A special audit report of Bank of Uganda (BoU) on seven defunct commercial banks indicates that Dfcu Bank, which took over its competitor Crane Bank Limited (CBL), played the role of the valuer and buyer at the same time, leaving questions whether such a transaction can be said to be credible.
The Auditor General John Muwanga who compiled the report, says that: “In a meeting with… EDS (Executive Director Supervision) Justine Bagyenda (fired earlier by BoU Governor Emmanuel Tumusiime-Mutebile), he says: “the EDS explained that BoU relied on the Inventory report and due diligence undertaken by Dfcu to arrive at the Purchase of Assets and Assumption of Liabilities (P&A).”
That means, according to the report, the Shs200 billion Dfcu Bank is meant to pay came from its side and not the side of BoU. A source at BoU says Bagyenda and Deputy Governor, Dr. Louis Kasekende played a big part here as they so much wanted Dfcu Bank to buy off Crane Bank at whatever cost.
The contentious loan book of CBL
According to the report, at the time of takeover by BoU, CBL net loans amounting to Shs768 billion constituted 65 per cent of the total assets. And according to the P&A, the loans and advances of CBL were transferred to DFCU except the insider loans.
According to the CBL Inventory report as at October 20, 2018 (positron at the start of statutory management), CBL had Gross loans and advances of Shs1,096,351,522,000 and made provisions for impairment of loans and advances of Shs328,331,847,000 resulting into net loans and advances of Shs768 billion.
Important to note is that Dfcu received the CBL Inventory report on December 12, 2016 and undertook due diligence whose results were incorporated in a bid for the purchase of all the assets and assumption of the liabilities of CBL submitted to BoU on December 20, 2018.
According to the DFFC Bid, the due diligence conducted indicated net loans and advances of about Shs576, billion and the bad book (fully provisioned for and written off loans) of about Shs485 billion.
DFCU could offer a deferred cash bid of consideration of Shs200 billion to buy CBL based on net recoveries of the bad book (Shs485 billion). Additionally, the recoveries of the bad book would be used to settle CBL liability to BoU to a maximum of Shs200 billion.
Meanwhile Muwanga in his reports cites a Memo from Ms Bagyenda to Mutebile dated 31st July 2017, indicating that the bad book was Shs570.38 billion out of the gross loans of about Shs1. 2 trillion. This was bad book was unfairly transferred to Dfcu to provide a resource for repayment of loans of Shs200 billion and bridge the shareholder’s deficit of Shs439.72 billion at the date of takeover.
“I could not establish how the consideration of Shs200 billion was derived from the bad book of Shs570.38 billion.
I was also not provided with the schedule of loans and the corresponding collateral transferred to Dfcu therefore I was not able to establish the values and categories of loans transferred performing loans, non-performing loans and fully provisioned/written off loans (bad book)),” Muwanga complains in his report.
Failure by BoU to sign CBL annual report
Mr Muwanga was also frustrated that BoU did not sign a report on the financials of CBL after taking over its management. “The annual report and financial statements for the year ended 31th December 2016 provided were neither signed by BoU nor the Auditors, Furthermore BoU did not provide financial statements for the period 1st January 2017 to 25th January 2017 (P&A completion date) thus I could not establish the details and values of assets and liabilities transferred to Dfcu,” he says.
“In absence of the signed financial statements, I was unable to rely on the accounts to establish the financial performance of CBL during statutory management and its financial position as at 31st December 2016,” he adds.
Plan to revive CBL ignored by BoU
Section 89(5) of the FIA states that the central bank shall exercise statutory management over a financial institution for the minimum time necessary to bring the financial institution into compliance with prudential standards.
In achieving the above function, Section 90(4) (c) of the FIA 2004 requires the statutory manager to evaluate the capital structure and management of the institution and recommend to the Central Bank any restructuring or re-organization which he or she considers necessary and which, subject to the provisions of any other written law may be implemented by him or her on behalf of the institution.
However, according to the report, BoU management did not provide a plan or assessment detailing efforts to return the bank into compliance with prudential standards despite funding of Shs478.8 billion being injected into CBL. In absence of the plan or assessment to revive CBL, I could not provide assurance as to whether Sections B9 (5) and 90(4Xc) of the FIA 2004 was complied with.
“BoU management explained that when BoU took CBL into statutory management/ it was found to be grossly insolvent. It is not possible to revive a bank with this level of insolvency and restore it to full compliance with capital adequacy and other requirements. Therefore BoU pursued other means to resolve the bank,” he says. Mutebile has always made similar assertions whenever he gets opportunity to address audiences. He made a similar statement as he addressed participants attending the recently concluded Uganda Bankers’ Association conference held in Kampala.
Bagyenda Kasekende help Dfcu skip paying interest on Shs200 billion
The report by Muwanga wonders why Dfcu was not asked to pay interest on Shs200 billion it is paying in instalments to buy off CBL.
I observed that the Board position to charge interest on the Shs200 billion liability assumed by Dfcu could not be included in the P&A and the Shs200 billion liability agreements with Dfcu since these were signed two days before the Board meeting,” he says.
In the next meeting held on June 22, 2018 at the Office of the Auditor General, Muwanga says that BoU management explained that the Board was only informed to ratify the decisions made by management since the Board delegates powers to the Governor to make such decisions.
BoU management further explained that the Board resolved to recover the said interest from the shareholders of CBL and not from Dfcu|. The purchase and Assumption agreement had already been signed.
CBL insider Ioans of Shs63.6 billion, some already collected by BOU
At the time of writing this report, Muwanga says BoU had collected a sum of $1, 141,102 (about Shs.4, 1billion) from these loans leaving a balance of about Shs59.5 billion. “The loan files and the collateral are still in BoU custody,” he says.
BoU claims against CBL shareholders unfair!
Muwanga reports that according to the P&A agreement between BoU and Dfcu; the rights of CBL to claim against its shareholders, directors or other parties for wrongs done prior to takeover date would remain with the Receiver (BoU).
BoU’s failure to prepare statement of affairs of CBL
Muwanga quotes Section 106(1) of the FIA 2004 requires the liquidator to keep proper financial ledgers and financial records in a manner prescribed by the Central Bank in which shall be recorded all financial transactions relating to the liquidation. As such, BoU as the liquidator was expected to prepare a statement of affairs for CBL in receivership but that was not done.
“BoU management explained that CBL is still under receivership and has not yet progressed into liquidation. At the appropriate time, following completion of the current court cases, a statement of affairs will be prepared in accordance with the law,” he says.
Tax refund to CBL unestablished, BoU to blame
Muwanga says the tax refund to CBL could not be established because financial statements for the period ending December 31 2016 prepared by BoU were not signed by both BoU and the Auditor.
“Besides, accounts for the period between 1st January 2017 and 25th January 2017 (P&A completion date) had not been prepared at the time of writing this report. I could not therefore establish the tax refund du