Sick economy claims more casualties

Sudhir Ruparelia, Uganda’s richest businessman has commandeered the front pages in the last few days with an urgent message; the economy is sick. He has put up his Crane Bank for sale. Crane Bank, the third largest bank in Uganda with 46 branches registered soaring losses last year raising eye-brows.

The toll of provisioning of such a large portfolio in such a short time explains the urgent need to replenish the bank’s capital reserves. Crane Bank’s lending spree was partly banked on expensive deposit mobilisation.

It’s only a few years ago when Crane banners advertised 20 per cent fixed deposit, a few points above the 365 day note government debt. Tons of people would be happy to beat inflation by 12 per cent, officially inflation is reported in single digits but it is more like 12-15 per cent per annum.

This did not sound like a good idea in hindsight given the relatively cheap deposit mobilisation costs of some of its rivals. Market leader Stanbic has a “golden” handshake that allows it to do most of government’s banking.

Institutions that need AAA ratings to settle high denomination transactions are likely to look at the biggest foreign banks, Stanbic, Barclays and Standard Chartered, the last one riding off one of the worst years in its 114 year old history in Uganda.

In this environment, BoU’s action giving them relatively small National Bank of Commerce’s deposits to absorb; DFCU got Global Trust’s was a false positive. They acquired some deposits at a zero premium while the Central Bank assumed the liabilities of the liquidated banks.

Once the economy began slowing down, Crane’s thin margins began to wear even thinner. Unlike the foreign banks which pool risk with their offshore parents, Crane did not have that advantage. Its shareholding concentrated in the hands of one family even after dilution was a problem. The world of international business and commerce; the lucrative international forex markets and credit programmes underwritten by lenders were limited.

The large trade loans that went sour after the currency slide in 2013/2014 affected their clientele causing many loans to crash.

For a while Sudhir rode the tide, he found a way of efficiently converting some of these properties into “Crane branded” structures throwing as many as 14 buildings on Kampala Road onto the rental market. That’s not counting scores of other buildings in areas like Kamwokya. Rapid conversion has an impact on quality; most loans in Uganda reach disbursement stage when just 80 per cent of the face value is left.

Banks eat up between 6 per cent and 10 per cent in official fees and unofficial commissions. Borrowers also have to pony up another 10 per cent in legal fees, stamp duty, and blood money to collect the necessary consents and leave a little breathing space for cash-flow in the dry months. As such, a loan with a tag of Shs1 billion disburses at 800 million.

The inflation monster if a loan is disbursed in foreign currency is another headache. Officially, inflation in Uganda is very low; it’s not a problem even though dollar loans have faced even more trouble. A dollar coupon rate of 12-14 per cent is murder in the civilised world; it effectively translates into a domestic rate of 25 per cent. Crane Bank used to advance credit at rates nearing 30 per cent.

Rather than let the problem fester, it seems the old sage at the Central Bank, Governor Mutebile and his top lieutenant in charge of supervising banks, Justine Bagenda turned the heat on Crane Bank. This process managed through internal directives is feared by banking licence holders. A few lucky ones like Orient Bank survived it. With little or no warning, the Central Bank seizes the statutory deposit and shuts the doors.

Realistically Crane Bank is “friendly forces” in the political eco-system. It’s too big to fail. Closing Crane Bank is not an option given the disruption it would cause in banking and real estate at the same time.

Mr Ssemogerere is an Attorney-at-Law and an Advocate. [email protected]