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What next for distressed banks like DFCU now that BoU won’t give them loans?

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The Bank of Uganda Governor Prof. Emmanuel Tumusiime-Mutebile while addressing delegates at the Annual Uganda Bankers’ Conference on July 17 in Kampala, categorically stated that his bank will not give loans to distressed commercial banks in the country.

“The BoU has no obligation to bail out a distressed bank by providing it with liquidity support, in the hope that it will somehow be restored to financial health. Such an option would be extremely dangerous,” he said. That warning did not go well with some bankers who were hoping to rush to the central bank for rescue. They will now have to look elsewhere for bailout.

As Mutebile was delivering his speech, Uganda’s Prime Minister Dr Ruhakana Rugunda and the Minister of Finance Matia Kasaija were so attentive because government wants commercial banks that are financially stable. This is so because stable banks boost the economy by lending to the private sector and government. On the other hand, distressed banks can end up costing government and impacting negatively on the economy as they have no ready cash to lend to borrowers.

Before Mutebile gave his address, Patrick Mweheire, the CEO of Stanbic Bank and Chairman of Uganda Bankers Association (UBA), had in his earlier speech hinted that about six commercial banks of the 24 under the supervision of BoU were loss making, something he said was of a great concern. That means such banks are distressed as their debtors are not making payments on their debts; hence the banks are losing money for future business.

Mweheire also cried out that commercial banks in Uganda are not being helped by courts of law as they take a long time than to dispose of the civil suits. And that this impacts negatively on their investments such as limiting on their liquidity and growth of their loan portfolio.

In Uganda, most of the court cases involving banks arise of debtors failing to pay back the loans as agreed. However some banks are careless when giving out loans especially to tricky borrowers who exploit the loopholes. Other losses are a result of syndicates between borrowers and the staff in the banks.

But the governor in his statement pointed out that mismanagement of the money leads to the situation of distressed banks. And he sees no value in giving a mismanaged bank a bailout which could create losses at the taxpayers’ expense.

Question is whether Mutebile is watching such distressed banks and whether he intends to close them to save depositors money which he said s one of the major considerations for the closure of any bank. He mentioned he closed five such banks at different periods. Those included National Bank of Commerce, Greenland Bank and recently Crane Bank among others.

But as that happens, DFCU, a major commercial bank that acquired the other in January 2017 is in a liquidity crisis even as it earned in excess of Shs20 billion as net profit that year. Insiders say that bank was recently denied a loan request from BoU, a proof that the local banking industry is weak. That could explain why that bank failed to reach out to fellow banks but instead wanted BoU to loan it taxpayers’ money at a cheap rate.

That bank is in the situation where major shareholders want to exit and top managers resigning as well as high deposit withdrawals. It appears shareholders want to share the profit and go instead of ploughing back some of the proceeds. It would be illogical therefore for BoU to give such a bank a loan which comes with a low interest rate compared to that obtained from a fellow commercial bank. That bank was aware of that difference before tempting BoU.

We are now waiting to see if BoU will act to wipe out distressed banks in the industry like it has done in the past. A distressed bank is as good a failed bank and one of the measures to arrest the situation is to sell them, merge them or sell its assets, transfer its liabilities or liquidate them.

This is what some of the defunct banks went through as BoU erased them from the local banking industry. However, on the recommendation of parliament, BoU is being investigated by the Auditor General for selling and liquidating some of the banks without writing any report.

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