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What if we had let Crane Bank fail(?)

“The supreme art of war is to subdue the enemy without fighting.”
― Sun Tzu, The Art of War

It is July 2015. The big news. Several companies are seeking a government bailout. The figure. About Shs1.3trillion. The economy is in slowdown mode. Some of the companies are heavily leveraged. The bailout could save them from being taken over by the banks. Panic has set in. Some banks could be affected. Terribly. A source tells us that if the bailout doesn’t happen a bank. Crane Bank. Could fail.

April 2016. Deadline day. Crane Bank releases its financial results. It is a loss. A first loss since the modern day era of financial regulation – 2004. The amount. Shs3.3bn. The figure seems to be small but it is a reflection of a much bigger problem. The troubled lender is facing serious liquidity challenges. It simply can’t meet all obligations of its depositors. Fellow banks are finding it hard to lend it money. The lender of last resort, Bank of Uganda (BoU) has placed serious restrictions on Crane Bank because it doesn’t want the leverage to continue. Crane Bank shareholders realize that they have to raise capital. Fast. They go out looking for a buyer. They get one. BoU is uncomfortable with the new buyer. The bank continues to hemorrhage. They are still looking for a buyer.

October 2016. BoU decides to take over Crane Bank management to stop the hemorrhage. The bank that had assets of over about Shs1.8trillion now has liabilities higher than that. If the bank were to shut down, it simply would not meet obligations. It was in trouble. It needs a cash injection. Using taxpayers money. Shs473bn. BoU creates stability. Allows Crane Bank to continue operating under its management. In January 2017, after some competitive closed bidding, dfcu acquires some Crane Bank assets and immediately injects Shs200bn to shore up its capital. Dfcu also commits to paying taxpayers the Shs200bn over a period of time – said to be about 3 years. Taxpayers still need Shs193bn.

Who will pay it?

A forensic audit on Crane Bank reveals several acts of misconduct on the part of shareholders. From the illegal transfer of properties and fraud. BoU initiates a plan to recover money said to have been “hand-picked” from the bank by shareholders.

What follows is a “war”

“When you surround an army, leave an outlet free. Do not press a desperate foe too hard.”
― Sun Tzu, The Art of War

The war includes discrediting the Executive Director Supervision, Justine Bagyenda. She is corrupt. Her properties are exposed. Her bank accounts with amounts of money not expected of a civil servant are also exposed. Was she taking bribes from banks? Was she laundering money? Is she a thief? If she is all this. Then the takeover of Crane Bank and eventual sale to dfcu was fraudulent.

This is war.

“So in war, the way is to avoid what is strong, and strike at what is weak.”
― Sun Tzu, The Art of War

The other includes successfully getting the court to rule on conflict of interest by the previous lawyers of Crane Bank – MMAKS and AF Mpanga. Outside the court proceedings. Another war. Discrediting Vision Group CEO Robert Kabushenga. Discrediting the lawyers in well-done videos that point them as rogues.

The war is also being played out in the courts. BoU started it. The allegations are mindblowing. Settlement talks are ongoing. Sudhir won’t let go. Strikes back. Meera Investments (one of the defendants in the original BoU case) wants its property back. It alleges that about 46 properties were illegally transferred from Meera Investments to dfcu. It wants dfcu evicted and those properties returned.

It also wants dfcu to pay rental charges of about Shs30billion.

The other is now that shareholders feel aggrieved that the bank was bought for pennies yet it had assets of over Shs1.2trillion. The liabilities are not mentioned.

One writer noted: this is perhaps going to be the largest dispute in the banking sector in the history of banking in Uganda. It is. It is getting dirty.

Parliament is getting involved too.

Did we really need to get here? Why didn’t BoU let Crane Bank collapse? Why did taxpayers money have to come into play? Why didn’t the regulator see this earlier?

“There is no instance of a nation benefitting from prolonged warfare.”
― Sun Tzu, The Art of War

The assumption is that a banking collapse would have hurt so many. In the instance that Crane Bank had failed, its obligations to depositors would not have been there. People would have lost money. The Deposit Protection Fund only guarantees that depositors would get no more than Shs3million back. Imagine all those corporate and fix deposit accounts. It would have sent massive ripple effects on the sector. A run on all other banks. Wouldn’t this have been better? Would the system have corrected? Would the economy have collapsed? Not good for politics. Maybe this is what we would have needed.

A look at this scenario shows you that failing was not an option for such a big bank. What we question is whether the regulator failed us by perhaps not scrutinizing the operations of Crane Bank.

“Staff also notes that the quality of banks’ reporting is a risk to the validity of the stress test results, as the Crane Bank episode has illustrated. The authorities agree that the experience calls for more intrusive supervision, and explained that they are also focusing on banks’ risk management frameworks.”

The rumors had always been around. They were far too many not to believe. The “cold war” currently going on may help the sector but it may also prove that the powerful shape the politics and will always be protected as long as they live. Crane Bank was too big to fail.

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