The Governor of the Bank of Uganda, Tumusiime Mutebile while appearing before the Parliamentary Committee on State Authorities and State Enterprises (COSASE) together with his Deputy, Louis Kasekende made a case for the grounds on which the Central Bank closed a total of seven defunct commercial banks.
This probe follows issues raised in the Auditor General’s Report on Defunct Banks.
In his response to the committee, Governor Mutebile said that, “In conducting the supervisory role, the primary objective of the Bank of Uganda is to ensure the stability and soundness of the banking system and protection of depositors’ interests.”
“While performing this role, there is a possibility that a financial institution may run into problems. In such circumstances, the Financial Institutions Act 2004, prescribes the type of actions the Central Bank should take in the different circumstances. They include; issuance of directives on corrective actions that the financial institutions must comply with, placing the Institution under statutory management or receivership and/or liquidation, depending on the nature of the problem.”
Mutebile also said that, the 7 defunct banks in the Auditor General’s Report were put under resolution largely due to insolvency problems.
“In conducting bank resolution, the Central Bank is mindful of the need for the depositors to access their funds in the shortest time possible, keeping the cost of resolution low but also most importantly the need to protect the remaining part of the banking industry from any contagion effect or systemic shocks, he added.
The Governor further stressed that, while carrying out bank resolution, in a number of cases, the Central Bank identified other banks that purchased the assets and assumed liabilities of the banks under resolution.
“The decisions and actions of selling the assets of banks placed under resolution, were based on the objectives of protecting the depositors’ funds, increasing confidence in the banking system and fostering financial sector stability, which is the core reason for our existence as an Institution.”
Over the years, Bank of Uganda ensured that the bank resolutions were conducted seamlessly without causing instability in the financial sector and protecting the interests of the depositors added Mutebile.
He made emphasis to the Committee and the public that the principal objective of financial regulation is to maintain stability and soundness of the banking system. This he said would greatly be undermined if there is erosion of confidence in the key stakeholder i.e. the Depositors.
Indeed, in the ranking of claims in an insolvency of a financial institution, the Deposit Protection Fund ranks first, next, is the liquidator’s expenses, then the wages of employees of the institution. These are followed by the secured creditors, then unsecured deposits, followed by other types of creditors.
It is only and only if, there are residual assets, that the shareholders get anything since they rank at the very bottom of the distribution order.
Resolution of banks is a complex exercise and each bank being resolved has its own unique circumstances. There are a number of challenges encountered during resolution. One of the main challenges is litigations by the different stakeholders. There have been several court cases against banks under resolution spanning many years.
The other challenge in bank resolution relates to the difficulty in collecting and recovering of loans due to encumbrances placed on the collaterals, unsecured and poorly documented loans. There are also delays that result from the requirement to verify creditors and their claims particularly for those banks with poor documentation. This may also apply to the depositors. All these challenges have had implications on the timeliness of bank resolutions.
Notwithstanding the challenges, Mutebile assured the Committee of the progress being made to conclude bank resolutions.
He noted that in addition to paying off the depositors, the central bank had twice paid the creditors of Cooperative Bank, Greenland Bank and International Credit Bank from the proceeds of the liquidation on a pro rata basis.
Furthermore, said that in September this year, Bank of Uganda made a final call on the creditors of Greenland Bank, Cooperative Bank and Global Trust Bank in liquidation, to settle claims.
Bank of Uganda continues to pursue the pending court cases that are currently affecting the conclusion of the resolution of some banks, he added.