{UAH} Government rescues Crane Bank with Shs200b

Government rescues Crane Bank with Shs200b

Sources say the decision follows Cabinet ministers' warning that the collapse of Crane Bank poses a risk to the entire financial sector

SUNDAY OCTOBER 30 2016

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Rescued. Crane Bank headquarters in Kampala. PHOTO BY COLLEB MUGUME 

By Mark Keith Muhumuza

Kampala. In order to avoid a complete collapse of Crane Bank, the government has used Shs200 billion in taxpayers' money to rescue the fourth largest bank in the country. 
According to sources in Bank of Uganda (BoU), the decision to inject Shs200b in Crane Bank came after Cabinet ministers warned the collapse of Crane Bank posed a risk to the entire financial sector and insisted that something should be done to avert the crisis.

Although Ms Christine Alupo, the BoU director of communications, attempted to clover-up the rescue plan, insisting that there was no money given to Crane Bank to boost the capital base, Ministry of Finance confirmed to Sunday Monitor that they released an undisclosed amount of money to Central Bank. 
"We gave funds to BoU to manage the monetary situation in the country in accordance with its mandate," Mr Jim Mugunga, the Ministry of Finance spokesperson, told Sunday Monitor.

Urgent issue
Mr Mugunga explained that Treasury works closely with BoU to ensure monetary stability, adding that: "Currently, the Crane Bank issue is one of the situations that needed to be prudently managed. It is not uncommon for such challenges to warrant interventions."
Asked to spell out the amount to BoU and whether Parliament was consulted before using taxpayers money, Mr Mugunga said: "I am not aware or at liberty to tell how much and where the Central Bank deployed the resources as provided. They can explain how they used the money."

A member of Finance Committee of Parliament also told Sunday Monitor that the committee last week received information through a whistleblower that Treasury officials had used taxpayers' money to bail out Crane Bank. The Committee is expected to summon Finance minister Matia Kasaija and Secretary to Treasury Keith Muhakanizi to explain the rescue package. 
What is not yet clear in the deal is how that money was deployed to Crane Bank even though sources told Sunday Monitor that the Shs200b was disguised as BoU capitalization before the money went to Crane Bank.

Crane Bank was on October 20 taken over by BoU after it had fallen short of capital requirement stipulated in the Financial Institutions Act 2004 (Amended in 2016). 
Asked whether BoU capitalised Crane Bank, Ms Alupo said: "It isn't the case as matters of capital requirement can only be established after an inventory of assets and liabilities. This is the focus at this point, along with the search for a strategic investor which is progressing well." 
Crane Bank had been an active participant in the interbank market where fellow banks lend to each other. Sunday Monitor understands that the distressed nature of Crane Bank had forced other banks to lend to it at rates sometimes higher than 25 per cent. The interbank rates, according to BoU statistics, have averaged about 16 per cent in the last two months.

"There was a run on the bank that took out deposits from the bank. That put pressure on the bank to find money to lend and also provide cash for the unprecedented levels of depositor withdrawals," a source at BoU explained. This deprives the bank of liquidity and space to maneuver; sometimes this can lead to insolvency. 
The government has already indicated that it will not let Crane Bank collapse but instead is preparing it for strategic investor. 
In a statement issued on Friday, Prof Emmanuel Tumusiime-Mutebile, the BoU governor, categorically stated that Crane Bank would not be closed.

"In spite of the fact that the Bank of Uganda took over management of Crane Bank; the bank will not be closed but we are seeking new investors who can boost the capital base of Crane. There is no bank in our economy that is facing imminent closure," he said as he sought to reassure the country on the health of the banking. 
The commitment from government officials is that they will be no letting Crane Bank close but rather have a new set of shareholders to run the bank going forward. Earlier last week, Mr Kasaija had stated that government would do what it takes to ensure Crane Bank remains open.

BoU lender of last resort?

According to several sources, the option Crane Bank had to access such money was by borrowing money from BoU. One source noted that BoU is not in the business of capitalizing banks but it has a window cash and financially distressed banks can access. 
Known as the Lombard window in the global banking sector, Crane Bank would access such a facility because of the risk around it by fellow peers. According to the Monetary Policy Statement for October 2015, the rate at which BoU lends to commercial banks is now at 18 per cent. Much lower than the 25 per cent plus banks are lending to Crane Bank. In order to access the lending window at BoU, Crane Bank has to pledge short term collateral in form of government securities. The other option provided for in the rules is for BoU to buy back treasury bills bought by Crane Bank previously in order to generate money for the bank to use for its daily activities. Ms Alupo also confirmed that Crane Bank was entitled to access such a facility. She, however, by press time had not confirmed whether Shs200b was accessed by Crane Bank using the lender of last resort facility.

Gwokto La'Kitgum

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