THE CASE FOR LOCAL BANK OWNERSHIP

The other day Professor Ezra Suruma published an opinion on how the banking industry is being remote controlled by neocolonialists, who have no interest in promoting the mobilization of indigenous capital by among other things shutting down local banks and making it too expensive for local businessmen to open banks.

He said as result local business struggle to access capital.

These were strong charges by a former deputy governor of the Bank of Uganda and former finance minister. They need to be taken seriously.

For people coming to the discussion late a look back into the history of the banking sector and how we got to where we are may be useful.

In the 1990s the banking industry was dominated by two government banks – Uganda Commercial Bank (UCB) and The Cooperative Bank. Both through mismanagement and political interference, had most of their loan book blighted by bad debt as to render them insolvent. They could not meet their day to day obligations.

"In fact in his “Advancing the Ugandan economy” Suruma reported that things were so bad, at UCB when he joined it as chairman and Managing director, that people seeking to withdraw from their accounts would have to seat and wait for depositors to come into the bank, which money would then be paid out to them...

A bank in similar distress today, would not survive an hour after it opened its doors for business on any day.

Government tried in both cases to salvage the banks but didn’t have the capacity to, shutting down Co-Operative bank and selling UCB to Stanbic Bank.

Unfortunately, this malaise was not restricted to government banks. Several small private banks fell victim to the same ills of mismanagement and folded under the weight of the subsequent bad debts. 

What was interesting is that the biggest source of bad loans was insider lending. The owners would lend themselves huge sums, drawn from depositor funds and fail or neglect to pay them back.

In effect the banks were providing inexpensive capital for its owners and directors.

As a result of this, government rewrote the law books to strengthen Bank of Uganda’s supervisory powers and improve the requirements for anyone wanting to start, own and run a bank.

Under the new laws the central bank was insulated from political interference, commercial banks’ shareholding was diluted to prevent against a single dominant individual owner and the capital requirements for owning a bank were pushed up substantially from sh1b to the current sh25b.

"Given our experience the logic was simple, we need a strong industry regulator and strong commercial banks that can not only absorb losses when they turn up, but have strong enough capital bases to innovate and better serve the public....

As a result of these changes private sector lending has jumped to sh16.5trillion at the end of last year from sh731.6b in December 2001.

This statistic alone suggests a strong growth in access to credit to the private sector. It is inconceivable that Ugandans are not getting their fair share of this.

That most of this credit is going to trade and services and not manufacturing and agriculture, is down to structural deficiencies that need to be addressed.

There is really no way around it. Ugandans will be best served by an industry that is robust enough to meet their needs, not whether it is owned by locals or not. Unless of course the argument is for these local bank owners to have access to cheap money at the expense of the depositors, which is what led to earlier bank collapses. 

That being said neocolonialism in its various guises is real and cannot be wished away. However, to blame it for our failures, poor governance in our institutions, is to abrogate our personal responsibilities to ourselves and country.