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The East African : Nov 7th 2015
The EastAfrican 34 BUSINESS NOVEMBER 7-13,2015 Uganda govt slashes minist≥y budgets to add≥ess deficit BY HALIMA ABDALLAH Special Correspondent AFTER FAILING to prevail on parliament to pass the Finance Amendment Bill 2015, the Uganda government has decided to slash the budgets of ministries as a short-term measure to address deficits. The Treasury is also putting on hold external borrowing. Ministry of Finance of- People walk past Imperial Court, the head office for the Imperial Bank Ltd in Nairobi. The Bank is currently under receivership. Picture: File Does Kenya banking secto≥ give su∞cient deposit p≥otection? I s the banking sector in Kenya on trial? The jury is still out. This is not because all the banks are not playing fast and loose but as recently evidenced, some may not be following the set ground rules. Anyone with a basic knowl- edge of bank operations and management will tell you that banks’ main “stock-in trade” is trust. A depositor walks into a commercial bank with savings; this action is all based on trust. When that confidence is abused the consequences can be dire not just from the specific bank but to the entire banking sector. The story goes that Julius Caesar divorced his wife, Pompeia, allegedly because of rumours about her behaviour. When Pompeia was put on trial, Caesar said he knew nothing about his wife’s rumoured philandering, but declared that he divorced her because his wife must never be under any splash of suspicion. The same applies to a banker: To a customer or depositor, his or her bank must never be under even a shadow of suspicion. The moment customers start doubting their bank, they vote with their feet and a run on the bank can result. In an article published at the beginning of the year, I argued that African banks need to take the issue of depositors’ insurance seriously. If Africa is to grow we must getour banking right. No well-structured economy COMMENTARY MACHARIA KIHURO “When that confidence is abused the consequences can be dire not just from the specific bank but to will grow when it is claimed that “75 per cent of sub-Saharan adults” do not yet have a bank account. Of course ,there are many reasons why so many Africans remain unbanked but lack of confidence in our banking systems is key among them. Deposit insurance cover has been used in developed countries to shore up customer confidence. Deposit insurance concept was mooted in the US after the Great Depression. The economic turmoil that hit the financial markets led to massive panic withdrawals from banks; most came crashing down. The government had to react to bring customers back to the banking halls. The answer was deposit protection for customers. Kenya and indeed most of the East African countries have deposit protection policies. The question is how effective they are. The European Parliament in 1994 passed a legislation requiring all member states to have deposit insurance for at least 90 per cent of the deposited amount with a minimum of least €20,000 ($21,978) per depositor. In the US, the 2008 global financial crisis caused the figure readjusted to at least €50,000(54,946) per depositor, this was later increased to $250,000. Most EU countries in- creased their limits. Germany, France, Finland, Belgium etc. have enhanced their insurance limits to €100,000 ($109,892). China, in November 2014, proposed that every depositor be insured to the tune of 500,000 yuan ($81,300). While Kenya may not match what these economies have achieved over years, continuous measures to improve the position are necessary. In Kenya, the CBK stipu- lates that banks contribute a percentage of their total deposit liabilities based on a risk-adjusted contribution methodology. It further advises that a flat rate of 0.15 per cent be applied to the deposits held by a member institution with a minimum of Ksh300,000 ($2,890). Rwanda is in the process of setting up such an arrangement while Uganda and Tanzania have set one up already. The question is how much is sufficient to ensure depositors feel comfortable banking their savings. Deposit insurance will nev- er be the panacea to the problems in the banking sector. The regulator must step up the regulation of these financial institutions. CBK has indicated there was laxity as far as regulation was concerned for some of these wayward banks. Better regulatory tools coupled with both regular onsite and off-site inspections are needed. Financial institutions that do not play by the rules must be reprimanded and those that are compliant need recognition. If CBK would even publish some of this information, it would build a lot of confidence among would-be depositors. Inspections should go beyond checking on the quantitative aspects of performance. The devil lies in what is unquantifiable — the corporate governance structures need be rock solid. Financial institutions must be encouraged to invest in robust enterprise risk management frameworks. History and experience demonstrate that financial institutions that fully implement serious ERM systems are able to detect some of these challenges and risks even before a regulator steps in. Macha≥ia Kihu≥o is a financial ≥isk p≥actitione≥ based in Nai≥obi, Kenya. jkihu≥firstname.lastname@example.org The Uganda Parliament in session. The august house refused to pass an amendment bill. Picture: File ficials acknowledge that the government made restrictive proposals in the Finance Bill, that are causing implementation challenges. To correct this, an amendment Bill was brought to parliament would give the government access to money in the consolidated fund. In May this year, parlia- ment passed the Public Finance Act that removed provisions for supplementary budgets and demanding that the budgets be gender sensitive. In addition, any unspent balances must be returned to the consolidated fund by June 30. “We made errors, but we have also carried out reforms in the past two years. Now, my hands are tied. We are saying we need flexibility in the law,” said Secretary to the Treasury Keith Muhakanizi. Last month, parliament adjourned indefinitely, after failing to pass the Bill on grounds that the government was amending the Finance Act to usurp the former’s oversight powers. “I called parliament from recess and the Ministry of Finance failed to present their issues. They tried to smuggle in matters against the Constitution. Especially, they wanted open authority to get money from the central bank. What sort of public expenditure is that? We are supposed to control public expenditure; let them amend the Constitution first before they take away our powers,” Speaker of parliament Rebecca Kadaga said. Parliament also protested the government’s removal of provisions that ensured the budgets are gender-sensitive. As the political campaign season gets more demanding for MPs working to retain their seats, parliament has had difficulty raising a quorum, leaving the Ministry of Finance with few options. “We have the money in the budget as appropriated by parliament but we cannot shift expenditure. We can use it to pay the pensioners. The government is not broke, but it is this prob- We made errors, but we have also carried out reforms in the past two years. Now, my hands are tied.” lem of non-flexibility. The quicker we can have the law the quicker we can get out of that confusion,” added Mr Muhakanizi. Treasury starts the finan- cial year without any funds because the taxman has not remitted any collected revenues, while any balances from the previous financial year are taken back to the consolidated fund, and accessing them requires parliament approval according to the recently passed Finance Act. Apparently, budget per- formance in the first quarter of this financial year has been uneven. Statistics were not available by press time, but Mr Muhakanizi admits it has been a bumpy road, necessitating drastic measures.
Oct 31st 2015
Nov 14th 2015