BoU scandals put local banking regulatory framework on the spotlight

By George Mangula

According to its website, the primary policy objective of the Bank of Uganda (BoU)’s monetary policy is to hold annual core inflation to a medium term target of 5 percent. A secondary policy objective of monetary policy is to ensure that real output is as close as possible to the economy’s potential level. 

However, in July 2011, the Bank of Uganda reformed its monetary policy framework to meet the challenges of macroeconomic management generated by the transformation of the economy over the last 10 years, and in particular the rapid growth and diversification of the financial system. The reform entailed the introduction of an Inflation Targeting Lite (ITL) monetary policy framework, which replaced the previous framework which involved the targeting of monetary aggregates.

Under the ITL monetary policy framework, BoU sets a policy interest rate, called the Central Bank Rate (CBR), which is intended to guide short-term inter-bank lending rates and thereby influence the marginal cost of funds for commercial banks. The BOU uses regular interventions in the money market to ensure that the 7-day interbank rate is as close as possible to the CBR.

The CBR is the operating target of monetary policy. It is set once every two months and is publicly announced at a press briefing held immediately after the rate setting meeting, so that it clearly signals the stance of monetary policy going forward. The CBR is set at a level which is consistent with achieving the objectives of monetary policy. The CBR currently stands at 10 percent, even though banks have failed to match it due to other factors affecting the economy.

Analysts have commended BoU for keeping inflation within a single digit target over the years apart from 2011 when officials allowed billions of shillings to circulate in the economy during the general elections, causing inflation to jump to record 29.0 percent in December 2011. The money that caused the inflation was allegedly meant to enable President Museveni fulfill his campaign pledges to various groups in the previous elections which garner him support for 2011 presidential election.

“When we would analyse the inflation movements at that time, we would realise that much as there other factors like the cost of production of sugar, BoU was to blame for releasing billions of shillings to fund President Museveni’s campaign pledges. That was wrong. And that is why BoU has said it won’t make a mistake of printing any money come 2021 elections,” an analyst told this reporter.

“As there is more money in circulation like it was in Uganda during the 2011 general elections period, prices rise similar to regular inflation,” he added.

On the recent saga where some BoU staff are said to have printed extra billions of shillings for their own use, a local commentator on the economy added: “If it is true that the BoU officials printed the extra money and is circulating in the economy, then it is bad and could impact on inflation control. Money not backed up by production or output is bad for the economy. That is why governments all over the world fight illegal money printing.”

 “If the money supply multiplies quickly, then the rate of inflation escalates. This makes goods more expensive for businesses and consumers and puts downward pressure on the economy, resulting in a recession or depression,” he noted, and urged government to trace that money suspected to have been brought in the economy by BoU officials in April.

He also said such officials should be imprisoned for life. “These people (BoU officials) are there to keep the economy healthy but if they are making it unhealthy, them my suggestion is that they must be imprisoned for life,” the expert said.

Another financial expert this reporter talked to argued that government should have a strategy of changing the currency say after every 10 years, arguing that many criminals are printing illegal money.

“Why is it that some people are building apartments, schools, real estates, buying expensive cars yet many others can’t afford a decent house? There is a syndicate printing money in this country and it involves those running the economy,” he opined.

BoU’s role of regulating the banking sector

Before Parliament probed BoU over the closure of seven commercial banks, the institution and specifically top officials were held in high esteem. However, since the probe all that has changed as the BoU officials were found to be wanting in the execution of their regulatory duties. Indeed, today, the BoU has lost a lot of respect and top officials are now seen as corrupt yet they are supposed to regulate the local banking industry.

For instance, during the BoU probe by Parliament’s Committee on Commissions, State Authority and State Enterprises (COSASE), it was established that the institution invested in some of the banks that it regulates, something that put its regulatory role in question.

“For instance, COSASE found out that BoU Staff Retirement Benefits Scheme holds shares in DFCU Bank which bought Global Trust Bank, and Crane Bank as offered by BoU.
The committee also learnt that Dr. William Kalema who was a board member of Bank of Uganda was also a Board member of DFCU in 2014 when it took over Global Trust Bank,” a top politician said when asked. In such a scenario BoU is acting as a regulator and the regulated,” he added hoping that government will act on the recommendations of the COSASE report to correct the omissions.

In a related development financial analysts say it is wrong for BoU to do business with legal firms whose partners chair the boards of some of the commercial banks.

“You read the COSASE report if you want to know those firms,” one analyst said adding that it creates conflict of interest. “How do we know that the process was fair given the circumstances above?” he added.

Meanwhile, reports indicate that a confidential Report of the Presidential Tripartite Committee set up to investigate BoU Governor Prof. Emmanuel Tumusiime-Mutebile over staff changes in February 2018 established that there was recruitment of many people into senior positions that they were not qualified to handle. For instance, the report cited Dr. Twinemanzi Tumubweine, who was appointed executive director bank supervision, yet he reportedly has no prior experience in the banking industry.

Call for Tumusiime-Mutebile to resign

The biggest opposition political party in Uganda, the Forum for Democratic Change (FDC), has urged that Tumusiime- Mutebile, should resign, following a series of scandals.

About a month ago, five directors at BoU were arrested by the State House Anti-Corruption Unit (ACU) after Tumusiime-Mutebile approached the unit upon realising an anomaly in the consignment of the currency that was in April delivered through Entebbe International Airport on arrival from German printing company.

Speaking at the party headquarters, FDC spokesperson who doubles as the MP for Kira Municipality, Semujju Nganda, said Mutebile should ‘have retired long time ago’ for failure to effectively manage the Central Bank.

Semujju deridingly described Mutebile as ‘a scandal himself’. “He is a walking scandal. Have you ever seen him walking, he is ever sleeping only to wake up when scandals have happened. Since President Museveni is the appointing authority, he should lay him off for failure to put BoU in order,” he added.

And, as if to prove his point, when Ssemujju was criticizing the Governor, two BoU officials were being charged at Anti-Corruption court sitting at Kololo Kampala, on allegations of inclusion of unauthorised cargo on the plane that BoU chartered to deliver printed money. 

Francis Kakeeto, a Branch Manager at Mbale and Assistant Branch Manager Fred Vito Wanyama were charged with abuse of office and in the alternative, corruption, which they both denied before magistrate Herbert Asiimwe.