Museveni On Sale Of UCB

On September 30, President Yoweri Museveni wrote to the Governor of the Bank of Uganda, Mr Tumusiime-Mutebile, on the proposed sale of Uganda Commercial Bank. Here is the text of what he said: I HAVE received resolutions passed by Parliament today regarding the privatisation of Uganda Commercial Bank. These resolutions do not change my long held view that UCB should be sold as soon as possible, as per our Privatisation Plan for the whole parastatal sector. Let me restate the reasons that compelled us to take the decision to sell the bank for the record. It is not in doubt that today UCB holds about sh400 billion of depositors’ money, which has to be protected. The past history of UCB is well within our knowledge. It was characterised by: (i) gross mismanagement whereby its managers lent enormous unsecured sums of money to themselves; (ii) deliberate poor assessment of loans by the staff who were bribed by the borrowers to lend contrary to the interests of the bank; (iii) reckless and/or unprofessional manner of handling business in disregard of concerns of prudential management. All the above led to the creation of a high level of non-performing assets, which forced the bank to provide for them, resulting in high interest rates. The few creditworthy customers who repaid their loans were forced to subsidise the vast non-performing majority. Even this subsidy was insufficient to cover the costs of the bank and as a result, the bank had to hike interest rates. Despite the fact that over the last ten years we have been able to keep inflation rate on average below 7%, we have failed to bring down bank interest rates because of the above malpractices. This situation must be arrested. You are aware that the 1997 attempt to sell the bank was unsuccessful mainly because of Uganda’s procrastination leading to reputable banks which had picked interest in UCB, such as CITIBANK and NEDBANK withdrawing from the process. This left the field to the likes of Westmont with the consequences, which are known to all and sundry. I have seen an argument in the Committee’s Report that the privatisation of the bank should be stopped because it has made profits and is no longer insolvent. I disagree with this position simply because the said profitability is unsustainable. The above situation has been caused by the unusually high interest rates on Treasury Bills prevailing at the time, and the fact that the Bank of Uganda has not yet invoiced UCB for all the costs which has been incurred in its intervention. We should not allow our petty internal disagreements to scare away bona fide multinational investors as were in the cases of Coffee Marketing Board, Uganda Airlines and the failed 1997 UCB transaction. Time has come for all of us to appreciate the necessity to harmonise our positions so as to maintain the hard earned credibility with our international partners. On the way forward, therefore, since the BOU was supported by government to resolve its intervention in UCB by selling a substantial stake to a core international bank investor, and, in order not to damage our image with the investor community and our development partners, I deem it the duty of the entire government system to be fully involved and supportive of the privatisation of the Bank. Taking into consideration the above, I strongly recommend as follows:- (i) that BOU proceeds to open the bids on the 1st October, 2001 as scheduled in the presence of members of DRIC and the Chairman of the Parliamentary Committee on Finance Planning and Economic Development. (ii) that the analysis of the bids be done by the BOU in conjunction with the Privatisation Unit. (iii) that if there is a successful bidder the final share transfers be executed by DRIC. As was agreed in the meeting of 22 August 2001, you must ensure that you commission an independent audit to evaluate the transparency of this whole transaction and keep me posted. Yoweri K. Museveni President Hon Members, yesterday a request was made in this House for Government to make a statement on how the resolution of Parliament regarding UCBL is being handled. The Prime Minister undertook to ensure that the House would be briefed accordingly. I am therefore making this statement today for this purpose. Hon Members will agree that both the Executive and Parliament were unanimous regarding the decision to privatise UCBL. Therefore, I wish to submit that the Executive has all along acted in conformity with the law, taking into account the views Parliament. Let me explain the basis of this opinion: First of all, members will recall that the BOU commenced the resolution of UCBL following the recommendations made by the sixth Parliament (as I listed them in my statement on Friday) and all actions since then have been in accordance with the spirit of these recommendations. The Executive has also endeavoured to take into consideration the recommendations of the current Parliament, and the views expressed by other stakeholders, including H.E. The President, who provided guidance in his letter of September 30, 2001. When the BOU intervened in UCBL, it put in place a number of stringent measures to stop any further deterioration of the bank. These measures included suspension of new lending, introduction of administrative measures to reduce the operating costs of the bank, and restricting investments to safe assets such as treasury bills. These protracted measures improved the bank’s solvency. However, Hon Members will appreciate that this is not sustainable because UCBL must increase its lending capacity to the public if it is to have a viable future as a commercial bank. This is why the BOU intervention cannot end before a sustainable solution is effected. This must involve acquiring a reputable banking partner for UCBL with the well motivated personnel, expertise and resources to undertake large scale commercial lending, which is currently in short supply in our economy. This is necessary to expand access to credit for domestic companies and reduce the cost of borrowing. Therefore, the BOU cannot lift its statutory management of UCBL until the bank has been successfully re-structured. For these reasons, it was not possible to implement the first part of the resolution of Parliament of 28th September 2001 in its entirety. Mr Speaker Sir, permit me to point out to Hon Members the reasons why it was absolutely necessary to open the bids on Monday the 1st October 2001 at 8.30 a.m. as indicated by the Bank of Uganda: (i) It was important to sustain the hard earned investor confidence in the entire government for the good of our economy. (ii) It was also important to sustain investor interest in UCBL for the good of our entire financial sector. Hon Members, recognising the above, the Executive has accommodated all the views expressed by Parliament in its resolution of 28th September 2001. a) DRIC was involved in the opening of bids, and has designated the Privatisation Unit (its technical arm) to participate in the evaluation of the bids, a report of which will be submitted to DRIC and other stakeholders (This is in line with H.E.’s recommendations). The involvement of DRIC will ensure that there will be full transparency and accountability in the process. Furthermore, government has sought the assistance of DRID, which will monitor the transparency of the entire process and a report will be presented to Parliament and the general public on completion of the transaction. b) I wish to reconfirm that public participation through the stock exchange is a major condition of the bid. The bidders are, therefore, expected to ensure that the public issue of shares will take place after the successful core bidder has taken over the bank. c) The UCBL will substantially increase competition in the domestic banking industry and especially in credit markets where UCBL currently has a very marginal role but has the potential to play a major role. Furthermore, neither of the two bidders, were they to be successful in acquiring UCBL, would have anywhere near a monopoly position in terms of market share of deposits. The Executive, therefore, is in full agreement with you that UCBL should not become a private sector monopoly. Hon Members, I will commit myself to provide this House with regular reports on the progress being made in resolving UCBL in line with the spirit of your resolution. I will also table before this House the independent evaluation report on the transparency of the resolution process, once the process has been completed. You will appreciate from the above, that the Executive took into consideration all of the resolutions of this august House when deciding on the way forward. Thank you all. Ends