The passing of the Financial Institutions Act by parliament in 2004 brought with it a new regime of what became unassailable discretionary powers enjoyed by the central bank in the regulation of banks.
In the wisdom of Parliament at the time, it was believed to be necessary to concentrate this discretionary power in a single financial regulator to determine things like the issuance or revocation of a banking license, minimum capital requirements or even to determine the shareholding in a bank.
This power was to be enjoyed in an environment which is remarkably insulated from democratic oversight under the notion that the central bank must be independent and free from political interference.
But after 20 years of experiencing what ravaging discretionary power of a central bank did to seven indigenous commercial banks, which were shut between 1993 and 2016, central bank officials appear to have become touchable and accountable.
The report of the Committee on Commissions, Statutory Authorities and State Enterprises (COSASE) citing irregularities and illegalities committed by BoU in the closure and sale of the seven banks is generally well received though it is underwhelming in some respects.
It is underwhelming because BoU doesn’t pay the ultimate price for the insidious failure to carry out its statutory and regulatory duty.
Ordinarily this should have called for harsh sanctions similar to those suffered by the closed banks. Whichever way you look at the report, one thing is clear – the Parliament of Uganda no longer trusts the opinion of the central bank as regards the regulation of the banking sector.
This is a very serious perception to be coming from the legislative arm of government, especially in respect of the regulation of such an important sector. Parliament only fell short of recommending and demanding that the central bank monopoly on bank regulation in Uganda should be broken even though by its damning report, it demonstrated that it has little or no faith in the financial regulator.
COSASE made a total of 46 recommendations in its report, the bulk of which were calling upon BoU to adhere to the Financial Institutions Act in carrying out its mandate.
There are one or two recommendations asking for an amendment to the law to give specific timelines for the winding up of banks, and to stop the governor from heading the management and board of BoU at the same time. Apart from that, business appears to be set to remain as usual despite the anticipated changes which the parliamentary probe was supposed to bring about.
In my view, it was light work for the committee to recommend that BoU officials should simply behave next time round when the same regulatory structure which empowers the same institution to license, supervise, close and liquidate commercial banks is still in place. In fact, such a mild recommendation is breeding ground for the same mistakes to be repeated.
Then once again, we shall have another special audit and report, which will be followed by another parliamentary probe in the next decade or so.
During the probe, it became clear that BoU officials had already taken a stand to fault the seven banks in their supervision reports, and yet the same officials proceeded to investigate and rule on the banks’ compliance just before closure and liquidation.
In such a situation, it was foolhardy to reasonably expect the BoU officials to act judiciously, impartially and beyond reproach, which is why COSASE found that the officials made questionable decisions and flouted the law with impunity.
It is this current single-model legal structure of regulation of the banking sector which made it easy for BOU officials to mishandle the closure and sale of the defunct banks without detection for a long time. We should not expect any difference from BOU if it is going to remain the accuser, investigator, prosecutor, judge and executioner.
It would have been in order for COSASE to recommend that the previous practice of outsourcing the liquidation to reputable audit firms be reverted to, like it has been done in the past. Parliament should push for deeper reforms of the legal regulatory regime by providing for other semi-autonomous or independent entities to separately license, supervise and handle the liquidation of banks.
The practicality of it may raise concerns relating to a multiplication of controls or regulatory arbitrage but it may still help to foster the economies of specialisation of the respective regulatory units and do away with the unwanted ineptitude and abuse which we have just witnessed.
Moreover, it is doubted that the kind of loss and damage occasioned by the excesses of a single regulator can thrive easily under a regime of shared regulation. We should not lose sight of the fact that for most countries, the single regulator model for their banking sector works fairly well.
It has obvious advantages like the economies of scale, the unified approach to regulation which eases and reduces the cost of decision- making in addition to reducing the costs to the regulated institutions. However, this model per se doesn’t prevent banks from failing. Ghana has a single regulator model but this did not prevent the central bank there from closing five banks in one year.
The only difference is that the central bank in Ghana did not mismanage the liquidation in such a brazen manner like the Ugandan central bank did. That is why for the case of Uganda, we may need for now, to adopt a regulation-by-activity model which should sit with different entities.
This multi-layer legal regulatory framework might be the solution or part of the solution to our unending propensity for indiscipline in the management of our public financial sector.
A multi-layer legal regulatory framework has worked in some countries like South Africa where the central bank, also known as the South African Reserve Bank, is the principal regulator but it is supported by the Financial Intelligence Centre, Financial Services Board and the National Credit Regulator.
All these institutions independently ensure that banks are compliant in various aspects of the law. In the same way, the central bank of Nigeria has power to supervise and regulate banks but the Nigerian Deposit Insurance Corporation is responsible for ensuring all deposit liabilities of licensed banks and it also acts as the liquidator of failed banks.
My logic is that there is a chance that if different people have to license, supervise, close and liquidate banks, then there will be less risk of abuse of process.
The kind of bias and prejudice that the seven closed banks suffered and complained of during the COSASE probe could possibly not have arisen if we were dealing with three different regulatory layers. It is never too late; parliament can still finish the job and clean up the regulation of the banking sector by ensuring a complete overhaul of the law in this area.
Mr Muwema is managing partner, Muwema & Co. Advocates.