Fred Muwema: There is no need for Central Bank monopoly of bank regulation in Uganda anymore

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 by the Central Bank 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 can do to seven indigenous commercial banks which were abruptly 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 by BOU in the closure and sale of the 7 Banks is generally well received though it is underwhelming in some respects. It is underwhelming because BOU doesnt pay the ultimate price for the insidious failure to carry out its statutory and regulatory duty which would ordinarily 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 an important sector like the Banking sector.

Following the COSASE Probe, Parliament 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 is one or two recommendations asking for an amendment to the law to give specific timelines for winding up of Banks and to stop the Governor from heading the Management and Board of the Bank at the same time. Apart from that, business appears to be set to remain as usual at BOU despite the anticipated changes which the Parliamentary probe was supposed to bring.

In my view, it was light work for the Probe to recommend that BOU officials should simply behave next time around when the same regulatory structure which empowers the same institution to license, supervise, close and liquidate the Commercial Banks is still in place. Infact such a mild recommendation is breeding ground for the same mistakes to be repeated so that 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 7 Banks in their supervision reports, and yet the same officials proceeded to investigate and rule on the Banks compliance just before closing and liquidating the Banks. In such a situation, it was foolhardy to reasonably expect the BOU officials to act judiciously, impartially and beyond reproach in the case of actual, potential or perceived abuse of office and conflict of interest, which is why COSASE found that the officials made questionable decisions and flouted the law with impunity. I am convinced that it is the 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 different from BOU if it is going to remain the Accuser, investigator, prosecutor, judge and executioner of regulated Banks. I think it would have been in order for COSASE to recommend for example that the previous practice of outsourcing the liquidation of closed Banks to reputable Audit Firms be reverted to, like it has been done in the past.

Now that the probe is over, Parliament should instead push for deeper reforms of the legal Regulatory regime of the Banking Sector 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 specialization of the respective regulatory units and do away with the unwanted ineptitude and abuse which we have just witnessed from the single financial regulator. 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 Bank regulation.

We should not lose sight of the fact that for most Countries in the world, 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 perse doesnt prevent Banks from failing in any economy. Ghana has a single regulator model but this did not prevent the Central Bank there from closing 5 Banks in one year. The only difference is that the Central Bank in Ghana did not mismanage the liquidation of the failed Banks 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 for some key aspects of Regulation. 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 Regulatory Authority for the Banks but it is supported by the Financial Intelligence Centre, Financial Services Board and the National Credit Regulator who 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 another entity called 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 the process and the law which has led to unfair Bank closures. The kind of bias and prejudice that the 7 closed Banks suffered and complained of during the COSASE probe could possibly not have arisen if we were dealing with 3 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.

Fred Muwema
Managing Partner
Muwema & Co. Advocates
22nd February, 2019