Professor Ezra Suruma published an interesting, if an
unsurprising, commentary in the last week about the capture of the financial
industry by foreign capital.
He argued that improved regulation of the banking industry –
increased minimum capital requirements and improved governance requirements,
was shutting out indigenous capital from bank ownership. He also argued that a
new regulatory framework of SACCOs was going to plug the last loophole for
indigenous capital.
I agree with Suruma in as far as foreign capital has the capacity and will to dominate our markets, I disagree with him in as far as he suggests that controls should be eased on local businessman to give them a chance to compete in the market. And this can extend to all markets from retail to construction to agriculture.
To start a bank today you need a minimum paid up capital of
sh25b, far out of the reach of most, if not all Ugandan businessmen. But it was
not always the case.
When the first bank in the NRM era went down, The Teeffe
bank in 1993, minimum capital required for a bank was sh30m or about $20,000.
One of the main reasons of the bank failures, apart from
mismanagement was that the failed banks were not adequately capitalised. What
this means that when the losses started to climb, due to hard economic times,
but mostly due to mismanagement, the shareholders could not cover them.
Banks are particularly senstitive to changes in the economy
or business environment. Unlike a normal trading business they are structured
in a way in which their shareholders’ interest is a small fraction of their
liabilities or obligations to the public.
If you opened a shop you can have all your equity in stock
and no major liabilities apart from rent, utilities and the wage bill, which in
times of crisis the shopowner can cover for a while in the hope the business
turns around.
What makes up for the huge mismatch between the banks’
liabilities and the shareholder money is confidence. The public’s confidence in
the bank’s track record. Put more crudely, the confidence that when I want my
money, which you are keeping from me I will get. Even if no bank can meet this
high standard.
Without this confidence no bank can survive.
"With deposits in the banking industry up more than 50 times last year compared to 1999, when UCB was taken over by the Bank of Uganda, it would be irresponsible even criminal for the central bank to keep bank owners capital low to favour local banks....
Apart from enriching a connected elite, it does not
guarantee improved service or even the overall health of the industry.
In fact, one can argue that the minimum requirement now of
sh25b for the 24 banks in the market, should be increased substantially,
quadrupled even, given that industry deposits are now about sh20trillion or
sh20,000b.
But let us look at this issue of indigenous businessmen’s failure
to raise capital.
What does it take to raise capital in this market?
I have seen some spectacular fundraising efforts being done
for weddings. Families and friends come together and raise tens, even hundreds
of millions of shillings in aid of a one day orgy of feasting and drinking to
celebrate the marriage of their children.
We can contribute to such a cause because it promises the
return of a good time at the ceremony, children. This will happen through a
well understood institution, which has a better than average success rate in
terms of a continuation of the clan and species.
So why cant we raise money for our business endevours the
same way?
One, business owners would rather own 100% of a small
enterprise than 10% of a bigger venture. We want to got it alone. Two, we don’t
trust each other with our money. In fact, as the last year has shown with the
collapsed Ponzi schemes, in order to separate people from their hard earned
money we need to promise outlandish returns in order to overcome their
mistrust.
"Our failure to raise capital to compete in the banking industry is down to our deficiencies in management, especially of other people’s money....
All those banks, which collapsed could not stand up to
scrutiny by the most objective measures. Their promoters ignored the rules of
prudent business and were caught in the act.
Suruma neglected to mention that right now their SACCOS and
investment groups raising enormous amounts of capital from their members,
growing by the year, in good and bad economic cycles, thanks mostly to their
observance of good governance practices and foresighted leadership.
It is true that Bank of Uganda’s interest in them could
cause some discomfort, but the central bank would be remiss as the custodian of
the country’s monetary policy to ignore these huge pools of money, collected
from normal citizens on nothing more than the trust of the SACCOS leadership.
As for the neocolonial plot to subvert the building of local
capital, the above argument suggests that the neocolonialists will walk all
over you if you are weak internally to begin with.
"Ethiopia, unlike the rest of the countries on the continent, was not colonized because they were united and not led by opportunistic leaders who either, sold their own into slavery or allied with the colonialists to try and subjugate local rivals....
If increased capital requirements are keeping indigenous
capital out of the banking industry a lot of the blame for this sad situation
is due to us. The sooner we acknowledge and do something about it the better.
