Nearly four years after the Bank of Uganda (BoU) issued a memo aimed at addressing unethical practices within the financial sector, its impact continues to reverberate, particularly among valuation firms across the country.
The memo, issued in September 2020, was prompted by complaints from valuers in Uganda who reported dubious instructions issued to some of their peers by the Banks. This, the valuers alleged, resulted in inflated collateral values of properties held by the Banks.
In an effort to arrest the unethical valuations, the BoU sent a circular to chief executive officers of commercial banks, credit institutions, and micro-finance deposit-taking institutions. The memo requested all the financial institutions to submit to the Banks regulator a list of all valuation firms involved in collateral valuations on non-performing or written-off loans during fiscal years 2017/18, 2018/19, and the first three quarters of 2019/20. The aim was to investigate these firms, and improve governance by the Banks.
This move, aimed at bolstering professionalism and reducing valuations risks, has had an opposite effect of pushing smaller and newer valuation firms out of the market. A silent but powerful shift took place within the financial sector: banks and financial institutions began to limit their panels to a few firms, typically between four and ten. This was meant to enable banks have proper governance over their valuers by reducing the number of firms on the panels.
Today, smaller and newer firms are still grappling with the consequences, finding it nearly impossible to gain a foothold in an industry now dominated by larger, established players, and in an environment where length of practice and size of professional indemnity insurance cover take precedence.
Did Uganda valuers shoot themselves in the foot four years ago?
One senior executive from a prominent valuation firm, who spoke on condition of anonymity, remarked, “The BoU’s intentions were clear and necessary, but the long-term impact has been tough on the smaller valuation firms. They are finding it almost impossible to get onto panels.”
Another valuer, also preferring anonymity, added, “The decision to limit the number of firms on panels was made to ensure quality and reliability, but it has had the unintended consequence of creating an exclusive environment. It’s challenging for new entrants, no matter how competent, to get a chance.”
This environment has created a paradox. On one hand, the law in Uganda requires that each customer be given a choice of four valuers during the loan application stage. This has ensured that all financial institutions have a minimum of four firms on their panel. On the other hand, the increased scrutiny from the Bank of Uganda on valuation practices has led financial institutions to enhance their governance over valuation firms. This has resulted in capping the number of firms to a level that is “easy” to manage.
While the regulatory framework in Uganda aims to provide customers with ample choices and ensure fair competition among valuers, it has also driven financial institutions to streamline their operations for better governance. Balancing these objectives remains a challenge.