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Governor Mutebile is wrong on UCB

By Vision Reporter

Added 6th March 2001 03:00 AM

SIR- I wish to respond to the Bank of Uganda Press Release, in The New Vision on February 20, 2001.

SIR- I wish to respond to the Bank of Uganda Press Release, in The New Vision on February 20, 2001.

SIR- I wish to respond to the Bank of Uganda Press Release, in The New Vision on February 20, 2001. Prudent commercial banking practice calls for efficient asset/liability management. A good banker is one who manages interest yielding assets by acquiring an optimum blend between risk-assets (Loan and Advances) and non-risk assets (treasury bills and government bonds) so as to cover his interest cost to depositors, overhead costs and a net return to shareholders. There is absolutely no logic for any banker to increase the proportion of risk assets to total interest yielding assets to a level where loan losses incurred continue to impair capital. The UCBL Chairman's recent Statement on the 1999/2000 operations revealed that inter bank placements/short term lending to other banks averaged sh20bn per annum. The fact that the public voluntarily transferred more than sh100bn savings from the closed banks to UCBL, rather than to other Banks, is a measure of restored public confidence in UCBL. UCBL is innovative in fully playing its financial inter-mediation role by connecting those non-institutional savers to borrowers through other commercial Banks. Indeed, Inter bank inter-mediation allows UCBL to expand lending without the risk of augmenting its non performing loan portfolio or increasing administration costs since it is obviously cheaper to administer relatively fewer wholesale advances to banks than thousands of direct loans to individual borrowers. It has also to be noted that now that UCBL has overcome insolvency and has fulfilled the regulatory requirements, it is poised to play a greater role in credit inter-mediation. It is trite and puerile to assert that UCBL's current profitability trend of sh19bn per annum is unsustainable purely because the bulk of the profit derives from treasury bills and government bonds. Are there any indications that GOU (Treasury) short term liquidity needs are set to decline materially in the short or medium term? Is the yield curve for government securities rate inverted? On the contrary a year on year comparison of February monthly average 91 day treasury bills rates reveals a rise from 5.47% for 1999 past 9% for 2000 to an all time peak of 21% for 2001. In this scenario, UCBL as a major participant on the supply side of the Uganda money market should continue to enjoy a contribution to its gross margin from interest earned on government securities in the foreseeable future. Even if the rates came down, because of the enhanced level of investment as result of an increase in retained earning, the interest earning of the bank will remain formidable. Should current profitability rates sustain, at 1999/2000 level i.e at sh19bn annually, it is obvious that the much touted sh3bn capital impairment will be rectified by less than 3 months retained earnings. Privatisation is unquestionably desirable. It is, however, vital to prepare public entities for this change. Now that UCBL is endowed with management practices which look to restore solvency and profitably by re-capitalising the bank through internal resources (retained earnings) without any demands on the Treasury, the uncharacteristic haste to sell off the bank for a song through a process that could be construed to be dubious and underhand deals should be stayed. This delay will not only fetch a better price on privatisation, but also prolong UCBL's growth and stabilisation role in the money market. This role is assured by the fact that UCBL retains profit towards expanding operations whilst a privatised bank would be under pressure to pay dividends to foreign shareholders. Name withheld on request Ends

Governor Mutebile is wrong on UCB

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