Mutebile tells distressed banks to forget bailout

KAMPALA. The Governor Bank of Uganda, Mr Emmanuel Tumusiime- Mutebile, has asked the distressed banks he did not name to stop wasting time begging for bailout and warned that such move would be “extremely dangerous”.
Speaking at the second annual bankers’ conference at Kampala Serena Hotel yesterday, the governor said BoU has no obligation to bail out any distressed bank because the central bank’s role is to protect depositors of the commercial banks and not the shareholders.

“The BoU has no obligation to bail out a distressed bank(s) by providing it with liquidity support in the hope that it will somehow be restored to financial health. Such an option would be extremely dangerous,” Mr Mutebile said.
“[The bailout] would allow the distressed bank to continue being mismanaged in the same manner that caused it to become distressed, thereby incurring further losses at the taxpayers’ expense.

It would also send a signal to all participants in the financial markets that mismanagement carries no consequences for the owners and managers of banks,” he added. Explaining the controversial sale of Crane Bank to dfcu Bank, Mr Mutebile explained that BoU had taken over the bank after an inventory of its assets and liabilities was carried out by a reputable accounting firm.
Although the matter is in court, the governor said the Crane Bank inventory found that the bank was massively insolvent, with core capital of negative Shs240b as a result of mismanagement.

However, BoU has been accused of writing off Shs650b as bad loans, which had security, and created negative capital.
In his counter suit against BoU, former Crane Bank owner Sudhir Ruparelia, however, blamed the bank’s problems on the weak economy and that when the case comes up for hearing, he will adduce evidence to prove he did not defraud the bank for his personal gain.

“The notion that this bank could have been rehabilitated by its owners - the same people who were responsible for its failure - if only the BoU had provided more liquidity support and allowed the owners to remain in control, is not tenable,” Mr Mutebile said.

In resolving a failed bank, the governor explained that the Financial Institutions Act provides for several resolution modalities. For example, he said the failed bank can be sold, merged with another financial institution, subjected to a purchase of assets and assumption of liabilities transaction (P&A) or put into liquidation.

Mr Mutebile said since 2010, the BoU has intervened in five banks, closing three of them and taking two others into temporary statutory management, adding that in none of these cases did depositors lose their money, nor was there any danger caused to the stability of the financial system.

Recent concerns

Dfcu position. The governor’s warning flies in the face of what dfcu managers in a public notice at the weekend called “malicious rumours” in regard to the liquidity challenges and the exit of one of the bank’s long term shareholders – CDC .
Assurance. The executive director of Uganda Bankers Association, Mr Wilbrod Humphreys Owor, said there is no liquidity problem at dfcu Bank.

“Dfcu Bank has liquidity of more than Shs1.2 trillion in instruments, cash in banks treasury bills and lending to other banks; Dfcu bank also has more than Shs400b in tier one capital, have credible shareholders comprising Arise company, which has 59 per cent, Rabol Bank and FMO, all these institutions are triple AAA rated financial institutions, so dfcu cannot be in a liquidity problem,” he said.

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