dfcu acquired Crane Bank for peanuts? Only if your head is buried in the sand

Two weeks ago, dfcu released its half-year after tax profit and it was all good. Dfcu announced a surge in after-tax profit of Shs114bn – the highest for any bank in Uganda in the first half of 2017. Dfcu over the same period in 2016 had only made Shs23bn. In the entire 2016, it made Shs46.3bn. The surge in after-tax profit is in the most part due to the fact that it is now a much larger bank after the acquisition of Crane Bank in January 2017.

The Crane Bank acquisition was significant – they would not have risked their money on it if they thought it was not going make money. The addition of some of the Crane Bank assets increased the loan book from Shs759bn to Shs1.2trillion as at end of June 2017. About Shs450bn of the total loans were acquired from Crane Bank. Loans to customers are assets for a bank because that is where the money is made. Other assets are things like furniture, branches and the core banking system among others.

The other significant acquisition from Crane Bank were the customer deposits. These are classified as liabilities because the money belongs to depositors. Dfcu’s customer deposits increased from Shs982bn to Shs1.8trillion. About Shs600bn of the new deposits came from Crane Bank.

The figures indicate that the acquisition of some Crane Bank assets and liabilities was indeed a good purchase. In terms of loans and advances, it meant dfcu could earn more interest income by the much larger loan book. More-so, dfcu also had access to deposits, however, the Crane Bank deposits also came with a large interest expense – in order to attract deposits, Crane Bank had perhaps the highest interest return on fixed deposits in the entire sector.

The higher income levels brought about increased profitability. Thus the after-tax profit rose to Shs114bn. For shareholders, the acquisition of Crane Bank was only but worrying at the start because they felt it was too toxic to take on. The performance provides some level of confidence.

A breakdown of that profitability indicates that about Shs60bn is from  fair valuation. In other words, this is a “paper profit” or what accountants call “unrealised gains.” This is a process hard to explain in English. dfcu hired an independent audit firm to carryout fair valuation process.

So, the core operational banking business contributed about Shs54bn to the after tax profit of the bank. Reasonable enough for a bank that made Shs23bn in the first half of 2016.

The reasons for the failings of Crane Bank are currently a subject of court case so we shall try to avoid that discussion. Bank failures are normal. They have happened before and will continue to happen.

There are some claims, rather unfounded that dfcu got Crane Bank for peanuts and that explains the profits. Pedestrian claims, like they say. For mergers and acquisitions, it is rather pedestrian to look at the loan book in isolation of deposits.

“BOU and DFCU also claimed that a lot of the assets of Crane Bank were bad loans, worth Shs 550 billion. They claimed that DFCU inherited Shs 800 billion worth of good loans from Crane Bank. Even a child of six years would see the stupidity of such a position – or the fraud involved in such a deal. If I am wrong to let BOU publish the sale agreement,” Andrew Mwenda claims in a rant.

Don’t mind the language.

In any transaction, as far as know, you don’t look at the assets in isolation of the liabilities. Also, transactions like this one are complex. Not just like buying tomatoes.

My understanding, from the several articles I have written, Crane Bank had more liabilities than assets. They had a negative net asset book of about Shs300bn. That is why it had liquidity challenges. It was struggling to meet needs of depositors. It was borrowing money from the interbank market (other commercial banks) at a premium, that the bankers at some point stopped to meet liquidity needs.

That is how Crane Bank ended up running to BoU – as a lender of last resort. Other banks had stopped lending and were charging as high as 20% because Crane Bank had become risky to lend to. BoU rejected.

 “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. Instead, BOU refused to play its legal role as lender of last resort to the fourth largest bank in the country which posed a systemic risk to the industry. BOU instead said it could only lend Sudhir at an exorbitant interest of 20%. Unbelievable! But even then it didn’t lend him, suggesting that it deliberately wanted Crane to fail.” Mwenda writes.

Oh well, there was a problem with Crane Bank. BoU was going to lend money to Crane Bank to recapitalize the bank – to meet the short term needs of depositors. That was Crane Bank’s big problem. On one hand, cash was being burnt to meet depositor needs, whereas there was another large chunk of loans had gone bad. About 45% of the Crane Bank loan book had gone by end of November 2016. So, on one hand, the bank needs cash to meet depositor needs but also people are defaulting on their loans. Without resolving the NPLs, any capital injection would go out the same way to cover for depositors.

Mwenda’s suggestion is that BoU colluded with dfcu to “steal” Crane Bank from Sudhir. If you start failing to meet depositor demands by reducing withdrawal limits, then you re putting them at risk. Instead of waiting for the wound to expand, you treat the wound to ease the pain until it is fully cured.

For BoU to keep Crane Bank afloat and meet depositor needs, about Shs450bn was injected in the bank. In one week alone, about Shs250bn was placed in the bank in form of liquidity. BoU needed assurance that this money will be paid back by the new investors in the bank.

That was a requirement prior to any sale agreement. Dfcu on acquiring some of the assets and liabilities of Crane Bank also raised $50m (Shs180bn) from Arise BV – in less than a month -, now its largest shareholder. So, there was an acquisition fee, the Shs450bn (dfcu will pay this back in phases) and also capital injection of Shs180bn. Notably, dfcu had to set aside cash to ensure depositors had access to money, even those that wanted out.

And still, dfcu got Crane Bank for peanuts? Only if your head is buried in the sand.

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 What “we learn” from the Crane Bank “leaked” forensic audit

Over the weekend, a forensic audit conducted on Crane Bank by PWC leaked to the public. The forensic audit was ordered by Bank of Uganda (BoU), once it took-over operations of Crane Bank on October 20th 2016. The purpose of the audit was to establish why a bank that appeared to have been doing well – ranked number three overall – suddenly started facing liquidity issues and also accounting for 20 percent of all bad loans in the banking sector. The nature of a forensic audit is in part aimed at bringing criminal charges against the shareholders and managers. Additionally, it is also meant to be used to recover money that may have been fraudulently acquired.

  1. The report leaked

It is understood, at least from the contents of the leaked report, that Bank of Uganda (BoU) relied on this document – at least in part – to drag businessman Sudhir Ruparelia to the commercial court in order to recover Shs392bn, alleged to have been extracted from the bank. The audit has been a carefully guarded document but largely presents nothing specifically new from what was seen in the document. There has been a sort of PR battle being waged against BoU, lawyers MMAKS & AF Mpanga together with the New Vision. The “leaked” report comes just in time to indicate the suit by BoU is actually being backed by an actual forensic audit. The leak is timely. It doesn’t change the narrative against BoU but it relieves the pressure on anyone the bank regulator. This report was not meant to leak, considering the confidentiality clause inserted by PWC.

“The contents of this report may not in whole or in part, be copied, be quoted, referred to, disclosed or disseminated to any other party without our prior written consent,” the report reads.

  1. This is not the final report

The forensic audit reads as a “preliminary report.” It is dated 21st December 2016. This is not the final report as there were other findings in April 2017.

“It is imperative that the contents of this report remain strictly confidential until the recommended additional investigative steps are concluded and relevant evidence,” the report adds.

The report also points to several interviews that need to be conducted in order to make conclusions on several of the allegations made in the preliminary audit report.


  1. Who does it implicate?

When BoU sold some of the assets and liabilities to dfcu in January 2016, Ms. Justine Bagyenda, the Executive Director Supervision at noted that a forensic audit was being carried out by BoU in order to establish what caused the large NPL exposure and whether there was any wrongdoing. The Daily Monitor did indeed report that the former shareholders and manager would face criminal proceedings. Indeed the forensic audit confirms this.

  • Sudhir Raparelia (concealed the true shareholding of Crane Bank, irregular transfer of Crane Bank branches to Meera Investments & illegal extractions) – Notably the possible criminal charges could be embezzlement, influence peddling & nepotism among others.
  • Rasikalal Kantaria – He owns a bank in Kenya and several properties. He has several friends in the Kenyan media. He was the said majority shareholder in Crane Bank (through White Sapphire). However, the audit established that White Sapphire was actually owned by Sudhir Ruparelia. His criminal sanctions could be money laundering and embezzlement
  • R Kalan – He was MD between 2006 and 2014.
  • The entire board of directors – Joseph Biribonwa, Ajay Kumar, Vivek Sharma, Tom Mugenga, Rakesh Gupta & Jyotsna Ruparelia (for failing to do their job and making false statements). It should be noted that the board prepared the documents on the financial reports that were given to external auditors.


  1. AR Kalan holds an important key

In 2014, Mr. AR Kalan, the long serving Managing Director at Crane Bank left the country on extended leave to deal with a personal problem. He was expected to return and perform his duties. To indicate that he would not be returning, Crane Bank then hired the services of Mr. PK Gupta who had been the managing director Bank of Baroda Uganda. Kalan had been a close confidant of Mr. Sudhir Ruperelia, the founder and majority shareholder in Crane Bank. The reasoning that he had left on health grounds continued to elicit debate especially because he stayed away for long. In fact the belief is that his departure was due to a dispute over Shs50bn – the total none-performing loan (NPL) portfolio that the bank held in 2013 and 2014 combined.


Bank insiders at the time noted that some bogus companies had been created by top level management in the bank. These companies were able to access loans from the commercial bank but because they were not real with no known activity, they defaulted on the loans. The loans were written off. The insiders at the time also pointed out that it is where Kalan and the top shareholder fell-out. BoU did not come-out to state whether this was true. It only after they took-over Crane Bank operations and management in October 2016 that they seem to have seen the fraudulent activities.


Kalan was the architect of several of these transactions, at least according to the forensic audit. Crane Bank’s problems started to emerge once he walked away from the Crane Bank. If he can corporate with the regulators – if found – then he holds all the vital information about several transactions.


  1. Don’t play for too long

The forensic audit indicates that at some point Crane Bank needed to clean-up – the contents are actually true. The ongoing fraudulent activities appear to have started way back but the bank did not clean-up its act. The clean-up and improving corporate governance of the bank would have steadied the ship and eventually provide the true picture of the bank. This clean-up is noted to have started in 2013 when several loans were written off but before this could continue, AR Kalan left the bank. It is believed that he had ambitions of listing Crane Bank on the Uganda Securities Exchange.

The alleged fraudulent activities went on for too long that even if the bank was enjoying some level of “protection”, it could not go on for too long.


  1. Amina Hersi Moghe

She is the proprietor of Oasis Mall and Laburnum Courts. She is perhaps the most specific borrower in Crane Bank the preliminary audit appears to “implicate.” According to the report, her companies had borrowed from Crane Bank about Shs79.4bn, about 20 percent of the total capital of the bank at the time. No red flags were raised. The audit points at least six companies where she is either a director or signatory. According to the audit, Ms. Moghe was using the same securities to secure different loans in the bank and no red-flags were raised. Two companies were also able to secure loans after only less than 10 days of incorporation. The transactions of Ms. Moghe were in violation of the Financial Institutions Act (FIA) and Crane Bank officials knew about this. Considering that this is preliminary report, it points to “possible irregularities relating to Ms. Moghe’s accounts that require further investigation.


Recently the government is reported to have “bailed” her out by acquiring a stake worth Shs49bn from Atiak Sugar, which she owns. No due diligence report has been seen to support the government investment in the sugar factory that is even yet to start production.


  1. Banking sector confidence derailed

No matter how much BoU reassures on the confidence of the banking sector, the actions by the proprietors of Crane Bank – as per the report – derail that. BoU carries out stress tests of banks and approves the financial statements provided, yet somehow, all this was missed.


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