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Mwenda wrong on Crane Bank, Facts speak for themselves – Part 2

Conscience is the voice of the soul,” says a Polish Proverb. In the first part of this two stage article, we purposely went on a historical journey to understand how banks have closed in Uganda, the circumstances, and eventual implications. We also did delve into the Project Nyonyi forensic report produced by Price Waterhouse Coopers which according to an international forensics expert I interacted with was a good job done.

The BoU Take Over

Armed with the forensic report, the central bank was right to kick into action. Mwenda argues that CBL still stood a chance but when you realise that the bank was being run like a dingy lodge in Kikoni, you then cannot blame BoU for the measures it took.

With the case of Greenland bank in 1999, BoU attempted to give the owners an opportunity to salvage the operation and nothing good came of it. The level of falsification of information from the bank was quite disturbing and this perhaps was the last nail in the coffin of that bank. As good students of history, I believe Mutebile and his team must have realised the correlation between Greenland Bank and Crane Bank in terms of falsification of information as well as lack of conformity to proper corporate governance of a Financial institution, hence the decision to take over.

Mwenda’s Assertions

Bank of Uganda acted in the most rush way in its resolution of Crane Bank issues which makes it suspicious. First when it claimed Crane Bank was in distress, it should have given Sudhir time to find an investor to inject new capital into the bank. Many banks were actually in negotiations with Crane to buy it.” ~ Mwenda

Basing on the historical lesson of Greenland bank, International Credit Bank and Cooperative bank, nothing justified CBL being given another chance to pursue remedial action especially under the same management that had failed to meet the minimum expectations to run a public Financial Institution. Apart from alleging that many banks were in negotiations with CBL, there is no attempt made to give us more information on which banks these were and what their offer was as well as their ability to stand tall amidst such an acquisition. Buying a bank is not merely about walking in with cash, there is a lot more to it than buying a car from a showroom.

BOU hamstrung Crane by stopping it from doing any new business like issuing new loans, overdrafts, bid bonds, performance guarantees, letters or credit etc. Crane was a bank for the business community. Stopping it from doing anything for three months was a disaster. It forced its customers who could not get a service to pull their money and business out of Crane to other banks and thereby transformed a capital adequacy problem into a liquidity crisis.”~ Mwenda

In the English language, there is an idiom, “throwing good money after bad.” It literally refers to spending more money on something problematic that one has already spent money on in the hope of fixing it. With the glaring evidence of poor corporate governance, insider lending highly linked to Mr. Sudhir Ruparelia, loans issued to one week old companies utilising collateral already pegged to previous loan applications, only a fool would allow CBL to dig a deeper hole. Mwenda conveniently avoids telling the public that CBL even before the BoU intervention was always negotiating with customers who wanted to make large withdrawals to spread them over a longer time frame. If it grunts like a pig, then it’s a pig. CBL had already dug the pit and could not be expected to get itself out of it.

Crane Bank had a good and wide branch network, a huge customer base, a great brand and $40m (Shs 144 billion) in tax assets. Its deposits had fallen from Shs 1.4 trillion to Shs 1.0 trillion because of BOU restrictions that caused a run on Crane. ~ Mwenda

Again, conveniently, he avoids notifying the general public that the net assets of CBL at the point of liquidation were negative to the tune of UGX 300Bn. The bank had client obligations of UGX 700Bn and the continued running of CBL was costing billions of shillings in losses monthly which was further eroding the company’s value.

There are other institutions that were interested in buying the Shs 550 billion worth of bad loans – at a discount of course. BOU refused this suggestion out of hand and therefore lost an opportunity to get a good deal. Instead it sold all the good and bad assets to DFCU at only Shs 175 billion ..”~ Mwenda

This is when I’m quickly tempted to remind Mwenda that selling off a bank isn’t akin to selling an old spent car. With the car, you can choose to sell off the engine, bumper, bonnet, doors, seats to different buyers. He insinuates that the bank could have been sold in bits and pieces based on who is offering what for the different portions. This is not how things are done my brother. There was need to maintain strategic balance in the banking industry hence the desire to get a takeover partner that not only knows the local market but has the muscle to ensure there is continued stability in the banking industry. I wish he could tell us more about those institutions that were interested in buying the bad loans and what their offers really were. Maybe he could win us to his side otherwise for now, this is mere samwa samwa (loose talk). Rumors do not apply here, we need to work with facts. DFCU is backed by ARISE BV that has invested over One Billion dollars in Africa.

BOU had injected Shs 450 billion of taxpayer money as liquidity into Crane Bank when it took over management. Under the sale agreement, DFCU is required to pay back this money to BOU over a period of three years without interest. Yet Sudhir had asked for a loan of only Shs 165 billion from BOU (as lender of last resort) at an interest rate of 5% to recapitalize the bank. So BOU would earn Shs 8.25 billion per year.” ~ Mwenda

Just in case Mwenda didn’t know this, DFCU was required to offer security for this UGX 450Bn injection BoU made into the ailing CBL. As a result, they attached most of the bank’s Treasury Bills to act as collateral. If they didn’t have them, then they would have probably been disqualified. The case he tries to make for Sudhir to be lent UGX 165 Billion is laughable and honestly it’s the last thing I expected from such an analytical mind. I have come across people who have lost money in the Telexfree scam, only to borrow more and get into the D9 scam, lose more money and now want to borrow more money to venture into another scam. CBL’s bubble had burst. The bank’s operations had become a ponzi scheme. No amount of continued lending especially to the same inept management would salvage it.

In fact if BOU had used the Shs 450 billion to buy distressed assets of banks, it would have saved many businesses from companies from collapse and with them jobs for Ugandans, taxes to government and promoted a healthy economy. And it would have earned interest of above 15% and made a huge profit…. DFCU took public funds for free.” ~ Mwenda

Again we are talking about treating symptoms here. How did CBL get to this point? As revealed earlier when analysing results from the PWC report, it is evident the bank was led into this state by its lead owner. This would be akin to rewarding a lion for eating a farmer’s cows. This is a situation where we are dealing with white collar crime. Once again, it would be good to have a list of some of the “many businesses” that Mwenda says collapsed and how many people they employed. I wouldn’t be surprised if reference here is to the shell businesses that were set up to merely act as conduits for money being siphoned out of the bank. As for DFCU taking public funds for free, I think that has already been dispelled earlier when I shared about the T-Bills put up as security.

Let us remember that BOU claimed that Crane Bank was insolvent, riddled with many bad loans and over statement of its actual financial position. So they sold its assets for Shs 175 billion only. What the news of DFCU profits for the first six months of taking over Crane Bank reveals is that BOU was either extremely incompetent and/or grossly misunderstood Crane Bank’s actual financial position. Or may be there was fraud. What we now know is that BOU sold very good assets at basement bargain prices. Why?” ~ Mwenda

I believe it is time to go for a quick lesson in accounting. When assessing banks for take over, the principle of Fair Value is used. It is the rational and unbiased estimate of the potential market price of a good, service or asset. It is usually done by specialists. In the case of CBL, a fair value assessment was done on customer deposits, physical cash and balances, loans and advances, computer software, listed stock and bonds, shares in private companies, land and buildings, furniture and fittings as well as other movable assets. So, when DFCU took over CBL, the fair value attached to the bank’s assets, less the acquired liabilities came up to UGX 60Bn. However, this does not mean that it’s money they actually inherited, it is the business potential of what they took over which might materialise or not. Based on accounting principles, this was reflected on the Profit & Loss of DFCU, hence the reflection of that profit that Mwenda dwells upon without bothering to find out how it got onto the books. When Fair Value is included, you have to make an effort to earn it tangibly, failure to do so implies that you have to remove it from the Profit and Loss statement. So, depending on how things go within the next one or two years, this Fair Value from CBL assets could easily diminish to zero thereby impacting the profit situation negatively.

DFCU had invested nothing to get these loans worth 800 billion. Given the average interest rate in Crane Bank of 25%, DFCU was inheriting an asset with income of Shs 200 billion (in form of interest per year). Yet it would have invested very little to earn this interest. It was obvious this was a deal made in heaven for DFCU.~ Mwenda

It is obscene to assert that DFCU invested nothing to get the loans of CBL when he is aware that the bank borrowed from its parent company US$ 50 Million in order to meet the core capital requirement of 12.5% by the Central Bank. Was it a deal made in heaven? No. DFCU exhibited the muscle required to manage this takeover without doubt. It’s a bank that has been around, established a solid reputation and shown consistent growth year on year. There is no evidence at least as of now of them cooking up their books, something which had become a pass time at Crane Bank. That 800Bn loan portfolio talked about is largely to cronies of Sudhir who chose to live large at the expense of public money and DFCU only needs prayers to recover that money. Without mentioning names here, I’m sure by browsing through the tabloids, you notice that all of a sudden, certain names that were famed for flashing money all over the place are no longer featuring, the noose is fast catching up.

What would have happened if CBL had been shutdown and liquidated?

To effectively understand the effect of a total closure of CBL, let us imagine a one Isma. Isma is an account holder with Crane Bank. He has a personal as well as a business account for his Workshop. Isma was given an opportunity to make supplies to a customer and as part of the agreement, a 50% deposit amounting to UGX 60 Million was wired to his business account. On his personal account, Isma has savings to the tune of UGX 17 Million which he hopes to grow to UGX 25 Million in order to buy his first plot of land.

One morning, he wakes up and he’s told, Crane Bank has been closed. First, he has to deal with the headache of the customer’s supplies, where is he going to get money to process them? Next is the uncertainty of his personal savings. This is a very grim possibility. I recall just after completing university when Greenland Bank was closed, a media house I had gotten accustomed to went down the drain overnight in the process. It was called the Crusader and one of its directors was Mr. Onapito Ekomoloit who eventually had to move on and seek employment elsewhere.

The next thing Isma hears is an announcement from the Bank of Uganda that all depositors in Crane Bank will be reimbursed upto a maximum UGX 3 Million Shillings which is what the Deposit Protection Fund guarantees. So, for his personal account, he should get ready to lose UGX 14 Million, money he has been saving over a year. While for his business, he loses at least UGX 42 Million of client money. Do you see the potential disaster?

In the case of Greenland Bank and ICB, the government strategically chose to pay up all depositors their outstanding dues on humanitarian grounds and thereafter went ahead to announce that in future, it would stick to what the law requires of it.

Did Mwenda want to see a scenario where depositors with UGX 100M in CBL walk away with a paltry UGX 3 Million? This would have further eroded the confidence in the banking industry hence the move to allow DFCU continue with operations of the bank while guaranteeing customers their money’s availability. The truth is, Sudhir and his cohorts had messed up the bank. Simple!!!

Whatever the case, DFCU demonstrated the ability to create continued stability in the banking sector of Uganda hence our need to applaud them for the take over. True, there were mistakes on the part of BoU especially in terms of supervision but that is a story for another day.

A close analysis of Crane Bank and its Investor(s) clearly reveals a systematic trail that begun years back to perpetuate questionable practices with the aim of disenfranchising the bank’s customers. Fraud risk factors are classified based on three conditions:

  1. An incentive or pressure to commit fraud – Yes there was
  2. A perceived opportunity to commit fraud – Not identified yet
  3. An ability to rationalise the fraudulent action – Yes, especially after altering the shareholding

These and many more issues may be addressed in a subsequent article if you the reader would like to know more.

So, Who raped Crane Bank?

John 8:23 ~ Then you will know the truth and the truth will set you free.

James Wire is a Small Business and Technology Consultant based in Kampala, Uganda

Follow @wirejames on Twitter.

Email lunghabo [at] gmail [dot] com

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Mwenda wrong on Crane Bank. Facts speak for themselves – Part 1

“I know of no time in human history where ignorance was better than knowledge,” once stated Neil DeGrasse Tyson, a highly respected American astrophysicist.

Following a trending, emotionally charged writeup on the closure of Crane Bank and allegations of how the Bank of Uganda raped the business, I thought it wise as usual to dig deeper into the facts and find out whether the motor mouthed (or motor fingered) journalist had got his facts right.

We always learn from history hence the need to take a trip into our banking history as a nation to establish how previous incidents of bank closures occured. The most prominent ones that come to mind are those of the International Credit Bank (ICB), Greenland Bank and the Cooperative Bank.

In 1998, when Bank of Uganda detected that something was amiss at Greenland Bank, an agreement was signed in September of that year with the management to undertake corrective measures. However, the financial condition not only worsened but led to a BoU takeover two months later in November. When this intervention occurred, BoU unearthed various assets and liabilities that had not been disclosed on the company’s balance sheet. This led the central bank to put the bank under Statutory Management in January 1999 only to eventually close it by April 1999.

During the same period, the Cooperative bank that had a long history of financial distress was revealed as insolvent after a BoU onsite examination in September 1998. Due to the serious management and governance problems unearthed, the bank was closed by May 1999.

For the case of ICB and Greenland bank, there is evidence that their balance sheet information while they were still operational grossly underestimated their insolvency. Not only were substantial assets and liabilities concealed from auditors and bank regulators by the management, there were also inadequacies in; accounting procedures which were very poor; shortcomings in documentation of loans, loan securities, guarantees among others with some documents entirely missing in some cases andlow value loan securities. (We shall later see the similarity with Crane Bank)

Central bank interventions are some of the trickiest decisions to make. This is largely attributed to the uncertainty about the true financial condition of the distressed bank considering that there are usually cases of deliberate misreporting. One may argue that the distressed bank be given time to sort out its mess but we have already seen that even when the likes of Greenland Bank were given that opportunity, it was a one way drive to hell. Taking on the hat of a regulator, one realises that allowing a distressed bank to continue operating under its very management creates incentives for the owners to take excessive risk with the depositors’ money since they have little or no capital left in the business and are hoping to restore the value of their capital quickly or even opting to deliberately loot what is left of the bank. Crane Bank (CBL), by offering Fixed Deposit accounts at interest rates of 20% is testimony to this. They had reached panic mode and were now morphing into a gambling arrangement or ponzi scheme to put it appropriately. Interest rate offers by banks are guided by among others the Central Bank rate as defined at a given point in time. At 20%, the CBL offer was way above what the average sensible for profit banking institution was offering.

After sanctioning a Price Waterhouse Coopers forensic audit on CBL, BoU was able to smell the coffee. Project Nyonyi (the code name of the study) revealed the following wrongdoings;

Shareholding irregularities.A one Mr Rasiklal Kantaria, a prominent Kenyan banker is said to have owned 47% of the bank through White Sapphire Ltd. The ownership of White Sapphire was eventually traced back to Mr Sudhir Ruparelia and his cohorts. This effectively abrogates some sections of the Financial Institutions Act, 2004.

Section 18(1) states; Except as expressly provided in this Act, no individual or body corporate controlled by one individual; shall own or acquire more than fourty nine percent of the shares of a financial institution.

The audit report recommended that Mr Sudhir Ruparelia be charged for Conspiracy to Defraud under Section 309 of the Penal Code Act that states; Any person who conspires with another by deceit or any fraudulent means to affect the market price of anything publicly sold, or to defraud the public or any person, whether a particular person or not, or to extort any property from any person, commits a misdemeanour and is liable to imprisonment for three years.

Section 324 of the Penal Code act further pins Mr Sudhir Ruparelia when it states; Any person who, being a promoter, director, officer or auditor of a corporation or company, either existing or intended to be formed, makes, circulates or publishes, or concurs in making, circulating or publishing, any written statement or account which, in any material particular, is to his or her knowledge false, with intent thereby to effect any of the following purposes — to deceive or to defraud any member, shareholder or creditor of the corporation or company, whether a particular person or not; to induce any person, whether a particular person or not, to become a member of, or to entrust or advance any property to, the corporation or company, or to enter into any security for its benefit, commits a felony and is liable to imprisonment for seven years.

Section 47 of the Financial Institutions Act clearly stipulates action that should be taken against anyone falsifying documents and gives a penalty of 5 years and/or a fine.

The transfer of CBL branch ownership to Meera Investment Limited (MIL). MIL is a company directly associated with Mr Sudhir Ruparelia. Not only did he undervalue the land on which the branches are located in order to benefit unfairly as the recipient, but he also took over the assets on that land whose construction had been fully paid for by CBL. MIL went ahead to sign new agreements with CBL that had very unfair terms which saw the bank lose Millions of dollars from the time this transfer was illicitly effected.

Accounting misstatements and the 2014 overstatement of fixed assets. There is evidence of falsification of bank statements to inflate profit going as far back as 2009, the sneaking back of off book liabilities in 2013 as well as a fictitious assets recognised by overstating the balances. A number of actions were identified in this regard. These acts are a grim reminder of what Greenland Bank and ICB did nearly two decades ago. This definitely is a breach of the Anti Corruption Act, 2009 Sections 20 and 23.

Section 20: (1) Any person employed by the Government, a bank, a credit institution, an insurance company or a public body, who in the performance of his or her duties , does any act knowing or having reason to believe that the act or omission will cause financial loss to the Government, bank, credit institution commits an offence and is liable on conviction to a term of imprisonment not exceeding fourteen years or a fine not exceeding three hundred and thirty six currency points or both.

Section 23: Any person, who being a clerk or servant, or being employed or acting in the capacity of a clerk or servant, does any of the following acts with intent to defraud—(a) destroys, alters, mutilates or falsifies any book, document, valuable security or account which belongs to or is in the possession of his or her employer, or has been received by him or her on account of his or her employer, or entry in that book, document or account, or is privy to any such act;(b) makes, or is privy to making, any false entry in any book, document or account; or (c) omits or is privy to omitting, any material particular from any such book, document or account, commits an offense and is liable on conviction to a term of imprisonment not exceeding seven years or a fine not exceeding one hundred and sixty eight currency points or both.

Cash extractions through fraudulent IT payments. CBL made fictitious payments to Technology Associates, a local IT firm purportedly for licenses to acquire Core Banking Software which was never procured in reality. There were inflated payments for annual software license fees where a payment of US$ 37,000 was inflated to US$ 1.7M.

The penal code adequately deals with this and punishes those involved in this kind of falsification under Section 309 on Conspiracy to Defraud.

Loans and Balances. Loans were issued without following proper internal credit policies and insufficient security (Sounds familiar with the Greenland Bank case in the 90s). As of October 2016, UGX 63.1Bn had not been disclosed as insider lending out of the UGX 63.6B identified as having been lent to related companies. 49% of all written off loans were traced to three borrowers and no serious effort was made to recover them. Evidence available links them to Mr. Sudhir Ruparelia.

After reviewing the irregularities exposed by Project Nyonyi, it’s time to assess the financial impact they had on the bank;

The 2012 transfer of branches: There is already a loss of UGX 3.9 Billion in ground rent as well as a recurring UGX 1 Billion annually. The 46 parcels of land transferred to Meera Investments were in most locations far more valuable than the listed cost of UGX 100 Million. A case in point are the parcels on Kampala Road opposite the City Square, Kireka, Ndeeba, Ntinda, Mukono among others. The cost of the buildings constructed onto the land is another big loss to CBL. In this regard, one can comfortably state that the loss cumulatively comes to not less than UGX 50 Billion.

Accounting misstatements. The accounting misstatements dealing with the Nostro account led to a loss of at least UGX 188 Billion.

Cash extraction through fraudulent IT payments in 2013 alone cost UGX 59.6 Billion. One wonders how much was siphoned out this way in previous years.

Loans and advances led to a total combined possible loss of UGX 424 Billion

On Corporate governance, CBL registered a very disappointing performance as indicated in the PWC report. It is even a shame that it took so long for the Central Bank to act upon matters which were already of public knowledge. I mean, who never knew that Mr Sudhir Ruparelia personally approved numerous loan dispensations?

So, who raped Crane Bank?

In Part 2, I share with you a point by point rebuttal of Mwenda’s seemingly unresearched allegations. Read on.

James Wire is a Small Business and Technology Consultant based in Kampala, Uganda

Follow @wirejames on Twitter.

Email lunghabo [at] gmail [dot] com

Additional research source: Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures by Martin Brownbridge

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