Bank of Uganda ended weeks of speculation about Crane Bank, announcing on Thursday that it is taking over management of the lender.
Here is what you need to know about the central bank’s move and what it means for Crane Bank and its customers.
What has happened to Crane Bank?
The bank was placed under statutory management by the regulator, the Bank of Uganda. This does not mean it was closed, but that the central bank has taken over its management. According to the Financial Institutions Act 2004, BoU now has “exclusive powers of management and control of the affairs” of Crane Bank.
These powers, among other things, mandate it to appoint a statutory manager “to manage, control and direct the affairs of the financial institution.” That manager, according to BoU’s letter to Crane Bank’s former MD, is Edward Katimbo-Mugwanya, an experienced banker who has worked with Bank of Uganda and Centenary Bank.
The bank will continue to operate as, well, a bank, but under the management of the central bank – represented by the statutory manager – not its former executive team, which was disbanded. The statutory manager is however required to prioritise the interests of the bank, its depositors and other creditors.
Why did Bank of Uganda take over Crane Bank?
The central bank has “prudential standards” all lenders have to meet. These standards require commercial banks to manage risks and hold adequate capital. Therefore, BoU was convinced that Crane Bank had fallen below these standards and that its management was incapable of raising it to satisfactory minimums.
The statement issued by Bank of Uganda says the lender was significantly undercapitalised and, if it continued to operate in that state, posed a threat to the stability of the entire financial sector. BoU was also convinced that the bank’s managers were not running it in the best interests of its depositors.
According to financial institutions regulations, a commercial bank is required to always hold a core capital – or the bank’s net worth – not less than 8% of its risk-weighted assets and off balance sheet items. Total capital shall also not be less that 12% of its risk-weighted assets and off balance sheet items. When a bank has less than 50% of the required core capital and total capital, it is considered significantly undercapitalised.
Interestingly, the central bank has been insisting that all banks are meeting the minimum capital requirements. Last year’s supervision report said that “all commercial banks met the minimum regulatory capital adequacy requirements;” Bank of Uganda’s 2015/16 report also said that “all banks met the minimum core capital requirement of 8% of risk weighted assets as at June 30, 2016.”
What both reports drew attention to, though, was the rise in the ratio of nonperforming loans to total loans. It rose from 4.3% to 5.3% between December 2014 and December 2015, and from 4% in June 2015 to 7.4% this June. Last year, Crane Bank was responsible for 20% of total non performing loans – which altogether came to Shs573.4 billion – in the sector. It posted its first loss in 10 years due to an increase in its loan loss provision, from Shs11.22 billion in 2014 to Shs50.35 billion.
Indeed, Justine Bagyenda, executive director supervision directorate at Bank of Uganda, told journalists on Thursday that Crane Bank has been on the central bank’s radar since September last year following regular onsite tests and an external auditor’s report that showed potential trouble.
It is quite possible that Crane Bank’s fate would have been different had it not been what the central bank classifies as a ‘domestic systemically important bank;’ basically, it is too big to fail. The FIA says that if a significantly undercapitalised bank fails to adhere to remedial recommendations and directives issued by the regulator, it will be closed or placed under receivership. But if the closure of that bank were to pose a “systemic risk to the stability of the financial system, the Central Bank shall take the financial institution into statutory management.”
What are the duties of the statutory manager? How long will he be in charge?
The manager has to return the bank to financial health, or to a state where it meets the regulators’ prudential standards. To do this ably, he is allowed a wide range of powers.
The FIA says the statutory manager can exercise all the powers of the board of directors until when the central bank deems it fit to appoint an advisory board.
Bank of Uganda will appoint an auditor to look at Crane Bank’s books, and also determine its assets and debts; this is to be done as soon as possible after the takeover.
The manager shall oversee recovery of any of Crane Bank’s assets; and, yes, that includes includes loans the bank made out. He will recover the bank’s debts and any money owed to the bank.
He can evaluate the bank’s capital structure and management, and recommend to the Central Bank what needs to be changed about them.
The statutory manager can also enter into contracts on the bank’s behalf, including raising of funds. And he can re-evaluate the bank’s balance sheet.
As a precaution, the statutory manager may also suspend the payment of the bank’s obligations to depositors and creditors. This includes limiting the maximum interest paid on deposits and other obligations to the minimum set by the central bank.
Some of these measures are being implemented, according to an email sent by Crane Bank executive director, Syed Anwar Raza to branch managers that Uganda Business News has seen. “This is to advise that under instructions from the Statutory Manager, Mr Edward Katimbo Mugwanya, all premature withdrawal of fixed deposits are frozen going forward,” the email said. “This is for strict compliance.”
The manager has utmost six months to right the bank, according to the FIA. Should that period elapse and the bank is still not meeting minimum standards as required by the regulator, it will be closed by the central bank. Other factors that weigh into the decision to close is the bank’s ability to meet depositor’s demands or pay its obligations when they are due, and whether its continued operation is in the best interest of its depositors, the public, and the financial sector.
But if the bank returns to health, its shareholders will be asked to appoint an interim board of directors. The board will serve for six months and, if the bank is well-run during that period, will take over the bank’s management,
Can the bank still be sold, or merged with another institution?
Yes. What the central bank is concerned with at the moment – and why it took over the lender – is returning the bank to health. BoU will gladly welcome a merger or sell the bank if it believes it is the best way to achieve that objective.
Four years ago, Bank of Uganda sold the National Bank of Commerce to Crane Bank immediately after placing it under statutory management.
And this year in March, BoU announced that it had sold Imperial Bank Uganda to Exim Bank (Tanzania) Ltd., five months after taking over Imperial Bank. This was after Kenya’s central bank suspended operations of its majority shareholder, Imperial Bank Ltd. Kenya, because of “unsafe or unsound business conditions to transact business.” Exim Tanzania bought Imperial Kenya’s stake, and changed the name of the Uganda subsidiary to Exim Bank Uganda.