By Andrew Meldrum.

Uganda's banking sector ended 1998 in crisis, with several banks closed or under management by the state central bank, the Bank of Uganda. Public officials are guardedly optimistic that 1999 will see banking become a source of stable and trusted finance that the nation badly needs.

In general, Uganda's financial sector is backward, even by African standards. Its stock exchange was only created in 1998 and so far it has achieved no listings. Uganda's banking crisis also has regional implications because the country's financial sector is inter-connected with banking enterprises in Kenya and Tanzania.

The banking sector began to wobble in October, when Trust Bank Uganda experienced a run on its deposits after its parent bank, Trust Bank of Kenya, was forced to close. Trust Bank reopened in early December and banking officials were relieved when there was no further run on deposits.

Shortly after Trust Bank's closure two more Ugandan banks closed. Trans Africa Bank closed after a series of newspaper reports alleged it operated along unprofessional lines. According to banking sources, Trans Africa Bank is carrying out substantial management reforms before re-opening in early 1999.

International Credit Bank also closed temporarily and is reportedly negotiating with its shareholders about new policies needed to assure stability. The biggest banking bombshell came in December when Major General Salim Saleh, President Yoweri Museveni's brother, revealed that he had secretly purchased the country's largest bank, Uganda Commercial Bank, through Greenland Bank, which he influences through his control of a related institution, Greenland Investments.

Previously it was believed that UCB had been purchased by Malaysian investors, but Gen Saleh said he took over their bid in order to keep the bank in local hands. Immediately after Gen Saleh's announcement, Greenland Bank was placed under state management.

Greenland Bank has extensive holding in the East African region, with subsidiaries in Tanzania and Zanzibar which are full commercial banks and a foreign exchange bureau in Kenya. It is hoped the state-appointed managers will restore confidence in the Greenland group. There are concerns about the health of the Uganda Commercial Bank, which is the country's largest bank with deposits of 200bn shillings ($153m) making it about five times bigger than the next bank.

It is significant that the 1998 closures only affected the locally owned and managed banks. No major problems have been experienced by the big international banks operating in Uganda, the British banks Standard Chartered and Barclays as well as the South African Stanbic group.

Ugandan government officials downplay the serious nature of the recent bank scandals. "Uganda's banking sector appears in crisis because of the failure of certain banks, but the entire sector is not in crisis," said Mr AW Walugembe-Musoka, public relations director of the Bank of Uganda, the state central bank. "It gives us concern in that we have these islands of instability, but we believe the problems are manageable. It is a troubled period but we are confident the banking system will emerge strengthened.''

Uganda's banking woes hit just as the country was beginning to improve on its low savings rate. A few years ago the savings rate stood at just 3% of GDP. By 1998 it had risen to 6% of GDP. By comparison Kenya has a savings rate of 22% and Zimbabwe has 32%. When the savings rate is higher it means that there are more funds that can be borrowed for major infrastructural development projects.

"We recognise that it is essential that our country's savings rate increases," says Mr Walugembe-Musoka. "In 1999 we intend to launch a campaign to restore public confidence in our banking system."

But Uganda's banking sector is going to need much more than a public relations campaign. What it clearly needs is strict management and monitoring.