Banks must appoint better managers that would allow them make a profit while protecting the interests of the depositors, Bank of Uganda’s deputy governor has said.
In a paper on corporate governance presented last week at the 5th annual international leadership conference at Serana hotel, Louis Kasekende said poor and abusive management was the reason some banks in Uganda had failed before.
“In the 1990s and early 2000s, Uganda’s banking industry suffered a number of bank failures. Eight banks failed, forcing the Bank of Uganda to intervene and resolve them. In some cases the failed banks were closed, in others they were sold to new owners,” Kasekende said.
In recent years, Nile bank was bought by Barclays, while the National Bank of Commerce was closed just recently. Uganda Commercial Bank was taken over by Stanbic bank. Earlier on, Greenland and the Cooperative bank were also closed, often amid public protest.
“Poor and abusive management was allowed to flourish in banks because their boards of directors were usually weak, lacking the professional expertise and often the independence and incentives to provide any effective oversight of bank management,” he said.
Kasekende said while BOU, the industry regulator, could help protect the outsiders – who include minority shareholders and depositors – there was more to be done internally to ensure sound financial standing.
“In a market economy, the onus for sound management, including the proper management of risks, must lie with the banks themselves,” he said.
“Bank regulators cannot be a substitute for [good] bank managers. As such ,good corporate governance is an essential complement to good bank regulation and supervision.”
Excessively heavy-handed regulation, while it might protect depositors, can also stifle innovation and risk-taking in banks, which would be detrimental to economic development, Kasekende said.
He added that banks should ensure their boards are independent, so that they can ably scrutinise the decisions of the management before approval. At least half of the directors of a bank, including the board chairperson, must be non-executive- not engaged in the day-to-day running of the bank – as they represent the interests of the bank’s outsiders, he said.
“When banks work badly, which is not uncommon, they can inflict damage throughout the economy, causing losses to depositors, firms who need credit and taxpayers,” he said.
“But it is unrealistic to expect that bank regulation alone can guarantee the efficient and safe operations of the banking system. Good corporate governance is just as important for sound and efficient bank management as good bank regulation.”
The directors must set pace by providing independent oversight of bank management. They must ensure that the bank’s risk management is adequate to ensure its safe operation, so that depositors’ funds are protected and that the financial statements provided by the bank to the regulator and the public are accurate.
Kasekende also warned banks against taking any risk they cannot absorb just in case it fails to materialize as planned hence the bank as to write it off.
Source : The Observer