Wednesday, August 21, 2013

UDB: THROWING THE BABY OUT WITH THE BATHWATER?


A few weeks ago the IGG had senior officials of Uganda Development Bank (UDB) hauled before the courts, alleging that they had victimized a whistleblower.

The whistleblower earlier this year had reported to police that there was something irregular with a $11m loan being processed for Savannah Commodities Ltd. Savannah needed the money to increase their grain processing capacity. More on that later.

It always plays well before the gallery when the big fish are arrested and paraded before the public. The clamour for something to be done about corruption is palpable wherever you go.

The financial system is not immune to its share of shenanigans but the way you confront corruption in the financial system cannot be the same way you confront the village thief, still licking his fingers after disposing of the stolen chicken.

The financial system is based on confidence, you undermine that confidence and nothing will be worth anything. If you think about it the money we carry in our pockets is just a coloured representation of our confidence in the government and our financial system. A dent to that confidence leads to debasement of the currency – the reason governments come down hard on money counterfeiters.

A bank’s biggest asset is the confidence of its clients and business partners. That is how bank’s can collect deposits many times the size of their shareholders’ capital.

No economy can grow or sustain growth without a financial system which commands the confidence of the population. Ask the western economies. At the heart of the recent global financial crisis was a collapse in confidence in the financial system.

The law enforcement agencies should investigate all criminal allegations to their logical conclusion wherever it is suspected that they have been committed.

However one has got to wonder about the current case against UDB’s officials.

At the center of the case is the loan to Savannah Commodities. The whistleblower brought this to the police attention because it seemed to contravene banking laws. According to the law a bank cannot lend to one player more a certain percentage of its capital. The $11m being processed for Savannah well exceeded this limit.

What the whistleblower neglected to mention to the police is that the loan to Savannah was not from UDB. The multi-million dollar facility was to come from the Cairo based African Export Import Bank with UDB serving as its agent in Uganda. So UDB was not bursting its own limits in facilitating the loan.

Of course as a result of the brouhaha the loan has not been disbursed, which may be the lesser loss in this whole sordid affair.

As for victimizing the whistleblower the court proceedings will make for interesting reading too and may serve as a useful opportunity for the IGG to re-examine its procedures.

To sustain development of any economy development banks are a key piece of infrastructure. Development banks have access to long term funds which can be used to finance the big projects in infrastructure, manufacturing and real estate, which take a long time to show results and therefore cannot be helped by short term loans offered by commercial banks.

For the law enforcement agencies run rough shod over an institution like UDB on the strength or weakness of an allegation you wonder about uncoordinated troop movements in the government.

On one hand we are talking about attaining middle income status in the next decade or so and with the other hand we are ripping out the guts that will make that aspiration real.

Again the law enforcement agencies have every right to go after suspected errant officials, and given the current climate in the country they will have plenty of people cheering them on. But they must be sensitive to the reality that their actions have far reaching repercussions for the country.

Millions of dollars in much needed long term finance to this country have now been frozen or cancelled all together on the basis of a case that the courts I suspect will make short work of. And for what? So that some official can earn cheap marks?

In our exuberance to fight corruption we need to be careful that we do not throw out the baby with the bathwater.

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