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BoU cites under capitalisation for Crane Bank takeover

Saturday October 22 2016

Uganda’s Crane Bank Ltd was on Thursday put under receivership by the regulator for operating without sufficient capital, prompting a cross-section of analysts to caution that the growing levels of bad debts in the Ugandan banking sector could choke the profitability of many lenders.

Crane Bank’s capital reserves had been eroded by high levels of unsecured loans turned bad, raisings questions on the quality of credit management practices by the directors who were also sent packing.

According to banking analysts, the growing levels of non-performing loans (NPLs) in Uganda’s banking sector as a result of a high interest rate regime could result in losses or reduced profitability for most banks this year.

“The high interest rate regime has contributed to a lot of loans going into default across the Ugandan banking sector. Crane bank had issued a lot of unsecured loans and as a result they have accumulated a huge portfolio of bad loans without sufficient non-interest income to cover the shortfalls,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.

Uganda’s average lending rates currently averages 24.29 per cent according to the latest figures from the Bank of Uganda, compared with Rwanda (16.95 per cent), Tanzania (15.79 per cent) and Kenya which has introduced interest rate caps at 14 per cent.

“Quite a number of banks in Uganda reported an increase of NPLs. We expect Ugandan banks to register reduced profits this year,” said Mr Kuyoh.

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An analyst who did not want to be named said: “If Crane Bank was put under receivership because of the issue of capitalisation, then it might not have a significant impact on the industry, but if it is an issue of NPLs then it will put pressure on the entire industry.”

The Bank of Uganda (BoU) suspended the board of Crane Bank and put the lender on statutory management for being undercapitalised and posing a systemic risk to the stability of the financial system.

READ: Uganda's central bank takes control of Crane Bank

Governor Emmanuel Tumusiime-Mutebile said the continuation of Crane Bank’s activities in its current form is detrimental to the interests of its depositors. “This action has been taken upon a determination by BoU that Crane Bank Ltd is a significantly undercapitalised institution as defined by law,” he said.

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