THE BANK'S SOCIO-ECONOMIC IMPACT
Ever since its establishment till the early 1990s, UDB had to operate under a very difficult and uncertain environment, which impacted negatively on its portfolio. Given such an environment, UDB may not be said to have been as successful in financial terms as it could have been, however, in the broad context of the amount of financial resources it has injected into the economy and the resultant and sustainable direct productive capacity it has created for goods and services, extending further to include externalities contributing to the social well-being criteria like employment, entrepreneurial development and contribution to the population’s self-sufficiency in food production, UDB has made a noteworthy contribution to the national economy.
(ii) Between 1980 to 1995 the Bank had invested about US$30m in the Agriculture Sector. UDB’s participation in agricultural lending has been significant in reviving the country’s agriculture, both for the direct food production and related agro-processing industry such as milk and milk products, edible oil, maize and rice milling, and leather tanning. The revival has contributed to Uganda’s ability to produce an exportable surplus in food commodities like maize, beans and simsim.
(iii) UDB’s main role though has been to spearhead the financing of the country’s industrial sector. Initially, in the early 1980s, this involved primarily the rehabilitation of both the parastatal and private sector industries but later the growth and diversification of the country’s industrial production. UDB finances industry, especially where the activities involve the utilisation of local raw materials for the domestic and export markets and catering for mass consumer goods.
- The Bank has, between 1980 and 1994, invested up to US$ 120m in the industrial sector towards rehabilitation in the areas of agro-processing (sugar, maize, rice), breweries, tobacco, cement, textiles and garment units, among others e.g. Hima Cement, B.A.T., UGIL, UBL. The investment helped to revive the country’s industrial sector and contributed substantially to the country’s industrial base, especially from 1980 to date when the correction of the macro-economic environment has been underway.
- Besides, UDB has promoted a large number of new small and medium scale enterprises, especially through a new breed of local entrepreneurs. The major industries financed have been steel rolling and wire products, plastic tableware, beer crates, human drugs, soft drink and hotels (as part of the infrastructure for the tourist industry). Over a hundred small and medium scale industrial entrepreneurs have been promoted by UDB and several are graduating into large scale investors.
- UDB has taken cognisance of the country’s need for reviving, expanding and diversifying its export base. Through the investment in export-oriented industries, principally of coffee, tea, fish and processed timber, UDB has contributed effectively to this national effort.
At this stage of development, the country’s GDP is dominated by agriculture with a large subsistence segment and a cash crop sector mainly for export, a small industrial sector based on the processing of agricultural products and import substitution for basic consumer goods, and a narrow range of service industries. UDB’s funding has, therefore, been directed to the above economic activities and the bulk of its investment has gone into industries for food production, building materials, basic consumer goods and import substitutes.
Creation of Employment
The fact that some of the enterprises supported by UDB are inherently labour intensive, like the large sugar and tea estates, textile factories (all with over 2000 employees each), tobacco and soft drink factories (with over 500 employees each), and that the scores of projects funded are small scale industrial enterprises engaged in agriculture and industry have made UDB funding effective in employment creation. The Bank’s funding is estimated to have generated in the region of 20,000 jobs in industry and agriculture.
Advisory Services
UDB has been involved in a selective syndication of services, especially on the Government of Uganda assignments. It participated in the study for the establishment of the third cement factory in Uganda, at Budaka, Eastern Uganda. The study was funded by the Islamic Development Bank (IDB). The Bank later participated in the study of the viability of establishing a specialised Government owned Agricultural Development Bank, a study funded by the ADB. Recently, UDB was the lead bank in mobilising US$ 50m by a consortium of local and international financiers for the rehabilitation of the Kinyara Sugar Works Ltd.
Financial Performance
While UDB has thus made a significant contribution to the country’s economic development, its success is not reflected in its financial performance partly because of factors outside its control. A peculiar characteristic of UDB is its exclusive reliance on external financing for its operations. The mismanagement of the economy during the second round of political strife on the early 1980s and the slow pace of recovery from 1986 onwards led to a balance of payments crisis, a steep decline in the external value of the currency and intermittent suspension by the external financiers of lines of credit arranged by the Bank. This brought about serious disruption in implementation of UDB assisted projects resulting in unprecedented time and cost over-runs.
Secondly, the Currency Reform of 1987 dealt a serious blow to UDB’s resources. In absolute terms, the Currency Reformed dropped two zeros from the currency values held in cash or in banks and the balance was charged a tax of 30%, to arrive at the resultant cashholding. Thus a bank deposit of U.Shs. 1,000 became just seven Uganda Shillings. The new currency had a parity of 60 U.Shs. to a US Dollar as against 1,400 U.Shs. to US Dollar earlier. UDB suffered a loss of US$ 2.3m due to currency reform.
Thirdly, the period from 1982 to 1987 was characterised by political uncertainty, hyperinflation, falling exchange rates and high interest rates. Internally, some of the projects financed by UDB, especially in the agricultural sector, were destroyed by civil strife. The whole environment was thus not congenial to UDB’s developmental financing role. The economy registered negative growth, and the majority of UDB supported projects failed to meet their loan obligations. While the situation was however improved on the account of the Government of Uganda taking over/guaranteeing the repayment of the UDB dues in respect of loans to parastatals, the major portion of UDB’s portfolio remained poor.
Remedies Sought
Recognising the above danger signals, UDB embarked in 1990-91 on drawing up a Corporate Plan (1991-95) that was intended to arrest the decline and put UDB on a new course of sustainable growth through Government of Uganda providing the requisite capital, and UDB assuming its normal role of an apex development financial institution. Due to Government’s inability to capitalise UDB adequately, the Corporate Plan was only a partial success.
- In the wake of Financial Sector Reform Programmes initiated in 1991 which have resulted in restructuring the other key Government owned financial institutions, namely the Co-operative Bank, the Uganda Commercial Bank and the Bank of Uganda and in the enactment of the Financial Institutions Statute of 1993, there was a consistent demand from the Donor Community, led by IMF and the World Bank, for the restructuring of UDB.
- The return to Uganda of the term-lending institutions like Development Finance Company of Uganda (DFCU), CDC, IFC as well as the rejuvenated EADB and newly launched PTA Bank, all in the field of development financing has made the development banking field highly competitive. The competition is also intensified by the involvement of the commercial banks in development financing. All this made it imperative for UDB to carry out restructuring.
THE RESTRUCTURING.
As cited above, the restructuring of UDB became eminent by 31/12/96, the Bank having suffered huge accumulated losses since its establishment.
Servicing of the Bank’s external debts had become the entire burden of the Government and the future prospect was that with time, the burden would even increase.
Accordingly Government of Uganda placed UDB under restructuring on 12 September, 1997, under the management of a Restructuring Management Team (RMT) of three, headed by a Chairman. The RMT replaced the Board of Directors and Management of the Bank.
One of the major objectives of the restructuring exercise is to develop UDB into an efficient self-sustaining financial institution, well capitalised with adequate reserves, and prepare UDB for privatisation.
Key Activities of the Restructuring Programme
Restructuring of UDB is a special undertaking aimed at empowering the Bank to achieve its commercial, economic and social objectives. Through restructuring the Bank is also expecting to diversify its activities and resource bases.
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