda with 23 branches. The bank, valued at Shs75b, started operations in 2008 and was closed in 2014 on account of accumulated losses to a tune of Shs60b. Its closure came two years after the collapse of National Bank of Commerce in 2012.
Although BoU revoked the licence for GTBU in accordance with Sections 17(F), 89(2)(F) & (7)(C), and Section 99(1) of the Financial Institutions Act, 2004), the AG found that in the BoU deal with dfcu, there were no guidelines/ regulations or policies in place to guide the identification of the purchaser of GTBU.
There were also no guidelines to determine the procedures to be adopted by the Central Bank in the sale and transfer of assets and liabilities of the defunct bank to dfcu.
“I was not provided with the procurement process to ascertain the bid requirements, offers made, list of bidders, evaluation criteria, evaluation report and negotiation minutes leading to [the sale agreement with dfcu bank],” the AG report reads in part.
Though BoU officials insist that they shared preliminary information on the closure and sale of GTBU with dfcu, the AG’s report did not capture any evidence to prove that other prospective buyers in the financial sector were contacted or asked to put in their bids.
“In the absence of guidelines and procurement records, I could not ascertain whether BoU selected and evaluated the bids in line with the evaluation criteria,” Mr Muwanga said.
In their response to the absence of guidelines for selection of the buyer under Purchase and Assumption arrangement, the management of the Central Bank without delving into the details stated that such documents would “impede the flexibility of BoU to act expeditiously to resolve failed bank in the manner which is least disruptive and damaging to public confidence and stability of the banking system.”
Sale of performing loans
In the sale of GTBU loans at 20 per cent discount, the AG noted a serious discrepancy with Section 95 (3) of Financial Institutions Act 2004.
The section states that in determining the amount that is likely to be realised from the sale of the financial institution’s assets, the receiver shall evaluate the alternatives on a present value basis, using a realistic discount rate or document the evaluation and the assumption on which the evaluation is based, including any assumptions with regard to interest rates, asset recovery rates, inflation, asset holding and other costs.
According to Annex A of the GTBU purchase of assets and assumption of liabilities agreement, performing loans and overdrafts were transferred to dfcu at Shs22.6b, representing 80 per cent of the book value of Shs28.2b.
This, according to the AG, implies that dfcu acquired the loan portfolio of GTBU at 20 per cent discount. The AG report indicates that the loan portfolio of other closed banks were sold by BoU officials at a 93 per cent discount.
Although BoU said the transfer price [20 per cent discount] was agreed upon after negotiations with dfcu, negotiation minutes were not given to AG during audit. It is not clear whether the minutes in question exist or not.
“The evaluation of the alternatives and assumptions on which the evaluation was based were not provided for verification. Therefore I could not determine the justification for transferring the performing loans at a 20 per cent discount,” the AG report reads.
The BoU management has explained that estimating the recoverable amount of a closed bank’s loan portfolio cannot be done with precision, adding that because of uncertainty in the recoverable value and the costs related to recovery, it is always true that the buyer (dfcu) will be unwilling to pay the full book value of the portfolio of bad debts.
“It is inevitable that these portfolios will always be sold at a discount,” the BoU management explained.
After transferring assets and liabilities to dfcu worth Shs70.9b, the buyer later returned non-performing loans totalling to Shs5.9b to the liquidator.
Consequently, the AG told Parliament that GTBU in receivership was to pay Shs4.7b to dfcu which is 80 per cent of the book value of the returned portfolio.
The AG said he did not assess the management of assets and liabilities purchased and assumed by dfcu. The MPs will seek to know the details of Shs4.7b paid to dfcu.
The AG has also queried BoU on the management of GTBU assets worth 23b, including Shs6.6b picked from the 23 closed branches.
The AG noted that some property and equipment of the closed bank was used to offset the undisclosed amounts payable to dfcu bank.
The AG, according to sources, has asked the House line committee to investigate this transaction.
Additional investigations have revealed that as at December 31, 2017, branch property and equipment valued at Shs782.2m was transferred to dfcu.
The balance, retained by BoU, had through unclear circumstances moved from Shs5.6b at the time of closure of GTBU to nil.
The Parliament’s committee on Commissions Statutory Authorities and State Enterprises (Cosase) is expected to probe BoU officials on these matters, including the appointment of Meys Consulting Engineers and Valuers.
The company was contracted to revalue 119 pieces of equipment which were sold during an auction held in November 2014 because the officers received were below the reserve prices but these items were not revalued.
They also hired Quickway Auctioneers and Court Bailiffs sell and value 423 assets. The sale fetched Shs879.2m. The MPs will seek to know the details of this transaction.
“We received the Auditor General report and as a committee we are going to have a meeting to agree when to summon Bank of Uganda [officials] and other people involved. It was Cosase that instructed AG to audit closed banks after we noted problems.
“Now that the report is out, all those issues you have raised including missing documents, abuse of procedures, mismanagement of the sale of assets and liabilities will be investigated. These are some of the things we will be looking at, including the payments to external lawyers and liquidation costs involving taxpayers’ money,” Mr Abdu Katuntu, the Cosase chairperson, said.
Parliament investigation
He added: “There are people who wanted to block the audit into Bank of Uganda, but the Speaker [of Parliament Rebecca Kadaga] ruled on this matter. In any case, as a committee, we are not dealing with merits and demerits of [the] Crane Bank case before court. BoU must explain why they sold assets of closed banks without valuation and who approved the sale at 80 per cent discount?”
Although GTBU in receivership is holding a balance of Shs5.2b of a recovery account, BoU officials have not settled verified claims worth Shs226.2 million.
Failure to settle verified claims to GTBU has delayed the winding up process and resulted into high liquidation and management costs.
The total liquidation cost incurred by BoU officials with regard to the disputed sale of GTBU stands at Shs754.3m. This amount includes Shs409.3m BoU officials paid to undisclosed lawyers and estimated liability from on-going litigations.
