POLICY CONSIDERATIONS BEFORE BANK PRIVATIZATION: UGANDA'S EXPERIENCE

4/30/2020

BY LOUIS KASEKENDE EXECUTIVE DIRECTOR WORLD BANK

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AGENDA

        PRIVATIZATION OBJECTIVES GOVERNMENT OWNERSHIP OF FINANCIAL INSTITUTIONS UGANDA COMMERCIAL BANK (UCB) GENERAL POLICY CHOICES POLICY CONSIDERATIONS IN THE PRIVATIZATION OF UCB POLICY DECISIONS LESSONS CONCLUSION 4/30/2020 2

PRIVATIZATION OBJECTIVES

 IMPROVE EFFECTIVENESS OF MONETARY POLICY IN CONTRIBUTING TO MACROECONOMIC STABILITY  FOSTER FINANCIAL SECTOR EFFICIENCY IN RESOURCE INTERMEDIATION FOR ECONOMIC GROWTH 4/30/2020 3

GOVERNMENT OWNERSHIP OF FINANCIAL INSTITUTIONS

INSTITUTION NSSF SHAREHOLDING(%) UCB POSB 100 FOREIGN BNKS (5) 49 DFI’s (2) 100 100 100 4/30/2020 4

UGANDA COMMERCIAL BANK (UCB)

 PREFERRED BANK FOR ALL GOVERNMENT TRANSACTIONS  ACCOUNTED FOR 40.6% OF BANK ASSETS  OPERATED 85% OF ALL BANK BRANCHES  AS MUCH AS 55.6% OF ASSETS WERE NON PERFORMING 4/30/2020 5

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GENERAL POLICY CHOICES

TIMING ISSUES POLITICAL CONDITIONS THROUGHOUT PRIVATIZATION PROCESS AVAILABILITY OF ALTERNATIVE RURAL FINANCIAL SERVICE PROVIDERS CREDIBILITY OF SUPERVISORY AND REGULATORY FRAMEWORK FINANCIAL CONDITIONS OF REMAINING BANKS MACROECONOMIC CONDITIONS AVAILABILITY OF DEPOSIT INSURANCE OR PUBLIC RESOURCES TO PROTECT SMALL DEPOSITORS EXTENT OF FISCAL PRESSURES AND RISKS 6

GENERAL POLICY ISSUES (CONT.)

OWNERSHIP STRUCTURE      DOMESTIC OR FOREIGN OWNERSHIP SELECTION CRITERIA FOR STRATEGIC MAJORITY BUYER CONSORTIUM OF LOCAL BUYERS – CONFLICT OF INTEREST ISSUES PUBLIC OWNERSHIP – CORPORATE GOVERNANCE CONCERNS PUBLIC TRUSTS – POLITICAL INTERFERENCE 4/30/2020 7

GENERAL POLICY ISSUES (CONT.)

SALE OPTIONS  SELL ENTITY ON “AS IS” BASIS  RESTRUCTURE FIRST: a) b) c)  DOWNSIZING INNOVATIVE ASSET/LIABILITY MATCHING DEALING WITH NON-PERFORMING ASSETS ASSET STRIPPING – WRITE-OFF RESIDUAL ASSETS 4/30/2020 8

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POLICY CONSIDERATIONS IN THE PRIVATIZATION OF UCB

WHETHER TO PRIVATIZE OR RESTRUCTURE PROTECTION OF SMALL/RURAL DEPOSITORS IMPACT ON PAYMENT SYSTEM SOUNDNESS IMPLICATIONS FOR RURAL SERVICES FEASIBILITY OF A SEPARATE RURAL BANK POLITICS OF GOV’T/PVT CONTROL, AND LOCAL/FOREIGN OWNERSHIP SELECTION CRITERIA (FIT AND PROPER TEST) PRIVATIZATION LAW (COMMISSION OR BOU) VALUATION METHODOLOGY AND PRICING SALE OPTIONS: PVT TREATY/PUBLIC OFFERING FINANCING OPTIONS: INSURANCE/BUDGET 4/30/2020 9

POLICY DECISIONS

 PRIVATIZATION COMMISSION LAW TO APPLY  SELL 49% TO A STRATEGIC PARTNER - 1995  CLEAN UP UCB PRIOR TO SALE  SET-UP NPART TO HOUSE BAD DEBTS  RECAPITALIZE BANK  RETRENCH STAFF AND WRITE-OFF NON CORE ASSETS  INVEST IN NEW TECHNOLOGY 4/30/2020 10

LESSONS

 CONTINUED GOV’T MAJORITY SHAREHOLDING DISCOURAGED INVESTOR INTEREST  SECOND-BEST INVESTOR SELECTED  INVESTMENT IN TECHNOLOGY WASTED AS INVESTOR NEEDED DIFFERENT SYSTEMS  STRATEGIC PARTNER FAILED TO RUN UCB AND BY 1999 NPA REACHED 64%  NEED TO DEFINE ROLE OF CENTRAL BANK FROM OUTSET 4/30/2020 11

CONCLUSION

     PROCESS SHOULD BE GUIDED BY NEED FOR A SOUND AND EFFICIENT FINANCIAL SYSTEM IN THE INTEREST OF ECONOMIC GROWTH BANK PRIVATIZATION SHOULD BE DONE IN CLOSE CONSULTATION WITH CENTRAL BANK CENTRAL BANK LIQUIDATION OF A BANK MAY BE MORE PREFERABLE AND LESS COSTLY PRIOR-SALE RESTRUCTURING IS BEST AVOIDED POLITICAL BUY-IN CRITICAL THROUGHOUT PROCESS 4/30/2020 12

4/30/2020

THANK YOU

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