Tuesday, May 7, 2013


Last week the deadline for reporting of the banks’ financial results came with the traditional flurry of last minute activity.

According to a cursory survey of the top banks, profits were up 23% cumulatively.

A closer look at the results shows that while most banks cut back on lending or grew slower than in previous years they made more in interest compared to last year, presumably because of the high lending rates.

The banks justify the high lending rates as a function of the higher risk they take in this market, but the bad loans have remained stubbornly under or about five percent across the industry, suggesting their risk managements systems are quite robust therefore scuttling their logic.

There is a small financial institution, which using rudimentary financial analysis worked out that inflation would be reined in and therefore raising lending rates was not necessary. They tightened on their expenses and were more stringent in their lending policy. Not only did they lend more money out year-on-year they also made more profit than the year before and with no dramatic leap in bad loans.

So why is it that our high street banks, with more analytical processing  power can’t do the same?

The difference is in the incentive structure that the banks’ managers operate under.

Their bonuses are pegged to bringing in more businesses at the least possible cost.

With this in mind, in times of trouble the banks are wont to raise lending rates, cut back on lending and shovel almost-free customer deposits into the safe treasury bills and bonds. Even after a windfall year you never hear of deposit rates rising.

At the small financial institution I alluded to earlier the management are driven by a desire to provide a safe haven for clients’ savings and provide cheaper-than-market-rate loans. In times of hardship they cut back on administrative costs rather than raise lending rates to ensure a continuation of the cheaper than market rate loans.

So not only did the institution’s clients benefit from cheaper loans they also enjoy a five percent interest. Higher than any high street bank is offering on its savings accounts.

As if that is not enough the clients who also double as shareholders have seen their initial investment in the institution jump eighty fold in the last five years and this year for the first time enjoyed a dividend payout that was thrice their initial investment in the institution.

With our banks the benefits accrue the other way around.

The owners who are not depositors or borrowers or Ugandans for that matter, have benefitted the most from setting up in Uganda, while the depositors and borrowers almost all of whom are Ugandan have suffered anemic interest on their deposits and extortionist lending rates on their loans.

The shareholder equity, or the owners interest in the bank has grown threefold even quadrupled since 2005 in some banks. This represents up to 20% annual growth the last seven years.

We don’t have to look very far for how well shareholders are doing.

In 2004 dfcu listed its shares on the exchange at sh230 a piece. Shortly after they offered each shareholder a share for every four they owned, effectively making each initial share worth sh184. Today a share in dfcu is trading sh1,000 more than a fivefold increase in value since its listing.

No one wants a headache from thinking about the growth in wealth accruing to Stanbic shareholders. Not on a Sunday morning.

Few businessmen in this town – except maybe the casinos, insurance companies and banks, can boast such growth in shareholder wealth during the same period.

Something has got to give.

Appeals to have them lower lending rates or raise interest rates on deposits, have been met with sloth like slowness when compared with their willingness to raise lending rates – read ring in the profits.

Even the baleful gaze of Bank of Uganda governor has failed to faze them.

I suggest let them continue racking in their profits if they want – but let them share with us. Sell shares to the public. One bank has a gentleman’s agreement to sell shares on the Uganda Securities Exchange (USE) but have always found a way to dodge – for coming to 20 years now.

Clearly equity is where the money is.

Obviously it is useless trying to appeal to the banks good nature.

They argue that one sells shares when he needs money, going by the above they are having it good so they don’t need the money, we provide billions in dirt cheap money anyway.

They will tell you they are employing us, providing a much needed service and planting a few boreholes around the country for good measure.

True selling equity will still be concentrated in the hands of a few urban elite – like me, but more importantly it will boost our stock exchange as a place to raise funds.

The donors have cut off aid, we need to fire up our own mechanisms of raising finance and the capital markets serve that purpose – in fact a lot of aid is raised on the capital markets of Europe and dished out to us poor Africans who cant raise our won money.

Let government call in this favour using whatever means necessary – it is within their right. The banks really need to spread the love around more.


  1. This is a really good article Paul, much appreciated insight.

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