Banks should strengthen defences against fake news — Mutebile

A few weeks ago, plans by the CDC Group to downsize its stake in Dfcu Bank leaked to the press. On its face, the transaction looks routine. The CDC Group is one of the co-founders of Dfcu, which started in 1964; the other is the Uganda government. In 2004 it acquired a 24.3% stake in the lender from the German Investment and Development Corporation to increase it’s shareholding to 60%, which it retained even after Dfcu listed on the local exchange the next year.

It wasn’t until 2013 that CDC – at the time managing its stake in the bank through Actis – sold the majority of its stake to Rabobank, a Dutch multinational bank, and Norfund, Norway’s development bank, whose 10% stake in Dfcu acquired through 2004’s initial public offering was its first equity investment in a financial institution. Norfund’s stake rose to 27.54% while Rabobank bought a similar share, its first in Dfcu. CDC’s reduced to 15%.

At the time, executives with the CDC group said the new shareholders were the right partners to “open up new opportunities and add significant strategic direction to the bank.” After improving its governance structures and adding new business offerings, CDC was hoping that the new shareholders would support Dfcu “in terms of designing products that are designed to enter into the rural areas to provide agri loans to local farmers more appropriately than could have been done so far” since they had strong experience in agribusiness.

“The addition of Rabobank brings a partner with considerable agribusiness expertise into the shareholding, and reflects our appetite to invest alongside like-minded third parties,” CDC said in its annual report for 2013.

And later that year, even as it reduced its stake in the bank, CDC “reinforced its continued partnership with DFCU” through a $10m subordinated loan to the lender. The aim of the loan was to “increase DFCU’s lending capability, strengthen its capital base and ultimately enable support for more of the SMEs which are vital to the economic development of the country.”

That loan was repaid this April, according to a profile of Dfcu on CDC Group’s website.

Last year CDC decided to sit out of Dfcu’s rights issue which, according to the bank’s annual report, was “in line with its strategy to significantly reduce its stake in Dfcu by selling to other, like-minded investors who could bring in a new phase of growth”. This saw its shareholding reduce to 9.97%. But it wants to reduce this stake even further, according to recent reports.

The reason CDC is no longer the majority shareholder in Dfcu is because it has been selling off its stake. This is not unique to Dfcu; through Actis Capital, a spin-out private equity fund, CDC was a majority shareholder in Umeme and gradually reduced its stake until it exited in 2016. It’s also not unique to Uganda. Last year, CDC sold most of its stake in Ujjivan Bank, an Indian lender bigger than Dfcu.

In explaining the exit, CDC said it had achieved “robust financial returns” on its 2015 investment in Ujjivan, while also growing it to deliver a positive development impact. CDC “supported the company in its successful transformation from an MFI into a deposit-taking retail bank delivering impact at scale,” oversaw the doubling of its loan portfolio to over $1bn, and supported it as it listed on the stock exchange in 2016. The listing “saw significant interest from domestic and foreign institutions and our successful exit through the public markets is also a strong testament to the appeal of impact businesses to investors”.

Now, there could be some truthfulness in the reporting angles taken by the echo chamber that is Uganda’s online media. It is possible CDC Group is concerned about Dfcu’s purchase of Crane Bank against its wishes, like some have said – it was, after all, a brave decision given the state of that bank’s book, according to the accounts of some players in the transaction who saw the accounts. It is also possible that it might not like the way the bank is being run and decided to dispose of its stock.

But that is not what was said. The more creative websites claimed that Arise B.V., the Cape Town based fund that manages Norfund and Rabobank’s stakes in the bank and is therefore it’s biggest shareholder, also wanted out. Probably those who ran with that story were confused by reports that Deepak Malik, the chief executive at Arise, is leaving his position as a non-executive member of Dfcu’s board. Unfortunately for Dfcu, this came out at the same time as the CDC story – even though the bank has known for some time that he would relinquish the position, or so it claims.

Dfcu was forced to refute what it calls “malicious rumours”. And, like it was with Crane Bank two years ago, there was a lot of uncertainty about the bank’s stability. The embassies of the Netherlands and Norway were also apparently concerned about the rumours and said they could “impact investor confidence and foreign direct investment in Uganda.”

The central bank governor, Emmanuel Tumusiime-Mutebile, has also spoken out about the “regrettable” stories. In a speech at an informal dinner held by the sector lobby, the Uganda Banker’s Association, Mr Mutebile said the “false allegations sought to malign the bank” but failed.

“Nevertheless, this most regrettable episode demonstrates the need to build resilience to reputational risk by widening and deepening the moats (defences) for protecting public confidence in the banking system, especially in the current age where falsehoods spread rapidly through digital channels,” he added.

“The directors and management of financial institutions must prioritise reputational risk management, not least by developing proactive communications strategies with effective crisis control measures as well as the capacity to thwart fake news.”

As the Dfcu episode shows, this is a genuine concern; Dfcu is the second largest Ugandan bank, but many people were doubting its stability at the height of the stories. But whatever strategies the banks have in mind should be better than the numerous press releases favoured some of the bigger banks or social media posts wishing followers a nice lunch.

Read the rest of the governor’s speech below.

Remarks by Prof. Emmanuel Tumusiime-Mutebile, Governor, Bank of Uganda at the UBA Informal Dinner, Golden Tulip Hotel, Nakasero

27 July 2018

Good evening ladies and gentlemen.

I would like to thank all of you for convening once again over an evening meal, and with less formality than when we meet in boardrooms for technical business.

Let me start by congratulating the Uganda Bankers’ Association for the Annual Bankers Conference, which was held last week on the theme – “Financial Sector Stability: Managing Risk in a Fast Growing and Fast Changing Environment”. The conference provided valuable insights for the players in the financial services industry; and helped to improve public understanding of key issues in the financial sector.

I am pleased to report that the end-June 2018 data indicated continued strengthening of the financial performance of the banking industry in Uganda. In particular, the ratio of non-performing loans to total loans in the banking industry reduced further from 5.3 percent at end March 2018 to 4.4 percent at end-June 2018.

In addition, the banking industry’s cost to income ratio registered a measured reduction, while after tax return on assets rose marginally. We have now observed five consecutive quarters of improving financial performance among banks, driven primarily by stronger loan quality. As such, we can say that the rise of non-performing loans that hit the banking sector in 2016 has abated.

The banking industry has strong capital and liquidity buffers, which provide a solid platform for expanding intermediation in the year ahead. Indeed, the annual growth of bank lending to the private sector accelerated to double digit rates in the second quarter of 2018, for the first time since 2015.

Regrettably, dfcu Bank has recently been subjected to a series of false allegations in the social media and online publications, concerning changes in its ownership structure, governance, and liquidity position. These false allegations sought to malign the bank. Fortunately, they have failed. dfcu Bank’s operations have progressed normally and the bank remains in a strong liquidity position.

Nevertheless, this most regrettable episode demonstrates the need to build resilience to reputational risk by widening and deepening the moats (defences) for protecting public confidence in the banking system, especially in the current age where falsehoods spread rapidly through digital channels.

The directors and management of financial institutions must prioritize reputational risk management, not least by developing proactive communications strategies with effective crisis control measures as well as the capacity to thwart fake news.

And because prevention is better than cure, I urge all members of UBA to maintain strict adherence to the Code of Good Practise, particarly by avoiding negative references to competitors while marketing specific banking services and products. We are all aware of the reputational damage suffered by several major financial institutions in the industrial economies as a result of misconduct by their staff, such as in the LIBOR fixing and the miss-selling of mortgages scandals in Europe and the United States.

To conclude, I wish to reiterate that after a difficult period in 2016, economic growth has rebounded, inflation is low and stable, and the overall performance of the banking sector has improved. Therefore, I believe that we have strong grounds to be optimistic about the future of our banking industry; especially if we remain vigilant and resilient against the emerging risks.

Thank you for listening to me.