Why big investors are defaulting on bank loans

Last month Senana Investment placed caveats on three contested properties that are subject of dispute between the firm and Standard Chartered Bank over a Shs34 billion loan. It warned potential buyers of losses.
A few days after Senana’s move, the law firm KTA Advocates, gave public notice of an intended sale of Visare Uganda Ltd’s apartment block in Lugogo, Kampala.
The developments have been the tale of the property industry for years. Not a week elapses before an auctioneer or law firm advertises an intended sale. Some of them have been big.
The threat of foreclosures has been a constant threat since commercial banks’ appetite for lending to the real estate sector increased between 2007 and 2009, creating a bubble of growth.
Figures from Bank of Uganda (BoU), show that funding to the sector rose from Shs226.5b in 2007 to Shs586.6b the following year and by an additional 52.7b in 2009. It exceeded the Shs1 trillion mark in 2010 before the bubble burst in 2011 due to mostly external factors over which Uganda had no control.
One of the external factors was the global financial meltdown, which was triggered off by developments in the housing market in the United States. Many households borrowed much more than they could afford to pay because banks had suddenly made available to them mortgages at low interest rates, only for the interest to balloon a year or two later.

Cheap mortgages distorted the housing sector by fuelling house price increases, but the prices were to later stagnate and plummet, leaving banks with assets that were worth much less than what they had lent out. That was replicated in Uganda and exacerbated by inflation, which rose from four per cent in 2010 to 16.2 per cent in 2011. Commodity prices soared and consumption sharply declined. The shilling also sharply depreciated against the dollar.
The banks responded by hiking interest rates from 21 per cent to 35 per cent, which resulted into a rise in the number of non-performing loans (NPLs) and the onset of foreclosures.
Figures from the BoU indicate that as of December 2011, the NPLs amounted to only 2.21 per cent of the gross number of loans, but shot up to 4.2 per cent in 2012 and 5.43 per cent in 2013.
BoU’s director for economic research, Dr Jacobs Opolot, says other factors such as the failure of the oil industry to take off were partially to blame for the tumult.
“Members of the business community borrowed a lot expecting the oil industry to take off. They borrowed in dollars and invested in real estate, expecting to be paid in dollars. Besides not being able to rent out most of the properties, the shilling depreciated against the dollar, which meant that they needed extra cash to service the loans,” Dr Opolot says.
But the story of NPLs and foreclosures is not new. It has claimed quite a number of scalps since the first decade of the millennium.

Why stick to expensive money?
The outcry about high interest rates has been around for a while now. During celebrations to mark the 57th independence anniversary, President Museveni said it was partially responsible for pegging back economic development, but why is the business community stuck to doing business with banks that are operating like sharks? Is it impossible to access cheap money?

Mr Gideon Kirumira, who manages three commercial buildings in town, including Royal Complex, says it is possible to access such money from outside Uganda, but hastens to add that many Ugandans run their businesses informally, which would make it difficult for them to access such money.
“It is possible to access cheap money if you have a good business portfolio and assets. You should also be quite organised. Your returns and other relevant papers must be in order, but most of our people do not operate in that way,” Mr Kirumira says.

What mistakes are being made?
During an interview late last year, property mogul Sudhir Ruparelia said real estate is not the right business for people operating on borrowed money.
“Capital investment in real estate for new entrants (in real estate business) is not advisable. Real estate is fine as long as you have created surplus cash. If you want to grow with borrowed money, real estate is the worst business to take on,” he said.
Mr Kirumira echoes Mr Ruparelia’s thinking.
“Besides, the (high) interest (rates), they have to pay rental tax, ground rent, income tax, ground rates and also meet maintenance costs. Some of these buildings accommodate hundreds of people so the overheads are also high,” Mr Kirumira says.
“Banks start computing the interest on their loans almost immediately after the completion of the building, but marketing the building and occupancy often times take long. One may not be able to fill up the building immediately after completion,” he adds.
According to Mr Kirumira, matters are not helped by the fact that occupancy and rent paid for buildings in the central business district diminishes with every floor of the building that one ascends.
“The higher you go, the lower the occupancy and the rent gets. Occupancy rates are highest on the ground floor, first and second floors, and may be the third floor because of the retail nature of the business,” he further says.
The fact that most of the upper floors of the buildings are unoccupied means they are not making money yet they spent as much on them as they did with the more attractive floors. Landlords have started turning upper floors into accommodation areas while others like the Ruparelia Group have started turning some of them into parking areas.
Poor returns from sections of the buildings perhaps explains why banks and their erstwhile clients are locked up in disputes.
Last year, there were more than 10 major disputes. Some of those include one between Habib Oil and Standard Chartered Bank; Alexander Okello and Standard Chartered Bank; Shumuk and Dfcu Bank; Shumuk and Guaranty Trust Bank and Parambot Breweries Standard Chartered Bank.
Many banks also find themselves unable to recoup their money because the properties they took from the mortgagors cannot be sold for the right price.
Mr Festus Kateregga of Quickway Auctioneers and Court Bailiffs, says his firm handles at least 12 major auctions per year. If each of the 376 registered auctioneers does the same, it mean that we have at least 1,880 auctions per year, but Mr Kateregga is quick to add that some auctions flop.
“Sometimes the offers are way below the reserve prices. Naturally, the banks do not accept. Even now, there are so many properties on the market, but the banks find the offers quite unacceptable. There is, for example a five-acre piece of land in Kawempe Industrial Area, but there are no buyers,” he says.

Borrowing vs the economy
What then, is the problem? Is the economy doing so badly, or is borrowing money for business highly risky?
Mr Anthony Aol, the Shadow Minister for Finance and Economic Development, who is also the MP (FDC) for Kilak County North, blames the situation on what he termed as “doctored figures” on economic growth and high interest rates on bank loans.
“The data that should be helping business people to make decisions is fabricated. It is aimed at impressing donors and others who give it money, but it in the end hurts the business community. The interest rates are not in tandem with what people get from business. The interest often ranges between 20 and 30 per cent, yet the money is given over a short term. You cannot recoup money in such a short time,” Mr Aol says.

Unique challenges
The executive director of the Uganda Banker’s Association, Mr Wilbrod Owor, however, says it is not entirely about the interest rates.
“Businesses face different challenges. Sometimes conditions in the market are tight and some businesses may experience less turnover…other times there could be delays in certain major projects or in settlement of domestic arrears by government. Each particular segment of business may face unique challenges from time to time,” Mr Owor says.

Mr Owor adds that banks are working hard to lower the cost of doing business, but other facets of the economy must also feed into that.
Dr Lawrence Bategeka, the vice chairperson of the Parliamentary Committee on the National Economy, says: “I would need to look at the figures again, but we have macroeconomic stability, the foreign exchange markets are not volatile; interest rates may be high but they are stable. Output in agriculture and manufacturing are also okay.”
Mr Bategeka who is also the MP (NRM) for Hoima Municipality says those factors coupled with increased revenue collection are indicators that the economy is doing well, but that will not reassure the people at Senana and Visare who are fighting foreclosure.

Mr Owor says his organisation is in the final stages of operationalising an Asset Reconstruction Company (ARC), which will be tackling challenges of exposure from NPLs and businesses constrained by loans by, among other things restructuring loans.
Whereas that might be great news, for the people at Senana and Visare, there are fears that ARC might arrive a day too late.


LOST EMPIRES

Sembule Group
The biggest scalp was perhaps that of Sembule Group of Companies, the first indigenous firm to produce steel products, own a bank (Sembule Investment Bank), an insurance firm (Pan World Insurance), open a televisions and radios assembling plant, and manufacture energy saving bulbs and street lights . The groups flagship company Sembule Steel Mills in Nalukolongo was taken over in September 2014.
Trouble for the group began in 1997 when it took out a $6.6 million (Shs24.4b) loan from the PTA bank.
“PTA Bank did not trust that the directors and the management would be able to manage the money. The bank insisted on a management contract,” says Mr Stephen Sembuya, the company’s last chief executive officer (CEO).

Mr John De Clerk, who was described as “an expert in the steel industry” was appointed as CEO and the owners confined to the Board.
“Eventually, the CEO also wrote a letter requesting him to leave the premises and only come there when they were needed for a board meeting. Within a year, the management had misappropriated and wasted funds on things such as tarmacking the premises, changing furniture and installing air conditioners, which the owners had not prioritised,” Mr Sembuya says.
That marked the beginning of the fall. Mr De Clerk was fired and the firm placed under two receivers before it was handed back to the owners after more than seven years of their absence and loss making, but by then, it was heavily indebted. It never recovered.

Fort Portal’s Begumisa
In June 2010, Fort Portal-based businessman, Mr George Begumisa, lost a commercial building housing a hotel, bar and restaurant in his home town following failure to service a $5 million loan he had obtained from the East African Development Bank and Barclays Bank.
The banks also sold off his fish factory on Sir Apollo Kaggwa Road in Kampala, his plot in Kyadondo, Kampala, other buildings and farms.
Damani

In September 2012, tycoon Hashad Damani, lost the property next to Crane Chambers on Kampala Road to Sudhir Ruparelia following his failure to pay a Shs5b loan he had taken from Crane Bank.
Capt Roy
In March 2017, Capt Joseph Charles Roy, once considered one of the richest men with interests in real estate, rhino farming and air cargo, ran to court in an attempt to stop his empire from buckling under the weight of a $15 million (Shs55.5b) loan he had obtained from Crane Bank.
He sought to save his stake in Conrad Plaza and Plot 30 Jinja Road, saying he had paid back at least $19 million to the bank.