Transcript 72 kb PowerPoint presentation

Reforming and Privatization of
Public Sector Banks
By
Louis A. Kasekende
Executive Director, World Bank
April 9,2003.
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Introduction
• Objectives of financial sector reforms
• Why Reform or Privatize Public Sector Banks?
• Uganda’s Experience-Cost of Restructuring
UCBL.
• What was Done Wrong in Uganda’s Case?
• What did the Government do Right?
• Political related problems in Restructuring Public
Sector Banks.
• Role of International Community in dealing with
Public Sector Banks.
• Lessons from Uganda’ experience.
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Objectives of restructuring
• Macro-economic stability
• Promoting GDP growth
• Financial Deepening
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Why Reform or Privatize Public
Sector Banks
• Poor Corporate Governance, including insider
lending, reckless concentration in credit, frauds,
falsification of financial accounts.
• An inefficient financial sector leads to
misallocation of resources at a big cost to the
economy.
• Direct financial losses when taxpayers money is
used to protect depositors due to accumulation of
Non-performing assets.
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Continued…………….
• Poses macro-economic management challenges
e.g complication of management of monetary
policy.
• Cost to the general public due to high cost of
capital, lack of adequate resources to fund good
private investments.
• Continued intervention from the Central Bank
weakens the Monetary Authority often leading to
recapitalization and restructuring of the Central
Bank at a very high cost.
• Major impediment to enhancing competition and
efficiency, especially in Credit markets.
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Uganda’s Experience-Cost of
Restructuring UCBL
• Costly in terms of the financial resources
expended in compensating or protecting
depositors, macroeconomic management
challenges and in terms of costs borne by the
public.
-Preparation of UCBL for privatization cost
2% of GDP in 1998.
-Central Bank recapitalization cost 1% of
GDP.
.
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What was Done Wrong in
Uganda’s Case
• Took too long to implement restructuring and
privatization. Reform of UCBL was supposed to
start in 1992, however, transfer of its bad debts to
NPART took until 1997. The delay was costly on
two counts:
- First, it impeded competition and efficiency
especially in the credit market;
- Second, losses incurred through mismanagement of
the public sector banks that proved costly for the tax
payers; Restructuring UCBL cost 2% of GDP in 1998,
and recapitalisation of the Central Bank cost 1% of GDP.
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What was Done Wrong in
Uganda’s Case
• Sold to a buyer without capital, banking
reputation or expertise, which secretly assigned
the shares to another bank, further weakening the
sector.
• Central Bank intervention in 1999 proved
protracted (1999-2002) and was in conflict with
the regulatory role.
• Regulatory Forbearance
• Joint Responsibility between the BOU and
Ministry of Finance.
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What did the Government do
Right?
• Implementation of Market Based Policieswhich are relatively more efficient and
effective that administrative controls in the
allocation of resources.
• Political Commitment in the later stages of
the reform ensured consistent
implementation of agreed programs and
protection of the reform process from
interest groups and political interference.
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What did Government do Right?
Continued…….
• Establishing the policy makers’ credibility
through maintaining a stable macroeconomic environment.
• Commitment to fiscal reforms and fiscal
discipline.
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Political related Problems in
Restructuring Public Sector Banks
• Problem of selling reforms to the politicians who
fear to loose the benefits associated with directed
credit, including loss of political influence
• Managing the tension between strict prudential
requirements intended to promote a strong
financial sector and allocation of resources to
attain development goals as determined by the
Government
• Slow process of restructuring and divestiture
because of political interests risks asset stripping
and therefore reducing the market price.
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Continued…………
• The privatization process could be hijacked by the
politicians resulting into failures in the process
with huge financial costs.
• Blurred delineation of roles and
responsibility between the Central Bank and
the Ministry of Finance.
• Fear that the new owners will contract
services especially in rural areas.
• Inverse relationship between price and
quality of buyer, could sell at low price but
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to reputable buyer.
Role of International Community in
dealing with Public Sector Banks.
• Provide resources to restructure public banks,
however, effective solution is divestiture,
including privatization. Donor led restructuring
did not succeed.
• Support the Government in due diligence and
advisory services, because this is highly
specialized.
• Sharing country experiences on best practices,
and helping in the standardization of reporting
and information systems.
• Independent auditing of the restructuring process
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to assure credibility.
Lessons from Uganda’s Experience
in restructuring Public Sector Banks
• First, the best strategy for dealing with troubled
government owned banks should be to sell them
as quickly as possible to a reputable investor.
• Genuine restructuring requires hard decisions
which governments rarely have the incentives or
political courage to take.
• It is better to leave as much of the restructuring
as possible to the new owners even if this may
require providing them with financial incentives.
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Lessons continued……….
• The primary objective of a government in
privatizing a state owned bank should be to
sell the bank to an investor who can best
ensure the safety of the bank’s deposits.
• The best investor to purchase and run a
public sector bank is a large, well
established private sector bank with
substantial financial, technical and
management resources at its disposal, and
crucially, a long established international
banking reputation to protect.
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Lessons Continued……..
• Political commitment to reform is critical, to
ensure consistent implementation of agreed
programs and protection of the reform process
from interest groups.
• Neither government nor donors have adequate
incentives to ensure sound management of a bank
and consequently, neither should play a leading
role in bank governance.
• Do not let statutory management drag on; in fact
try and avoid it in the the first place.
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Lessons Continued……..
• Don’t avoid after-the-fact accountability;
in fact prepare for it.
• Don’t sell under any circumstances,
because credibility of Government policy
could be at risk.
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