UCB; FLOGGING A DEAD HORSE

Easily half of all Ugandans alive today were born after 2000. This is a source of great opportunity for the country, in that if managed well, this young population will deliver a boom in the economy in coming years as they become productive citizens. 

On the flip side, it also gives opportunities for revisionists to confuse the youth about the country’s history.

In the last week the fate of the defunct Uganda Commercial Bank (UCB) and the role of former central bank governor Emmanuel Tumusiime Mutebile in its demise came up. It was suggested, no, forcefully declared, that Mutebile’s closure of the UCB was part of an imperialist plot to weaken the economy.

I personally reported on the UCB privatization process, but before that the seeds of its destruction were laid by bank and government officials who thought they could suspend the laws of economics, politics and good sense to keep the bank afloat, accelerating its demise instead...

By the time the NRM came to power in 1986, UCB like the rest of the economy was on its knees. It was the biggest bank by deposits and with 36 branches – a branch in almost every district, was the biggest by branch network as well. But the huge branch network was more a liability than an asset as they were not connected and could not activate the synergies that would come with the branch network.

To illustrate, as recently as 2000 before it was privatized, if you drew a check in UCB Kasese and came to cash it in Kampala, it would take at least a month before your account was credited.

It does not take a detective to surmise the shenanigans that would go on to speed up the process.

This is important, because in the 1988/89 budget, then finance minister Dr Crispus Kiyonga announced the launch of the Rural Farmers Credit Scheme (RFCS), which was supposed to avail credit to small farmers, he however lamented that the UCB network, through which the scheme was being implemented, was too limited. He reported with glee that the Bank was set to open 136 new branches in the coming year to facilitate the scheme.

This was obviously a political decision.  There was no mention of how much government was going to give UCB to aid this project, which would have been necessary to shoulder the four-fold expansion of its network. In the next budget he reported that the bank branches had actually risen to 170.

Bankers tell me that to open a new branch anywhere in the country today would take at least $350, 000 or more than sh1.2b and that’s before salaries and overheads. So even if we reduced the cost of opening a bank by a factor of 10 to about $35,000 the bank was going to lay out at least $4.8m in a year to make the minister’s wish come true. Even the government of Uganda would be hard pressed to come up with these figures at the time. In the previous year government had collected sh17b in tax revenues or about $113m at the official exchange rate of sh150 to the dollar.

So, the bank must have dipped into its already strained resources to meet this commitment and it would not be a stretch to imagine that, they used depositors' money as well, in the hope they would put it back before customers realized it.

This did not happen, as the RFCS was a spectacular disaster that accelerated the bank's downward spiral. The general economy did not benefit from the scheme , the evidence being that 40 years later we are still a subsistence agricultural economy....

It was no wonder then, that one-time UCB boss Professor Ezra Suruma reported in his book “Advancing the Uganda economy” that cash was short in the bank at one time, that to cash your check at the main branch, you would be asked to wait as depositors came in and their money given to you. No bank would reach that state of illiquidity now before it was shut down. Which is as it should be.

While the connected types are blamed for borrowing the money and running, the unsustainable expansion of the branch network egged on by armchair economists, takes the bigger blame for the bank’s troubles.

And the government tried to save the bank. It swallowed all the bad loans that resulted from the RFCS, and placed them in the Non-Performing Assets Recovery Trust (NPART), filling the ensuing hole in UCB’s books with sh100b.

Finance minister Jehoash Mayanja Nkangi lamented that with those funds, he would be able to build three new classrooms for all schools around the country. That’s the cost of government intervention the critics do not factor in their musings.

But after cleaning the balance sheet, UCB went right back into its evil ways, accumulating bad debt and generally acting as a weight around the neck of the industry and the economy.

"So, to stop further hemorrhage government stopped the bank from lending, with all deposits it got going into buying treasury bills, which in 1992/93 were traiding at more than 20 percent, explaining how UCB became profitable again just before its privatization...

 But the bank was supposed to lend to the public and not to the government. People in the know discount the profitability of the bank at this time, as it was not serving its core function.

In a nutshell that is what led to the privatization of UCB, government could not support it and it was leading to the inefficiency of the entire banking sector.

The government insistence and Mutebile’s eventual disposal of the bank has actually ensured that the bank serves its role. So much so that UCB, now Stanbic, pays in taxes every year for the last three years, the equivalent or more than $20m. This is the amount Stanbic paid for UCB.

The revisionists want us to believe that selling the bank to foreign capital, has been a disservice to the economy, while presenting no evidence. It is just sexy to abuse foreign capital. The evidence paints a very different picture.

UCB was privatized in 2002 since then across the industry, deposits have increased to sh30.2trillion as of June last year from sh1.33trillion in 2000 (I couldn’t find 2002 figures in time for this). But more importantly lending jumped to sh18.3trillion from sh0.53trillion during the same period. This growth is not solely attributable to economic growth, as credit grew by about 17 percent annually, almost thrice as high as the average 6 percent growth shown by the economy during the comparable period.

While credit to real estate development, personal lending, trade and manufacturing are still ahead of agriculture, it is safe to say it is Ugandans who have benefited the most from this trend. Personal lending grew to sh3.7trillion in June last year from an insignificant number in 2000.

The critics seem to suggest that if banks were locally owned we would have done better, suggesting maybe locals would be given favourable rates and managers would look away when they default, is that the kind of banking industry we want? Especially since the beneficiaries would be an even narrower base of connected people as we have seen in the past.

If as Ugandans we are failing to gain funding for our personal projects the evidence shows it is more a function of our poor business acumen than that UCB is dead.