Justice David Wangutusi, Head of the Commercial Court, has substantially reorganised the deck of cards in the ongoing Crane-Bank/BoU/Dfcu saga. On Monday, he ruled that upon invoking receivership, which carries substantial relief, the legal entity formerly known as Crane Bank was no more, lacked legal personality, including capacity to sue or be sued in its own name. Further, the judge ruled that under the Financial Institutions Act, the sale and transfer of assets and liabilities was a final event without residual powers vested in Bank of Uganda to sue.
Bank of Uganda short on its books had sought to recover in the main suit Shs397 billion from the former owners of Crane Bank, whom it had just ousted from ownership of the bank, shut it, and sold it to Dfcu. Earlier accounts of the transaction are however disputed. The former receiver Mr. Katimbo Mugwanya only received partial inventory, and wasn’t part of the final disposal of the bank.
Second, the [sick bank] sic needed urgent cash infusions to protect its franchise. Crane Bank long in the market for a buyer due to its rapidly deteriorating financial position, was moving from illiquidity to insolvency.
In the exercise of its functions, Bank of Uganda under the constitution is not subject to direction or control of any person or authority. This reason comes after providing that the Governor and his Deputy are public offices. Being public actually has the opposite effect subjecting them to oversight.
The instant case of Dfcu should not be blown out of proportion. The closure of Crane Bank solved a number of systemic problems that were brewing in the banking system. Being a local privately-owned bank, it had no access to cheap emergency funding larger groups have or enjoy. Its association with Post-Exposure Prophylaxis (PEP) complicated its interaction with the international banking system.
Uganda has adopted the position that banks cannot have concentrated ownership of the degree that got Crane Bank into trouble because of the stress it puts on separation of roles between bank capital, management and regulatory responsibilities.
Right now, BoU’s suit for $100m is dead. That is about 10 per cent of what we owe the Chinese in annual escrow payments. The arrival of fintech in the credit industry at fixed rather than variable terms has allowed Uganda to avoid a credit crunch that follows a bank closure.
Crane Bank was big, but not a systemic risk to the broader economy. It was a source of cheap money for its owners. A failure further up the ladder, Centenary Bank, Barclays or Standard Chartered would be a cause of bigger alarm. Inspite of its reputation as a well- run bank, Centenary Bank must face two options - go public immediately to diversify its capital, or spin off its highly profitable micro-lending business.
Second the long arm reach of BoU to capture capital flight must be strengthened and captured under a new legal regime. In the last decade, BoU allowed Barclays, for example, to charge unusually high user fees to recoup regulatory losses in the US and the UK before allowing them to exit the market under sale to Absa.
The Central Bank’s resolution authority must be augmented to re-characterise transactions used to check abuses like insider lending. Lastly, the public accountants body, Institute of Chartered Public Accountants of Uganda must explain to the public how exactly the banks for the closed bank were audited by its members over the years without finding a single fault. An unqualified opinion as later developments hid many management problems.
It’s a legal drama. Crane Bank had questionable loans, property arrangements and deposits. Bank of Uganda knew about this, but can’t recover as Crane Bank’s arrangements were directives from orders above. In one way, Mr Wangutusi saved both BoU and Mr Ruparelia the anguish of a lengthy trial that could only serve to spill.
Mr Ssemogerere is an Attorney-at-Law and an Advocate.