ANALYSISBy Robert Kirunda
Both the Central Bank and dfcu Bank Limited confirmed that dfcu has now taken over some of the assets that belonged to Crane Bank Limited.
This brings to an end only part of the suspense that resulted from the Central Bank’s takeover of Crane Bank.
But much debris remains. With it come several unanswered questions. It is my intention to suggest a way to address these questions.
The first principal question is: What went wrong with Crane Bank? To answer this question satisfactorily, we must address many other lingering questions.
Much has been said about its original capital base being eroded. But what was this base in the first place? How was it comprised? How did it get eroded? At what point did this happen? Why were the proprietors unable to recapitalize the bank? We do not always expect banks to keep their deposits on hand.
But was this a case where deposits became capital; deposits became profits; deposits were used to cover losses and patch holes; deposits were used to amass value outside the bank’s balance sheet?
We all have on our minds the various branches that were rising at defiant speed across the country – some of which are now inevitably shut down. I will say nothing of the ever-growing real estate empire of one of the bank’s proprietors. Did dfcu take over these assets as well?
Bad loans
As for their lending habits, it has been suggested that Crane Bank was a good bank because it was viewed by downtown businesspeople as having more pragmatic lending practices. But is this all there was to the nexus between capital erosion and the fall of the once 4th largest bank by deposits? Were loans really the bank’s main purpose?
Was this the unluckiest bank whose customers all failed to honour obligations at the same time or is there more than is told of these lending practices and the larger business of this bank?
What about all those highly priced fixed deposits?
Where has all this money gone? Only Bank of Uganda (BoU) can confirm the ultimate figure. What we all know for sure is that a lot of taxpayer’s money has been injected to keep the doors open. And a significant portion of these funds has been withdrawn.
I hope that the other players in the industry can confirm that the large withdrawals that have been made over the last four months have translated into higher deposits elsewhere. I doubt that this is the case.
And it is this point that brings me to the centrality of why we need to pay closer attention to how this episode ends.
We have said nothing yet of the fate of Crane Bank employees.
If we are to avoid this sort of situation, we must address a crucial factor: How did this happen on the watch of the regulator? When they moved in, BoU designated Crane Bank as a systemically important bank.
In colloquial terms, what they were saying is the bank was too big to fail.
This is why a lot of money and time was invested in ensuring that the doors do not have to slum shut. But the second of the larger questions is: How did things get so bad as to require the sort of cash injection we are now talking about?
It is because of this question that I have suggested elsewhere that BoU has two options: Heads will roll on the inside of BoU; or the Central Bank will take stern, decisive and public action. I prefer the second option. I would like to suggest how this could be achieved.
Prosecuting proprietors
In the past, BoU preferred prosecution against a former proprietor, and has also set up a liquidation office to collect on assets of closed banks.
The former process scored some mileage and the late Sulaiman Kiggundu was sent to jail for a short span of time.
The latter process resulted in BoU collecting on assets for almost 12 years, before the same were factored to a private sector player.
This time, unlike the previous ones, there are a lot of public resources that need to be recovered. This needs to be done in a way that sends the message this will not happen again, if the industry is to outgrow these sorts of failures.
BoU should take a two-pronged approach.
A special prosecutor should be appointed to pursue criminal prosecution on offences under both the ordinary premises of criminal law (such as theft, causing financial loss, fraud) and under the Anti-Money laundering Act.
The special prosecutor will need experts in banking and broader aspects of commercial law, criminal prosecution and anti-money laundering.
In other words, this is a team of well-grounded individuals and not just one prosecutor as is in most cases.
This prosecution will happen before a judge of the High Court, as is the case in many other trials. I believe this is both necessary and provided for in the existing legal framework. Even better, we have precedent: It will be recalled that in 2005, a law firm was retained by the then DPP to beef up the prosecution team when Dr Kiiza Besigye was charged with rape. The same has been done in the General Court Martial.
In addition, it will be recalled that the media notices mentioned that dfcu had taken over only part of the assets and liabilities of Crane Bank. Anyone familiar with bank failures knows and expects a spate of litigation around the remaining assets and liabilities.
This is usually of a civil and commercial nature. I would counsel that all these matters be referred to a single judge and commenced at the same time.
BoU inevitably has an interest in this process because it retains the assets that were not taken over by dfcu. Referring these matters to a single judge achieves two purposes: it focuses the judge’s attention on what is inevitably complex litigation and helps ensure that all matters are not overshadowed by the enduring problem of court backlog.
Both judges would need to operate on a special dispensation from the Principal Judge and to work within a limited time frame.
It is not unlikely that many questions of law will arise. This kind of litigation, treated in isolation can take tens of years. A cap on time helps avoid this challenge. This approach is necessary because of the greater public interest involved.
Sector check
One must view this not just as a Crane Bank failure but also as an opportunity to truly investigate the very ethos of our banking system. I am persuaded that there will be more benefits to this approach than the limits of a press column can allow.
All bankers should know that there is a limit to how far public resources will be utilised to rescue them.
Where such resources are utilised, the regulator should spare no efforts in recovering them.
The tensions of who will take over Crane Bank may have subsided now but it is about time to shed the light of transparency on the opaqueness of the revolving doors of banking secrecy in this country. The taxpayers may pay the price to keep systemic banks open but at the very least, they deserve to know who was responsible and how it all happened.
Mr Robert Kirunda is a practising lawyer.