Bank of Uganda (BoU) Governor Emmanuel Tumusiime-Mutebile has said the Central Bank will not bail out financially distressed banks in the hope that they will restored to financial health and pay back later.
Mutebile who was speaking at the annual Uganda Bankers’ Association (UBA) conference at the Kampala Serena Hotel on Tuesday, said such a move would indicate that commercial banks are free to continue mismanaging their finances in the hope that they will be rescued.
“Such an option would be extremely dangerous. It would allow the distressed bank to continue being mismanaged in the same manner that caused it to become distressed, thereby incurring further losses at the taxpayers’ expense. It would also send a signal to all participants in the financial markets that mismanagement carries no consequences for the owners and managers of banks,” he said.
The governor’s remarks come at a time reports indicate that DFCU Bank, which acquired Crane Bank last year, is in a liquidity crisis and unable to give out loans to customers.
Sources indicate that despite declaring a 127 billion shilling profit after taking over Crane Bank, DFCU is in a crisis, at a time major shareholder, Britain’s’ Commonwealth Development Corporation (CDC) set to exit after 50 years of financing the institution.
“We must be realistic about what prudential regulation and supervision can feasibly deliver in a market oriented financial system. It is not possible for regulators to detect all instances of fraud that may occur in financial institutions, not least because such frauds are often carefully concealed from external auditors as well as regulators.”
“As a regulator, the primary objectives of the Bank of Uganda (BoU) are: to protect the interests of depositors and to ensure the overall stability of the financial system, through prudential regulation and supervision of deposit-taking institutions,” he said.
In a related development, Mutebile revealed that BoU’s takeover and eventual sale of Crane Bank was the most difficult decision by the Central Bank.
“The intervention in Crane Bank, was the most difficult of these interventions and the one which was potentially the most problematic, because it was a large bank of systemic importance, and because of the huge magnitude of the losses it had incurred,” said Mutebile.
“Nevertheless, BoU was able to resolve Crane Bank smoothly. It remained open under statutory management until most of its assets and liabilities could be transferred through a P&A to a suitable acquiring bank, DFCU Bank, thereby avoiding disruption to its customers. None of its depositors lost the money. Furthermore, despite the size of the bank and its links with other banks through the interbank market, there was no contagion to the rest of the financial system and no loss of public confidence in bank deposits.”
The theme of the conference was Financial Sector Stability: Managing Risk in a Fast Growing and Fast Changing Environment.
