Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures

Abstract

In 1998/99 four insolvent commercial banks were intervened and closed by the central bank in Uganda. One bank was closed promptly while the other three were all subject to some form of attempted open bank resolution before eventual closure. This article examines the lessons from this experience and concludes that, in general, prompt closure is preferable to open resolution. This is because the losses incurred by distressed banks are likely to be much greater than the estimates made by regulators or auditors prior to closure, while the prospects for recapitalisation by private sector shareholders are likely to be very limited at best. Open resolution entails serious dangers of moral hazard, which increase the eventual cost to depositors and taxpayers.

Challenges in banking the rural poor: evidence from Kenya’s Western Province

“…The Village Bank offers several different types of loans, most at interest rates between 1.25 and 1.5 percent per month (16)(17)(18)(19).5% APR). Loans are to be used for business purchases, with the exception of a loan for emergencies which features a higher interest rate (2.25% per month).The Commercial Bank grants microloans for existing businesses to individuals who have had an account at the Commercial Bank or with another Commercial Bank for at least 3 months.…”

“…A number of other African countries had major banking scandals during the 1980s and 1990s (Caprio and Klingebiel, 1997;Brownbridge, 1998), several of which cost over 10% of GDP (Daumont et al, 2004). Within East Africa, Uganda had a banking crisis in which four commercial banks, holding over 12% of the nation's deposits, collapsed over just 13 months in 1998 and 1999 (Habyarimana, 2005;Brownbridge 2002). Tanzania had a major banking crisis in the late 1980s in which government-owned banks (accounting for 95% of total bank assets) became insolvent.…”

“…Only a few households (11%) did not have a female head living in the homestead, but around 31% of households did not have a male head living in the homestead. 16 Polygamy is still somewhat prevalent -8% of households are polygamous. The average household in the study area owned just under two acres of land, and had just above 4,000 Ksh ($42) in animal assets.…”

Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province

“…In addition, the bank requires borrowers to attend several training sessions on loan management. The Village Bank offers several different types of loans, most at interest rates between 1.25 and 1.5 percent per month (16)(17)(18)(19).5% APR). Loans are to be used for business purchases, with the exception of a loan for emergencies which features a higher interest rate (2.25% per month).The Commercial Bank grants microloans for existing businesses to individuals who have had an account 11 The withdrawal fee is 10Ksh ($0.10) to withdraw amounts under 1,000Ksh ($10.50), 20Ksh ($0.21) to withdraw amounts between 1,000 and 4,999Ksh ($53), and 100Ksh ($1.05) for amounts of 5,000Ksh or higher.…”

“…16 Polygamy is still somewhat prevalent -8% of households are polygamous. The average household in the study area owned just under two acres of land, and had just above 4,000…”