Shs528b in banking exposed to profit repatriation - report

Millions of dollars are taken out of the economy annually in form of profit repatriation. PHOTO | FILE

A report on Uganda’s banking sector has established that more than Shs528b, which accounts for 72 per cent of the total profits after tax made by banks in Uganda, was at risk of capital flight in 2019.

Detailed notes from Summit Consulting’s banking sector report 2020, indicate that non-native banks operating in Uganda are the highest beneficiaries in the financial sector.

“Banks from South Africa, the United Kingdom and India remain the highest beneficiaries from Uganda’s financial sector with more than 72 per cent of total profit after tax generated by non-native financial institutions accounting for Shs528 billion which has been exposed to capital flight,” the report reads in part.

However, the findings did not reveal if the money was indeed repatriated.

Mr Mustapha Mugisa, the Summit Consulting team leader, defines capital flight as taking funds (usually profits) out of Uganda back to the investor’s home country (or elsewhere outside Uganda).

The two banks domiciled in South Africa - Stanbic Bank and Absa - with subsidiaries in Uganda, pose the highest risk of potential repatriation of capital worth Shs258b.

UK, from where Standard Chartered Bank is headquartered, has the potential to repatriate Shs124.7b.

Bank of Baroda and Bank of India, whose parent companies are based in India, have the potential to repatriate Shs50.9b while the US where Citibank is headquartered could drawback Shs48b.

Regional banks operating in Uganda from Kenya such as Equity Bank, KCB Bank, Diamond Trust Bank, ABC Bank and NCBA, among others, exposed Shs34.7b in 2019.

Nigeria and Mali accounted for Shs13.2b and Shs20.2b respectively.

Subsidiaries whose parent companies are based in Libya, Egypt and Tanzania could not repatriate any money in 2019 as they reported losses during the period.

Uganda has 26 commercial banks licensed by Bank of Uganda with most of them domiciled in countries overseas.

How it is done
Mr Mugisa said banks have multiple ways of engaging in capital flight, which among them “include transfer pricing, bad debts booking and transfer to subsidiaries and overpricing subsidiaries”.
Online sources define transfer pricing as an accounting practice that represents the price that one division in a company charges another for goods and services provided.

Transfer pricing, however, is mostly a tax avoidance tool where companies charge a higher price to divisions in high-tax countries with the aim of reducing profit while charging a lower price to increase profits for divisions in low-tax countries.

Uganda in 2011 put in place transfer pricing regulations in the income tax act aimed at curbing the act.

Impact on economy
The funds taken out of the country, Mr Mugisa say, would otherwise have been invested or ploughed back into Uganda to stimulate production and grow the gross domestic product.

Essentially, it means companies make money and take it out of the country.

“So capital flight makes Uganda poorer and keeps it dependent on imports. Profits are made in the country but they do not develop the country,” he says.

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