Ugee

More Banks Flock into Uganda for Super-normal profits.

Uganda’s financial sector is set to become more vibrant as new commercial banks plan to introduce new products to this comparatively small industry. One of the latest entrants, Kenya Commercial Bank (KCB), plans to market retirement benefits as a new product on the market when the pension sector is liberalised. Financial analysts predict this product could open another front in the war for customers among commercial banks, as more join the fray. It is expected that marketing a retirement banking product will attract good response from the public already frustrated by restricted access to personal retirement savings—whether in government or the National Social Security Fund (NSSF). Social security is not liberalised in Uganda and efforts to free the Shs 1,000 billion sector only stop at annual promises by the Minister of Finance, Ezra Suruma in his budget speeches. KCB says this product has been tested on the Kenyan market and passed with flying colours. Under the scheme, the bank keeps workers’ savings and pays interest on it. Savers may withdraw or shift their money to another bank that might offer higher interest rates. The battle for customers is currently centered on retail banking. This has seen banks scramble to open branches in rural areas originally considered unprofitable. Retail banking is about individual banking needs. This type of banking targets the not-so-rich clients previously ignored by the big commercial banks. KCB recently opened its banking hall to the Ugandan public with one branch on Kampala Road. It has plans to roll out more branches next year. With 133 branches in Kenya, Tanzania and Sudan, KCB is arguably the largest bank in the region and boasts of 111 years of banking experience. The banks’ entry into Uganda alongside Nigeria giant, United Bank of Africa; Housing Finance Company of Uganda, and Nigeria’s Continental Trust Bank brings to 18, the number of commercial banks in Uganda. More coming The new entrants also have their eyes on the mortgage and asset financing—two products highly popular with the growing business community and people in formal employment. This market is currently dominated by Stanbic Bank, dfcu Bank, Barclays and Standard Chartered Bank. Four more commercial banks will be licensed next year, the Bank of Uganda Governor, Tumusiime Mutebile has said. John Mark Wandolo, the KCB Divisional Director for Corporate Banking, is optimistic about business prospects in Uganda’s economy that the government says is currently growing at 6% per annum. “We are seeing telecommunication firms coming here, tourism is growing…and we are seeing investment opportunities coming from the discovery of oil,” he says. Two new telecommunication companies; Warid Telecom and Hits Telecom have already tested their networks in preparation for business in the first quarter of next year. At the same time, commercial exploitation of oil is expected to start in 2009 after viable quantities were confirmed in western Uganda. The Minister of Finance, Dr. Suruma, expects the economy to grow much faster thereafter. “I want to be optimistic that a people who have been able to grow at a rate of about 6% per annum for 20 years while at war and while without oil, can grow even faster when we are without war and have oil,” he said in the 2008/09 budget speech in June. According to Wandolo, growing regional trade has brightened banking prospects. Besides, Kenya is one of Uganda’s leading trade partners, accounting for more than 40% of Uganda’s trade with the outside world. While Bank of Uganda attributes growing investment in banking sector to “sound macro economic policies”, it is also true that it is cheaper to set up a bank in Uganda than, for example, in Kenya. The minimum capital required to set up a bank in Uganda is Shs 4 billion (about $2.4 million) compared to about $3.9 million in Kenya. The increase in Foreign Direct Investment from $73 million in 1998 to about $307 last year has been enticing to the banks. And after last month’s Commonwealth Heads of Government Meeting in Kampala, FDI is expected to rise. Also, the central bank, in conjunction with GTZ/SIDA, is developing a 5-year financial market plan to improve the country’s financial sector. The plan seeks to improve the issuing of financial products suitable for the customer and develop the capital market. It will also focus on growing the investor base by convincing government to liberalise the pension sector in order to promote capital market development. Interest rates Describing Uganda’s interest rates – currently at 19% compared to Kenya’s 13% - as “scandalous,” Mutebile is optimistic that the entry of new banks will increase competition and force the banks to lower the interest rates, and possibly the bank charges. “Beware, the days of high interest rates are numbered,” he said during the recent Commonwealth Business Forum at Sheraton Kampala Hotel. But Mutebile may have to do a lot more than being optimistic because KCB thinks otherwise. Catherine Njoroge, the bank’s Head of Retail, said that interest rates will be calculated after assessing the risk and collateral. Ugandan banks have traditionally perceived lending to the local private sector to be highly risky opting to invest more in government securities. And Gideon Badagawa, a senior Policy Analyst at Private Sector Foundation, said that admission of more banks will have little impact on interest rates unless the central bank initiates policies to encourage Ugandans to save more. “It is not about the number of banks that come to Uganda. We can have as many banks as possible. It is the reforms in the sector that will bring down interest rates that matter. There is need to mobilise savings in order to lend out that money at a cheaper rate,” he says. Uganda’s domestic savings ratio currently stands at about 10% of GDP compared to some of the fastest growing economies that have sustained a savings rate in excess of 30% of GDP. Badagawa also says that many loan products are tailored to cover a maximum of two years, which he says does not cater for the financial needs of the private sector. “For a farmer producing on a large scale, the bank will require him to make the first repayment like in the first three months. Now even before the man has harvested, the bank wants its money back,” he said.

 

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