After weeks of a tough investigation, the ongoing parliamentary probe into several shut banks over the years has actively built a case of potential personal conflicts of interest against some central bank officials and also shines a bright light on how their inability to pay attention to detail diminished transparency and effective management at the regulatory bank, reports SULAIMAN KAKAIRE.
A few days before the parliamentary committee on Commissions, Statutory Authorities and State Enterprises (Cosase) began looking into the closure of defunct banks, Dr William Kalema, a member of board of directors of Bank of Uganda (BoU), wrote a memo to BoU governor, Emmanuel Tumusiime-Mutebile, dissuading him and his management from cooperating with the parliamentary investigation.
In the memo, seen by The Observer, Dr Kalema argued that the probe would attract too much publicity, which would not only put the central bank in a vulnerable position, but would also invite unnecessary scrutiny of the bank’s officials’ “reputations.”
At the time it was written, too few people could read much into the memo let alone its underlying motive. But almost a month into the parliament probe, it has catapulted itself into a key piece of evidence and one of the documents the committee is internally analysing.
“We are studying this memo to establish its connection with the accusations levelled against the individuals implicated in the matters being investigated by the committee,” said a member of the probe committee who declined to be named.
“Obviously Dr Kalema is one of those being studied.”
In a few days, the committee will be examining Dr Kalema and circumstances under which he qualified to become a member of the BoU board yet he had served as a director of a defunct bank.
According to documents before the probe committee, Dr Kalema was one of the seven listed directors of the Cooperative bank, which was shut by BoU in 1999 because of continued poor performance and non-compliance with regulatory capital adequacy requirements.
Bugweri MP, Abdu Katuntu, the probe chairperson, told journalists that the Financial Institutions Act and Regulations bar an individual who has been a director of a defunct bank from serving as a director in another financial institution until the expiry of 10 years.
“We shall examine whether by the time he became a member of the board of Bank of Uganda, the 10 years had lapsed. How did he pass the fit and proper test?” Katuntu said.
According to section 53 of the Financial Institutions Act, no person can become a director of a financial institution without a written nod of approval of his or her compliance with the fit and proper test from the central bank.
The law further provides that for purposes of determining a person’s compliance with the fit and proper test, the central bank may look into the previous conduct and activities of the person concerned in business or financial matters and, in particular, into any evidence that the person was a director of an institution that has been liquidated or is under liquidation or management of the central bank or under receivership.
Since the process of winding up Cooperative bank is still ongoing, Katuntu wonders how this could have escaped the attention of the parliamentary appointments process and that of Bank of Uganda.
“How could parliament approve him as a member of the board? But the most unfortunate thing is the fact that BoU even approved him to be a director in Dfcu. How could this happen?” Katuntu said, pointing to documents that also reveal that Dr Kalema before being appointed to the BoU board had served as a director in Dfcu.
KALEMA’S CONFLICTING INTERESTS
Kalema’s previous connections with Dfcu and Cooperative bank have prompted an investigation into his tenure as a board member to establish whether he complied with Bank of Uganda bye-laws, in particular regulation 7(3) that requires any member of the board to disclose direct or indirect interest in any business transaction in which BoU is concerned.
“Our concern is to establish whether Dr Kalema by the time he was a member of the board [BoU] he had relinquished all the interests he had in the defunct banks, and also we would like to know whether at the meeting of the board at which business is discussed, he used not to vote on those matters as required by the laws,” said one MP.
MPs are investigating whether Dr Kalema’s links with Dfcu, in part influenced circumstances under which Dfcu was most favoured to purchase the assets and liabilities of the defunct Global Trust Bank Uganda (GTBU) and Crane Bank Limited (CBL) at not so favourable terms but also in disregard of the law.
GTBU was closed on July 25, 2014 due to undercapitalization and corporate governance weaknesses, among other reasons. BoU took over the management of GTBU in line with Section 88(1) of the Financial Institutions Act 2004.
And in line with Section 95(1) (b) of the Financial Institutions Act 2004, BoU and Dfcu arranged for the purchase of assets and assumption of all or some of the liabilities of GTBU.
Four years later, since the bank’s closure, the auditor general, John Muwanga, acting at the urging of Cosase, instituted a special audit that revealed that there were no guidelines/regulations or policies in place to guide the identification of Dfcu, as the purchaser of GTBU and that there were also no guidelines to determine the procedures to be adopted by BoU in the sale and transfer of assets or liabilities of the defunct bank to Dfcu.
Among the impugned clauses in the agreement include, a clause that gives Dfcu powers to act on behalf of the central bank to collect and manage assets worth Shs 21 billion, of which Dfcu is entitled to share 35 percent of the proceeds.
The other clause provided for the transfer of performing loans and overdrafts to Dfcu at Shs 22,630,112,656 representing 80 per cent of the book value of Shs 28,287,640,820. This implies that Dfcu acquired the loan portfolio at a 20 per cent discount.
The auditor general argues that the manner in which these two provisions were arrived at was not justified and the evaluation of the alternatives and assumptions on which the evaluation was based were not provided for verification, which contravenes section 95(3) of the Financial Institutions Act that provides that;
“in determining the amount of assets that is likely to be realized from the financial institution’s assets, the receiver (central bank) shall— (a) evaluate the alternatives on a present value basis, using a realistic discount rate; or (b) document the evaluation and the assumptions on which the evaluation is based, including any assumptions with regard to interest rates, asset recovery rates, inflation, asset holding and other costs.”
In respect of CBL, the MPs are investigating how BoU sold Crane Bank Limited’s bad book loans totalling Shs 570.38bn to Dfcu at a consideration of Shs 200bn, among other things.
MUTEBILE’S TROUBLES
But before the probe committee turns its guns on Kalema, it heard Mutebile’s confession that since 2001, when he was appointed BoU governor, he had never disclosed his personal interest in the defunct National Bank of Commerce (NBC), until the bank he helped found, started to go through troubles that triggered its closure by BoU in 2012.
While appearing before Cosase last week, Mutebile admitted he violated the Bank of Uganda by-laws, in particular regulation 7(1), which provides that every member of the board, officer or employee of the bank, shall be bound to disclose in writing his or her shareholding or other financial interest, if any, in any banking or credit institution carrying on business in Uganda.
“I had not formally declared my interests until the bank started having problems…,” Mutebile said, adding:
“When the matters of NBC came to the board…I declared my interests…because of that I asked the deputy governor to be in charge.”
Lubaga North MP Moses Kasibante asked Mutebile whether the holding of interest in NBC, did not impair his judgment as a regulator.
Mutebile maintained that: “Throughout my period as governor, I don’t remember taking any decision at all regarding NBC…”
Katuntu argued that the issues raised by the governor are very important.
“As a regulator, his judgement at no point should be impaired by personal interests…The governor should have even forfeited those interests because if you don’t, even your officers will always go slow on the bank because they know that their boss has an interest,” Katuntu said, adding that the committee will be re-examining these matters further to establish Mutebile’s culpability.
“There are laws and by-laws that regulate how officers should behave so we shall examine whether there was no breach of such regulations,” he said.
National Bank of Commerce (NBC) was closed on September 27, 2012 due to undercapitalisation, among other reasons. BoU took over the management of NBC in line with section 88(1) (a) and (b) of the Financial Institutions Act 2004 and subsequently placed NBC under liquidation, pursuant to section 89 (2) (f) and section 99 (1) of the Act.
In line with section 95(b) of the Financial Institutions Act 2004, BoU arranged for the purchase of assets and assumption of liabilities of NBC. On September 27, 2012, BoU and Crane Bank Limited signed a purchase of assets and assumption of liabilities agreement in which certain assets were transferred and liabilities assumed by Crane Bank Limited.
In his special audit, which is currently being interrogated by the probe committee, the auditor general queried the circumstances under which Crane Bank Limited was zeroed on to purchase NBC as well as what criteria BoU used to sell NBC’s assets worth Shs 9 billion below the book value.
BAGYENDA’S INTEREST
The other officers under investigation for probable conflict of interest include; Justine Bagyenda, the former BoU executive director in charge of supervision, and MMAKS Advocates, the BoU external lawyers.
In respect of Bagyenda, the committee is probing whether Bagyenda’s personal interests could have influenced her decision to close GTBU.
“We have information that Bagyenda’s sister, Edigold Monday, worked as an interim executive director of GTBU, but later resigned from the bank. We would like to get the connection between the bank’s troubles and Bagyenda’s personal relationship with Monday,” said an MP on the probe committee.
Indeed, when the committee interfaced with the former directors of GTBU last week, Busiro East MP Medard Sseggona attempted to push them to disclose whether they had any misunderstanding with Bagyenda or Monday. They said they had none.
However, the former directors never shied away from sharing the circumstances leading to the bank’s closure. The former GTBU directors, who were led by Bayo Folayan, a former manager at GTBU, informed the probe committee that on July 3, 2014 there was a meeting at BoU and the regulator said their bank was not being run in accordance with corporate governance principles.
On July 4, 2014, this meeting was followed up with a letter from Bagyenda requiring GTBU to comply with the issues raised. However, before GTBU could convene the general meeting of the company to address the corporate governance issues raised since some required the intervention of shareholders, on July 25, 2014, BoU closed GTBU due to undercapitalization and corporate governance weaknesses, among other reasons.
The former directors of GTBU argue that BoU asked them to rectify their problems within 20 days, which is less than the 21 days in which they could issue a notice calling an extraordinary members’ meeting as provided under the Companies Act and Regulations.
“The financial condition of the bank did not justify the closure of the bank…the bank was not signifanctly undercapitalised and the going concern basis was not in doubt…,” Folayan said, adding that GTBU directors should be compensated with Shs 316 billion for the illegal closure.
Similarly, Cosase is investigating how BoU hired and maintained MMAKS Advocates as its external legal advisors yet at the same time the firm’s partners are directors in some commercial banks.
“We have discovered that there was not only mismanagement at the bank but there was institutional capture which was occasioned by conflicting interests,” Katuntu said, adding:
“The conflation of interests makes the mismanagement at the bank inevitable. For instance, we heard that BoU staffs saving scheme invested in the shares of Dfcu. How can the officers of BoU act professionally yet they have invested in these commercial banks? It is highly doubtable that they can make decisions that contradict their interests.”
skakaire@observer.ug