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Tuesday, October 15, 2019


The time tested model of attracting cheap deposits and lending at higher rates may not change fundamentally in the banking industry but developments in technology and the regulatory environment mean they may be coming up to a major inflexion point, a recent banking survey suggests.

The “JSR 2018 Uganda Banking Survey” released last week by accounting firm, J Samuel Richards & Associates told us much of what we know -- that the industry is in a healthy state; some of what we guessed -- that the industry is dominated by a handful of players and that some banks are punching way above their weight.

Industry profits were up 19% to sh1,025b in 2018 from sh859b in 2016. It also showed that the top five banks – Stanbic, Centenary Bank, StanChart, DFCU and Barclays together control the lion’s share of the key metrics -- Operating Assets (61%), Customer Deposits (61%), Loans & Advances (62%) and Profits before tax (77%).

Of interest too was that operating assets – those assets that make money like loans, as opposed to those that facilitate the trade, like buildings, were up 24% during the same period driven by growing customer deposits, which grew to sh19,589b last year from sh15,584b in 2016.

That customer deposits continue to rise is a good thing for the economy and may very well help keep lending rates down...

Critics of the industry claim they go for the easy pickings, lending to government rather than to the private sector. But the survey shows that just under half the operating assets – 48% go to loans and advances and only half of that goes to buying treasury bills & bonds, which bias should be as it is.

The breakdown of private sector credit may show an emphasis on trade finance and construction by the commercial banks and a small, though growing portfolio of SME lending, but that is an industry structural issue. Commercial banks are geared towards lending to going concerns, the bigger the better.

Clearly size matters.  While industry profitability grew, of the 24 banks surveyed five made losses. But given that only seven of the banks achieved higher than the industry profit before tax margin average of 32%, there are more banks than is comfortable struggling to build deposits and therefore not lending optimally...

This may have prompted the authors of the report to suggest that a consolidation of the smaller banks may be due, due to competitive pressures or that the regulator Bank of Uganda may be inclined to raise the minimum capital requirements from the current sh25b to much higher in the not so distant future.

JSR didn’t cover it in any detail in this report, but they think that the “Increased deployment of Fintech based solutions across the finance and banking value chain, which will complement banks’ operations but also enhance competitive and disruptive pressure in the industry.”

Mobile money the posterboy of the fintech industry in Uganda last year saw more than sh70trillion transacted across all platforms, a growing trend that shows no evidence of plateauing soon. To put this in perspective this was almost twice the government’s sh40trillion budget for this year.

The banks too have jumped on the trend, all but a few offering an E-banking solution, which along with the newly introduced agency banking, are depopulating banking halls and in extreme cases leading to the closure of whole branches.

The two trends the report suggests will lead to an “Erosion of the brick and mortar competitive advantage.” It is already happening, having many branches will no longer be an obvious competitive advantage and may allow smaller banks who are quicker to adopt to new technologies, to overhaul bigger rivals...

Published before last week’s one percentage point decrease in the Central Bank Rate (CBR) to 9% JSR foresaw a continued reduction in yields in government paper which would force banks to lend more to private sector.

With inflation dipping to below two percent for the first time since May last year inflationary pressures seem to far beyond the horizon hence the Bank of Uganda’s action. The reduction will definitely impact on the yields on government paper making an already sticky situation for small lenders even stickier.

The banking industry has been the biggest beneficiary of the last three decades of economic reform and growth and it has taken maximum advantage of it.

Detractors say that the fact that the industry is predominantly foreign is cause for concern. They seem to suggest that locally owned banks would be more responsive to local businessmen and that the sticking to onerous banking rules is shutting out local capital.

"That same discretionary engagement maybe what shut down most of the local banks over the last two decades...

Apart from the fact that businesses are competing with government for a very finite pool of resources, a lack of diversification in the banking industry beyond commercial banks means it will always be a struggle for the SMEs to have products tailored to their needs.
Maybe that is a gap the local financiers should fill?

Monday, October 14, 2019


This week we commemorated 57 years of our Independence from the British.

At the last census in 2014 almost all of us -- 97.2 percent of the population were below the age of 54. Five years down the road the people who were not around at Independence is near total.

"It does not touch our hearts to know that in 1962 there were only 300 A-Level students or that there was no chartered accountant, solicitor, architect or pathologist in the civil service. Those are folk tales that there are not enough old people around to tell us around the fire or wherever families now commune....

But digging up an old World Bank report authored in 1962 it is shocking how it seems time has stood still.

“Over the last 60 years, Uganda’s economic growth has been unspectacular but steady. Uganda remains an agricultural country: two-thirds of gross domestic product is derived from farming and over 90 percent of all exports are produced from the land. Agriculture is in large part subsistence farming (mostly done by women with hoes) with a growing, but as yet smaller, proportion of total output produced for the market: three-fifths of the area under cultivation are used to produce food for the consumption of the cultivator and her family,” the report read.

The study went on to report that industrialization was still in its infancy and that there was an acute shortage of skilled manpower which would put a cap on how far the country can go in achieving its development ambitions.

If you extrapolate the statistics to account for the population growth which has grown more than fivefold since, subsequent governments have outstripped the colonialists’ achievement in access to education and health, the stock of infrastructure and even the shift of the economy away from subsistence agriculture to services and industry.

But clearly Independence serves as a very low bench mark. The UN’s Human Development Index, a measure of living standards, we in the lower reaches of the survey of 190 countries.

While we have seen the most sustained period of economic growth in Uganda’s history in the last 33 years, it counts for nothing if people’s living standards are not being lifted along with the general economy.

The reason for that is not hard to find. Most of the growth of the last three decades has come in services, construction and industry, mostly in the urban areas. But when three quarters of your population are in the rural areas and seven in ten people derive their livelihood from agriculture, it comes as no surprise that most people cannot relate to the fantastic growth in the economy this country has managed...

So looking forward it is seems obvious what has to be done.

Economic growth has to sustained. There can be no improvements in general living standards without economic growth.

Investments in education and health too have to continue, even accelerated. All the roads, dam and railways will count for nothing if you do not have the manpower to sweat them. The Economist magazine a while back reported on a study which showed that between infrastructure development and building human resource capacity, countries are bets advised to bias their investments toward building human capacity.

In our case what this means is while we should not let up on the momentum of infrastructure development, we should emphasise the quality of the outputs in the education and health sectors more than the inputs. Building classrooms and health centers are all very nice but what is better is the quality of graduates that emerge and the health service delivered.

We don’t need to go anywhere to show proof of this. Our better educated population – than at Independence, has proven more ingenious and creative in resolving our day to day challenges despite the deficits in infrastructure and all else.

"One major bottle neck needs to be handled too. The donor community complains that we are failing to utilize funds availed to us. Our absorption capacity is as low as 15%. What this means that if the donors have committed a billion dollars to us we are only utilizing $150m with rest being sent back to be passed on to other countries....

Reduced donor dependency is desirable but to attain that it would not hurt to use their funds to achieve that.

On closer scrutiny our inability to absorb these funds is bogged down with prolonged bureaucracy, with projects not being expedited unless the President intervenes personally. That is not the way to run a modern state.

This state of affairs benefits a few to the detriment of the many.

If we are serious about overall development, we need to look into this urgently.

Tuesday, October 8, 2019


Last week National Social Security Fund (NSSF) announced an interest rate 
of 11% on member savings, which was a let down from last year's record 
15% payout.

Ironically because of the way the Fund's portfolio is constructed with eight in
every ten shillings parked in fixed income assets, mostly government paper, 
when there are fears of inflation the rates go up and NSSF booms. But when 
inflationary pressures ease, as happened last year, yields fall and NSSF suffers.

Which is what happened this year as average yields on their paper fell to just 
above 15% from more than 17% the previous year.

Nevertheless the Fund's total assets grew 14% last year, a bit of a slow down 
because over the previous four years assets grew an average of almost 16% 
annually, but this number grew faster than the economy's six percent.

Asset growth is important because assets throw off the revenues, which are 
used to pay interest to members but more importantly grow the asset base. 
Ideally more assets lead to high income, ploughed back into acquiring more 
assets, which leads to higher income. A virtuous cycle.

The question for me as a saver is, can NSSF continue this double digit growth
into the future, or at least until when I am ready to cash out?

NSSF's principal duty is to ensure the safety of member savings, so it should 
come as no surprise that whereas they are planning to reduce their dependence 
on fixed income assets, these will remain a major component of their portfolio.

As long as inflation remains under control we can expect that this asset class 
will show a real return for members. Real return is a return higher than inflation rate.

The government budget is currently financed 50% by debt, mostly treasury bonds,
so one can assume that well into the future yields on this government paper will 
remain in double digits, as government looks to meet its commitments on 
infrastructure, health and education. Or until oil start gushing out of the 
Albertine region. People familiar with that situation are not holding their breaths.

Higher fixed income yields are however a double edged sword. When these 
are higher share prices tend to suffer, why should a fund manager try to be clever 
betting on the stock market when government is offering double digit returns?

But also for the companies, higher yields on government paper mean that lending 
rates also rise, constricting expansion and growth. No wonder share prices suffer.

But NSSF is committed to building its equity portfolio to 25% from its current 19% 
as it reduces its exposure in fixed income to 70%.

In long term this makes sense. In a growing economy like our own, the smart 
money is buying shares in companies which will ride on the economy's growth.

NSSF's sh11trillion asset base is the largest pool of patient capital we have in this 
country. With more than half of its savers under 30 years of age, It can therefore afford 
the luxury of buying shares and holding these for the long periods it takes for these 
to mature.

The challenge though is that, because of its size NSSF cant find enough sizeable 
equity investments to move its needle.

But it’s well set up to play a pivotal role in the aforementioned oil sector. NSSF like 
it did in relieving UK private equity firm, Actis of its stake in Umeme a few years ago, 
may very well find itself in the thick of things in contributing funds to the refinery and 
oil pipeline projects.

And finally the Fund plans that in the next decade it will bring at least 7000 housing 
units to the market, which alone will make it the biggest rea estate developer in Uganda. 
This aside from the tens of thousands of square meters in commercial space they will 
be bringing online during the same period.

Granted, the cash on cash returns on real estate are anemic, but these will serve 
to swell the Fund's asset base, which it can leverage to get involved in bigger and 
more lucrative deals here and abroad.

And how all these grandiose schemes be financed?

Over the last five years savings contributions have been growing at annual average of 
11.9% to last years sh1.2trillion. What this means that this figure will be doubling at least 
every six years.

This is before you talk about realised income which last year came in at sh1.25trillion 
and doubling every five years.

The proposed amendments to the law that governs NSSF if passed, will only strengthen 
its position to collect more and be more attractive to members by providing more than 
the existing products.

According to the annual report released last week the management of the fund is 
becoming more efficient as measured by cost to income ratio -- 1.28% and expectations 
are that this should improve as the Fund's processes become more automated and 
its own agency service kicks in.

However, in answering our question, will NSSF continue to grow, the one metric 
that then Fund is best placed to capitalise on is that, out of a 14 million workforce barely 
two million have any form of social security.

Monday, October 7, 2019


My man Warren Buffett turned 89 at the end of August. Over the last 78 years of his life – he bought his first share at 11, he has been building Berkshire Hathaway. The record though, shows he has been CEO of the biggest financial services company in the world since 1970.

Judging by his age, his is a long story. A 900-page tome about his life – “The Snowball: Warren Buffett and the business of life” was published a few years ago and should be essential reading at all business schools and for all business leaders.

Over the last 20 or so years he has kept not a few millionaires on tenterhooks about what his succession plans are for the $350b company he has cobbled together over the last half century.

Last year he appointed two vice chairmen Gregory Abel and Ajit Jain, a signal to the market that he had narrowed it down to two candidates to take over in the event that he gets “hit by a bus”. By the way he co-chairs the company with Carlie Munger, who will turn 96 in January.

"Buffett has had the luxury of longevity to mull over who he will hand the baton to when the time comes. Most business owners unfortunately, have mortality knocking at their door much sooner....

In the last few weeks two of our own businessmen have come face to face with this reality. For one it has been forced upon him and into the public domain, with an embarrassing family court battle and for the other, through the planned commemoration of the 25th anniversary of his flagship enterprise.

Mohan Kiwanuka, who has over the last 30 or so years built a conglomerate of his own, had to fight off a court challenge from his son, who believes that Kiwanuka might not be in charge of all his mental faculties and as a result, doing things detrimental to the health of his company. The court ruled against the son in a family drama that we might not have seen the end of.

Sikander Lalani on the other hand was able to reflect in the company of friends and family, at a dinner to commemorate a quarter century of his Roofings Ltd, about his life journey and his plans for his enterprise beyond himself. If there were any differences of opinion about his plans within his family, there were nowhere in evidence.

The challenge of passing it on is never an easy one because it is psychological more than anything.

We often start our businesses as a way to make a living for ourselves and family. Depending on how it goes, the business is either dead within five years or progresses along the exponential curve – all the ups and downs smoothed out mathematically, that characterizes all successful business.

But in the early days when survival is key, there is never any time to think about the long term. It is there that the seeds of eventual bad blood are sown...

The building of the company has been a labour of love for the founder. He lives and breathes his organization. Why things are done one way and not the other, is often buried deep in his subconscious, inaccessible to even the closest family or partners. The vision for the company is not only never shared, but is a moving target in the founder’s mind. And then to compound it all the founder has a desire that the enterprise should continue after him just the way it is, preferably run by a blood relative.

And who can blame them. We have the same challenges with our children.

We want them to grow up and complete our unfinished business. You want him to follow in your footsteps into medicine, the law or engineering, never mind that he has no inclination towards any of that. And when he finally puts his foot down and chooses his own path, it is a crisis.

They suggest that in bringing up our children we should focus on giving them the building blocks – education, health and values, that will help them navigate life away from our protective, the kids would say, domineering, ways. Easier said than done.

Same with a business, the easier said than done part especially. Owners from as early as possible should prepare the business for the day when it will not be theirs.

"This conscious, psychological separation may on one hand mean, the business owner may be unable to lay down his life for his life’s work, during those times when the business is suffering existential threats. During these times the only difference between its survival or death is the sheer will power of its founder...

On the other hand, the step back is what will allow the owner to deliberately build systems that will ensure the business’ continuity after himself and more importantly will throw up some capable leaders, credible candidates to run the company when the founder steps aside.

That still leaves the issue of its ownership. We refer back to Buffett.

Given his longevity and surprising good health, surprising because he lives on soda and burgers, his children who were never directly involved with the business have charted their own paths and their taking over the running of the business is not an option.

In the aforementioned account of his life, he intends to give away all his interest in the company to charity, mostly through The Bill & Melinda Gates foundation, which may very well end his family’s interest in the business.

This would be anathema to most founders who would like to see their legacy live on in their businesses controlled by their children.

Buffett’s example is a classic case of separating himself from the business and ironically gives it the best chance of living on well after he has stepped down.

"With interests from everything from insurance to railways, furniture to food, paint to private jet leasing Buffett has not been a hands on boss, focusing more on choosing and overseeing good managers who can work under minimum supervision...

So while it has been a challenge to finger his successor the business has been prepared to run without him for the last fifty years.

Thursday, October 3, 2019


The Lubowa housing estate works are in advanced stages and Temangalo housing estate, which will kick off in 2020 are among the real estate development projects that will vault NSSF into the biggest real estate developer in Uganda over the next ten years.

"Between these two projects more than 7000 housing units --- 2,417 in Lubowa and 5,000 in Temangalo, will be brought to market over the next decade. By the time of their completion amendments to the NSSF Act will make it possible for members to have first call on the houses.

During the just concluded Annual Members Meeting NSSF announced that the 326-unit first phase of the Lubowa estates was under away and set for completion by next year.

The project that will involve the development of ten phases, spread over ten years, is already occupying a significant amount of contracting capacity with four construction firms currently employed on the $400m project.

Real estate developement of the size that NSSF has planned can have a huge ripple effect throughout the economy.

Most of the inputs sand, bricks, cement and iron bars will be sourced locally as wil the labour on the various sites.

"With proposed amendments to the law governing NSSF, the Fund's managment will be able to structure real estate products for its members that will jumpstart the mortgage finance industry....

It has been suggested over the years that members would using their savings be able to put down the crucial down payment on a houseb, alowing them to get further financing to buy a house. NSSF in the two orojects has planned low cost to high cost housing to cater for the whoke spectrum of their membership.

Beyond it personally building NSSF is piloting an offtaker concept -- 160 housing units in Kyanja, where a private developer builds houses to the Fund's specification, on completion NSSF buys the units. This could alleviate another bottleneck dogging the real estate development industry -- a lack of funding for developers.

"Operating under the PPDA rules, which govern all public sector procurement rules NSSF  is bound to ensure that not less than 30 percent of the value of works -- sub contracting, suppliers, equipment and ither services are ringfenced for Ugandans and resident entities ensuring local players a fair shake in getting work....

Other developments in commercia buildings like what is most likeky going to be the Fund's signature debelopment The Pension towers, a three tower development in Nakasero set for completion in 2022 and others inthe oipeline will also make NSSF the largest commercial space deveoper.

With a total asset portfolio of sh11trillion which is on course to double by 2025 the Funds plan to keep its real estate holdings at five percent means they couldnhave real estate developments around the country of a trillion shilings up from the current sh600b.