When will government’s commercial bank start operations?

The promise:
In the run up to the 2016 General Election, the ruling National Resistance Movement (NRM) party released a manifesto in which it committed itself to addressing issues around macro-economic stability if it was given a fresh mandate.

The manifesto listed eight areas of action. Lying in position five on that list was a promise to establish a state-owned commercial bank.
“The NRM government will set up a commercial bank in order to increase access to credit. This will offer affordable credit to the private sector,” the manifesto reads in part.
The idea to once again set up a commercial bank was received with a lot of excitement in business circles especially given the many difficulties that local business persons have been experiencing in accessing credit.

That situation arose partly due to government’s decision in 1997 to sell its stake in what used to be the government- owned Uganda Commercial Bank Limited (UCBL). UCBL was established in 1965 by an act of Parliament, The Uganda Commercial Bank Act of 1965, as a successor to the Uganda Credit and Savings Bank, which had earlier been set up by the colonial administration.
It rose to become Uganda’s biggest financial institution followed by another defunct bank, the Cooperative Bank Limited.

The bank greatly benefitted from Amin’s decision to throw out Ugandans of Asian origin and all British protected persons and nationalise their businesses.
The bank took advantage of the presence of vacant premises to expand its network of branches. By the time Amin was ousted, UCBL operated 186 out of the 231 bank branches across the country.
Even under the NRM, the bank continued its ambitious expansion programmes by opening up in sub- counties, but poor management of loan portfolios and the high cost of maintaining nonprofit-making branches soon caused it solvency problems.

The bank was forced to not only close all the rural branches, but also to seek capital injections from the government.
In 1999, government sold 49 per cent of its shares in the bank to Westmont Land of Malaysia, but it was once again forced to recover the same after Westmont failed to meet its side of the bargain.
The majority of government’s shares in the bank were finally sold off to Stanbic late in 2001.

Prior to selling to Stanbic, Bank of Uganda, in a statement issued in May 2001, detailed the objectives behind the sale.
“The first objective is to ensure that UCB is managed in a professional and prudent manner in order to fully safeguard its deposits... The second objective is to ensure that UCB maintains a nationwide branch network, and in particular, that it maintains branches, and a full range of banking services, in areas of the country which are not served by other banks,” read the statement in part.
The promise to recreate a national commercial bank has raised questions about how government will go about creation of the new institution and how it will be managed.

Capital investment
According to the manifesto, government intends to go about it by building on what is already in place and providing the required capital investment by way of capitalisation.
“In order to address the macro-economic stability issues, NRM will pursue the following;…establish a commercial bank by merging Post Bank and Pride Microfinance Limited, and recapitalise Housing Finance Bank to enable it play its core role in financing mortgages,” the manifesto reads in part.
Now more than 31 months since the manifesto, the populace handed the NRM a fresh mandate, there is nothing to suggest that it is moving to deliver on this promise.

Impact
Insufficient access to finances, which a locally-owned commercial bank would have addressed, continues to be the biggest impediment to growth of the local business sector.
Failure on the part of the local business communities to access funds has stifled local entrepreneurship.
Local businessmen are finding it increasingly hard to accumulate capital and nurture technological innovations. This is evidenced by the fact that not many indigenous traders are upgrading from trade to manufacturing or industrial production, which is pegging back growth and development.

Uganda is an agricultural country with more than 85 per cent of the population engaged in agriculture. There are however no financial institutions to provide low interest loans in the form of crop finance to facilitate trade in agricultural produce such as coffee, beans, cotton and others from the farmers.
Little wonder that many of those involved in the trade of such commodities have not proper grain processing and storage facilities such as silos.
It also means that no financial institutions are available to offer those involved in agriculture with loans to finance investment in machinery and tools to boost production while at the same time taking into consideration factors such as vagaries of weather and seasons.
The situation has contributed to the collapse of the rural economies and increase in the levels of poverty in the countryside.

Income inequality
The poverty and income inequality has resulted in rural urban migration as sections of the populace descend on the towns in search of jobs or anything that can put food on table.
The sharp rise in the number of children that we find on many streets of Kampala City and in most major urban centres is also partially as a result of the poverty and income inequality which has been partially occasioned by lack of finances to grow the rural economies.

While it is true that Uganda has very many other banks, their policies do not seem to be tailored to serve the peculiar economic situation in the country or the varying economic fortunes of the various parts of the country.
Those banks do not seem to be serving the interests of the bulk of Ugandans. We, are therefore, back to the situation that prevailed in the immediate post-independence era when governments were compelled to create their own banks in order to enable their people access cheap money.

Official position

The Minister of State for Cooperatives, Mr Fredrick Ngobi Gume, told Daily Monitor at the weekend that government’s focus has shifted from merging the financial institutions to create a commercial bank to reviving the Cooperative Bank and finding other ways of ensuring that business and farming communities have access to cheap money. “The essence wasn’t necessarily to merge those institutions, but make resources available so that we offer farmers and low income business people low interest loans. We are talking of loans that attract single digit (interest rates) figures because we realized that local entrepreneurs might not be able to grow their businesses using money borrowed at commercial rates,” Mr Gume said. To that end, he said, government has already made available Shs75billion to the Uganda Development Bank. He said that local investors can now access loans through the Ugandan Development Corporation.

Monitor's position
The idea of opening a national commercial bank is quite welcome but as we prepare for it to “return,” there is a need to try and avoid the pitfalls that led to the closure of both the Cooperative Bank and the Ugandan Commercial Bank.
Some of the reasons that led to the collapse of the two banks included mismanagement, management fraud, poor credit policies and practices, appointment of incompetent and unqualified persons into senior management positions, insider lending, failure by the Bank of Uganda to meet its supervisory functions, government’s interference and failure to pay its debts. While it is not clear how much government owes the defunct banks, on May 13, 2016, the Minister of Trade and Industry, Ms Amelia Kyambadde, told a gathering at the commissioning of an office block of Kyankwanzi Savings and Credit Cooperative Society that government owed 10 different cooperative societies at least Shs13b. This time round,w there should not be heavy government involvement as that has previously proved to be one of the biggest causes of low profitability and gross inefficiency. The new bank should be allowed to run professionally.

Voices

“We advised the government to focus on cooperatives. For you to jumpstart the economy, you need to have an agricultural bank. There is no way you can reach middle income status unless you invest in agriculture, which is the strength of the economy. The National Development Plan II emphasises investment in agriculture, tourism and development of the oil infrastructure, but government is not looking at it,” Anthony Akol, Kilak County MP (FDC), & Shadow Minister for Finance and Economic Planning

“Formation of a commercial bank to provide low interest loans to our business people and industrialists is certainly a great idea, but these people’s (NRM government’s) management is hopeless. What happened to UCB? Will the story be any different? Such a bank cannot work for as long as banks are managed like Mr Museveni ATM from which he withdraws funds for distribution at election time,” Francis Barnabas Gonahasa, Kabweri County MP & Shadow Minister for Agriculture

“The thinking is right. It will be great if the implementation is also right because the biggest challenge that we have as a country is expensive finance. The Commercial banks levy exorbitant interest rates and the loans are short term, which is not favourable for agriculture and agro based businesses. But the question is who will get the money? We don’t want a situation where the money ends up the hands of a few government officials and rich people,” Richard Muhumuza Gafabusa, Bwamba County mp (NRM)

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