Supervisory mandate of central banks and the spate of bank failures: who is to blame?

Author:Norman Mugarura, Patience Namanya
Position:Department of Law, Bishop Stuart University, Mbarara, Uganda
Pages:341-354
SUMMARY

Purpose This paper aims to examine how central Banks (in the narrow purview of Bank of Uganda) exercise their supervisory mandate to foster an efficient sound business environment for banks to operate efficiently. The authors were motivated to write on the subject of bank supervision because of the closure of Crane Bank and putting it under administration in 2016. The closure of this bank generated a lot of controversies on both sides of the political divide and in the press. Initially, the popular view was that Crane bank was poorly supervised, and as a result, it was exploited by insiders to commit money... (see full summary)

 
FREE EXCERPT
Supervisory mandate of central
banks and the spate of bank
failures: who is to blame?
Norman Mugarura
Department of Law, Bishop Stuart University, Mbarara, Uganda, and
Patience Namanya
Department of Governance, Anti-Corruption Campaign Africa, Kampala, Uganda
Abstract
Purpose This paper aims to examine how central Banks (in the narrow purview of Bank of Uganda)
exercise their supervisory mandate to foster an efcient sound business environment for banks to
operate efciently. The authors were motivated to write on the subject of bank supervision because of
the closure of Crane Bank and putting it under administration in 2016. The closure of this bank
generated a lot of controversies on both sides of the political divide and in thepress.Initially,the
popular view was that Crane bank was poorly supervised, and as a result, it was exploitedbyinsidersto
commit money laundering, fraud, insider dealing, just to mention but a few. This put Bank of Ug anda
(the Central Bank) in a negative spotlight for failure to provide the required oversight of this bank. In
Uganda, the supervision of banks and other nancial institutions is the responsibility of Bank of
Uganda.
Design/methodology/approach The authors adopted a qualitative research approach using
secondary datasources, including books, journal papers and websites, andevaluating primary legislation but
also empirical evidence both in Ugandaand other jurisdictions. The secondary data was evaluated to draw
comparative analyses of causes of banks failures in countries both in Africa, Europe, USA and others
jurisdictionsacross the globe.
Findings It would be onerous to chargecentral banks with the responsibility of preventing bankfailures,
even though they would are required toinstitute measures to prevent banks from collapsing and its ripple
effects on the economy. Effective banking supervision is a core factor for the success of every bank, but it
cannot single-handedlyprevent a bank from collapsing. A well-supervised bankcan also fail not necessarily
because of inherentweaknesses within its banking supervision, but it could fail because of extraneousfactors
beyond the control of individual banks. For example, Lehman Brothers Ltd (a highly leveraged of broker
dealers) collapseddue to factors beyond its control, the Northern Rock and Royal Bank of Scotland in the UK
were nationalisedby the British Government.
Research limitations/implications The limitation of the paper was that data on centralbanks and
failed banks both in Uganda and other jurisdictions(the scope of the paper) was overwhelming, and it was
dauntingto sift throughand analyse it in depth.
Practical implications Banks play a fundamentalrole in the social-economic development of countries,
and how they are regulated is signicantly important for the stability of economies. They provide loans,
guarantees and other nancial products to businesses, and they are engines for economic growth and
development.
Social implications Banks affect, people, societies, businesses, markets and governments. Therefore,
this paper has widerimplications for the foregoing constituencies.
Originality/value The originality of the paper is that this paper is unique, draws experiences across
jurisdictionsand evaluates in the narrow purview of bankingregulation in Uganda.
Keywords Central banks, Agent banking, Bank supervision, Failed banks
Paper type Research paper
Supervisory
mandate
341
Journalof Money Laundering
Control
Vol.23 No. 2, 2020
pp. 341-354
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-10-2019-0084
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm

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