Banks are in trouble all over East Africa. After the news that four sizeable banks in Kenya had been put under the direct administration of the Bank of Kenya, troubles spread to Uganda provoking a regional banking crisis. Crespo Sebunya reports.

After Kenya, the Uganda banking system is in crisis confirming Western donors' concerns that the $90m donor-funded bank reform project, launched in 1992, has failed. A recent investigation by the international auditors Price Waterhouse and Deloitte Touche, into the affairs of four banks each owned by prominent business families, revealed the precarious state of affairs in the Ugandan banking system.

In September, the Bank of Uganda closed the International Credit Bank (ICB) owned by the Ugandan tycoon, Thomas Katto, who has extensive interests in media and real estate. Depositors were told that the Bank of Uganda intervention was meant to protect depositor's interests.

Two other banks, the Trust Bank (which was also put under administration in Kenya and Tanzania) and the TransAfrica bank, owned by the Mehta family of Asian industrialists, were also told to suspend their operations. The Crane Bank owned by the all-purpose tycoon, Sudhir Ruperelia, has also been investigated.

The Central Bank dismissed Patrick Katto (Thomas Katto's son) who was the managing director of ICB after the discovery of massive illiquidity at the bank.

Another bank, the Greenland, managed by the former Central Bank Governor Sulaiman Kiggundu, survived closure by a whisker after taking the Central Bank to court to lift the blocking of its account.

Parliament recently asked for full investigations into the Greenland Bank's dealings with the Uganda Commercial Bank which was recently restructured, selling 49% of its equity to the Malaysian firm, Westmont.

MPs in parliament wanted to know on what terms some of the directors of the Greenland Bank had been loaned up to Shs10bn ($7.3m) from UCB.

The National Bank of Commerce also narrowly escaped being taken over by the Central Bank. It was one of the banks mentioned in a World Bank report in 1997 for failing to raise Shs500m needed as a capital requirement. The NCB was owned by the minister of state for foreign affairs, Amama Mbabazi; the minister in the president's office, Dr Ruhakana Rugunda; the permanent secretary in the ministry of finance, Tumusiniime Mutebile and a former minister of primary education Brigadier Jim Muhwezi. Perhaps it was their powerful political intervention that saved their bank.

Worried donor agencies led by Mrs Ulrike Wilson, the IMF representative in Uganda, said the Central Bank supervision was not tight enough.

A shake up of the Central Bank followed with the early retirement of Henry Kibirige, the director of the Supervision Department. He may have been a victim of political manoeuvres because he wanted to launch investigations into the running of the NBC and Greenland Bank but was given the push before he had time to start his inquiries.

At the bottom of the Ugandan banking crisis is the volume of bad debts on the banks' balance sheets and suspected corruption and money laundering in certain banks. Many powerful politicians have borrowed money and have not repaid the loans. This has meant that the banks have now been forced to tighten up against other genuine commercial borrowers, demanding even higher levels of security.

The banking reforms, launched in 1992 were meant to strengthen the banks' capital ratios by raising the minimum capital requirement to at least Shs500m ($360,000). Now commercial banks have reserves averaging Shs50bn and have been successful in attracting new depositors. Total deposits in March 1998 reached Shs630bn a 15.5% increase since March 1997.

But the private sector has yet to reap the benefits. The Central Bank says there has been a 30% reduction in bank loans because the banks are nervous of lending to inadequately secured projects. Many banks would prefer to invest their money in government treasury bills issued by the Central Bank where they can be safe while earning high interest rates.

Interest rates on loans to businessmen are also high, at more than 15% even though the inflation rate is only 6%.

The Ugandan banking system is also concentrated in Kampala and a few major towns. In most of sub-Saharan Africa, there is one bank to every 7,000 inhabitants but in Uganda the ratio is far worse, one bank to every 115,000 inhabitants. The saving ratio is also pitifully low.