The struggling Crane Bank

One of the financial institutions; Crane Bank you aware of has for the past 10 years won many prestigious awards including African Banker of

One of the financial institutions; Crane Bank you aware of has for the past 10 years won many prestigious awards including African Banker of the Year issued from London. On 21st October 2016, we woke up to the news that Bank of Uganda had taken over management. We are aware that Crane Bank complies with the Financial Institutions Act, has the Board of Directors, External Directors and Annual General Meeting (AGM). We met with Dr Twaha Kigongo Kaawaase to discuss the future of the banking sector.

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Qn: I understand you sit on the IFAC SMP committee, what exactly is your mandate on that committee?

An: IFAC SMPC stands for the New York-based International Federation of Accountants, Small and Medium Practices Committee. IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies.

IFAC is comprised of over 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce. The SMPC is a subcommittee of IFAC for small and medium audit firms worldwide.

My role as a member of the SMPC is to see to it that the voice of SMPs is heard in setting standards and to ensure that the standards that come out are applicable and scalable to audits of whatever size and are followed by accountants within IFAC member bodies like our own Institute of Certified Public Accountants of Uganda (ICPAU).

Qn: How does a young accountant get to sit on this committee?

An: A young accountant requires to have ‘CAKE’ – Cumulative Audit Knowledge and Experience to qualify for some of these roles. You don’t just wake up and say I can participate in the setting of standards. You need to be grounded. You need to know the theory and practice of regulations of accounting and their application. I have had a consistent exposure and application of standards, for now, close to over 28 years.

Qn: What are your comments on Crane Bank’s financial woes from a profit of Ugx51bn in 2014 to a loss of Ugx3bn in 2015?

An: Banks hold various funds in their coffers. They have the shareholders’ and depositors’ money. Banks generate revenue by lending out depositors’ money. What is happening, in my suspicion, is that the quality of the Crane Bank’s loan portfolio went bad.

If you made a profit of Ugx51bn in 2014, and within a span of one year you have a loss of Ugx3bn, and you have not been hit by a catastrophe we are aware of, probably your non-performing loans were not properly provided for in the first instance. The other side could be that Crane Bank was hit by a huge expense that was out of the normal.

But we are not aware of any huge expense incurred by Crane Bank say one of its branches catching fire. Operations have been normal. The only suspicion that is abnormal is probably people who borrowed money were not paying back as they should. The quality of the loan portfolio declined. This affected Crane Bank’s capital requirements.

But once it is detected that the portfolio is threatening to be non-performing and not meeting the norms of the regulator, the regulator will require you to make provisions for bad loans. And when you make a provision, the impact is clear; it eats into your capital because it is an expense. Much as you say you have assets, you are likely not to meet the minimum capital requirements. I think this is what happened to Crane Bank

Qn: Central Bank is implementing a new law: Amended Financial Institutions Act 2015. Are you telling us that somehow the regulatory oversight role is wanting?

An: No, it is not wanting. In fact, the regulator is doing a very good job. The regulator carries out an on-site and off-site inspection of these banks. I think if what I have read in the papers is Central Bank is implementing a new law: Amended Financial Institutions Act 2015. Are you telling us that somehow the regulatory oversight role is wanting? No, it is not wanting. In fact, the regulator is doing a very good job. The regulator carries out an on-site and off-site inspection of these banks. I think if what I have read in the papers is Bank’s on-going concern status may be at risk. The report I read is unqualified. This means the auditors were comfortable because the information obtained was satisfactory enough to make an unqualified opinion

Qn: What is your take on the quality of external auditing and why would they give this kind of status to the bank because just after six months there is a problem? What would be your take in terms reputational of auditors in the country and specifically for this particular bank if you look at the trends of the various audits?

An: The accounts of Crane Bank on the website are clear. It has had reputable international auditors over the years. Auditors are supposed to give a certain level of assurance. That level of assurance is not an absolute level of assurance. It’s a reasonable level of assurance. As you have said that the reports were unqualified, this time round they (auditors) would not qualify the accounts because if they tested the receivables (the loans) and found them somehow impaired, they ought to have advised on the amount of the provisions for bad debts to be increased in the accounts.

If that provision is indeed affected in the accounts as it appears it was, auditors could not issue a qualified report. If indeed there were no other issues pointing to the instability of the bank. So the regulator picks it up from there if such a provision impairs regulated capital.

The Founder's Dilema - Why the SME's fail (24 downloads)

This article first appeared in the Summit Business Magazine in the November- December 2016 issue under the section Banking

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