POST BANK MAKING BELIEVERS OF US

The banking industry’s annual reports are coming in fast and furious ahead of the month end deadline.

In general the industry seems to be doing what it does best, making money and growing from strength to strength. The capital requirement increase – banks were required to increase their minimum capital to sh150b from the previous sh25b, has not worked itself into the bottom line yet, but we can expect that the effects of this will begin to show up in this year’s results.

Among the eye watering returns of the big players, one small player (is it small anymore?) is quietly but determinedly gaining ground on the big boys.

When critics of the banking industry start complaining how the industry is dominated by foreign capital and how there are no major local players, they either forget or unaware that Housing Finance Bank and Post Bank are local banks.

Post Bank is wholly owned by government and only begun operating as a Tier I bank in 2022.

Last year Post Bank reported a net profit of sh27.5b an 82 percent jump from the previous year’s sh15.2b. this came on the back of a 30 percent rise in income largely due to the loan book growing by a third. Growth in expenses did not keep up with income allowing the bank to report a 68 percent leap in operating profits.

It helps too that while high bad debtor provision have fallen to 24 percent of the loan book compared to 119 percent in 2020. Bad debts are the bane of the banking industry’s existence, a lack of discipline in this one area can and has led to collapses in the banking industry in our lifetime.

And to show last year’s result was no fluke, over the last five years the bank has shown double digit growth in total income, net profit and size of loan book. This last segment has contributed to the bank crossing the one trillion shilling mark in assets for the first time last year.

Last year the bank launched its online wallet Wendi, which will and is already easing government’s disbursement of Parish Development Model (PDM) funds beyond the use of its 58 branches.

The bank has proven efficient with the funds it superintends over reporting a return on Assets of 2.6 percent versus the industry average of 2.2 percent. While share holders will be glad to know the Return on Equity last year was 16.8 percent. While this is lower than the industry average of 20 percent it has been growing at compounded average range of about 15 percent over the last five years.

The point is that assuming Post Bank can maintain its momentum and discipline it can become a very significant player in the economy not only because of its size but because of its reach into the rural areas...

Discipline is key as their cost to income ratio of 83 percent  way higher than the industry average of 68 percent or market leader Stanbic’s which hovers around 50 percent.

Interestingly the bank which was hived off from the old Post & Telecommunications Corporation—the other companies are Uganda Telecom and the Post Office, is the only one of the trio showing not only a return but potential growth.

What does it take to run a state owned bank properly? Post Bank, the only wholly owned government Tier I  bank,  maybe showing that it can be done. It helps that in Chairman Andrew Owiny and CEO Julius Kakeeto, who took over four years ago, they have leaders with strong private sector experience.

It also probably helps that government’s objectives of increasing financial inclusion across the country ties in very well with Post Bank’s drive for profitability and long term sustainability.

This column has been consistently opposed to government being in business, not out of some capitalist dogma but because government’s main objective – anywhere in the world, is to hang on to power. It does this by doling out patronage, which often does not tie in very well with company’s efforts at long term sustainability.

"Government backed companies, the world over fail or at least fail to efficiently deliver goods and services, because when the desire for regime survival comes up against the profit motive, the latter often loses out...

It is still early days by any measure to bring out the champagne for Post Bank but initial indications are promising.

Opportunities abound especially if the bank can roll out its Wendi online solution, which with its 58 branch network and hundreds of banking agents, could provide the necessary synergies for the bank to climb to the next level in the industry.

 

DEVELOPMENT: EVERYBODY WANTS TO GO TO HEAVEN BUT NO ONE WANTS TO DIE

Last week downtown Kampala was shut down for a day or two as traders protested Uganda Revenue Authority (URA) methods of revenue collection.

As I understood it the new Electronic Fiscal Receipting & Invoicing Solution (EFRIS) leaves little room for discretion and has a long memory, which can make some people uncomfortable. EFRIS has then compounded a long standing complaint about invoicing, and how URA uses its own set of values to determine taxes on goods imported for instance. Another long held gripe is when the trader is liable to pay tax on a product or service sold at the point of invoicing or when cash actually changes hands.

You have to sympathise with this last one. Imagine delivering a service to government, you invoice today and are immediately liable for the tax but government pays you years later, this can wreak havoc on your cashflow situation.

In the same week the Bank of Uganda released its state of the economy report, which for me had some interesting revelations.

First, that in the first six months of the financial year, July/June our interest payments grew 17.4 percent, growing faster than revenue collections which grew by 12.4 percent, essentially that while government revenues are growing they are not keeping pace with the rate of growth of debt repayment. Interestingly most of the debt repayment is for local debt, mostly contracted through monthly government paper auctions. This is a double edged sword.

This was necessary as net external funding for the budget fell off a cliff to minus-sh122.3b compared to sh1,352b in the previous year. For any number of reasons external lenders are not coming through with their pledged funding, forcing government to look more to the domestic market. And even then they could only do it within reason, with net domestic financing only increasing by 6 percent.

And secondly that back ground probably explains why domestic arrears repayment collapsed by 73 percent to Sh175b from sh651b, which was also a pittance, in the previous year.

The recent friction between traders and URA, reminds me of the VAT strike of 1996, months after it was introduced. Then like now, one has the sense that not enough sensitistaion was done and traders going about their business as usual have found themselves on the sharp end of URA’s pressure to collect. But as said earlier, then as now, there is a section of people used to dodging taxes realizing that their space for maneuver is becoming increasingly squeezed.

The most sustainable way for an economy to develop is if it does this under its own steam, using resources generated internally, more than relying on foreign charity.

In Uganda it seems we are on the right track as revenue collections grow and government has built a credible mechanism for raising funds locally.

But to build up revenues more of the economic base has to be taxed. New taxes will always be a source of discomfort, as will the case be if you haven’t been and now have to start paying taxes.

Workers in formal employment forgo at least 30 percent of their income to the tax man. But out of a working population of about 11 million only about two million pay taxes on their income.  Pay As You Earn (PAYE) accounted for 17 percent of revenues collected in the first half of this year.  Imagine if half the workers of Uganda paid their taxes and doubled this percentage?

People are quick to argue that the wastefulness of government is a disincentive to paying taxes. But those are excuses. It is also possible that law enforcement is so starved of resources they are fighting an uphill battle to clamp down on wastefulness. It is not in doubt that they are under resourced.

"The claim of a lack of political will is there, but unless we want arbitrary arrests and convictions directed by the politicians, there is no way around the resourcing of the law enforcement agencies, to have a long lasting impact on the fight against government waste and corruption...

So we have to pay our taxes.

We point at places like Sweden that have nice infrastructure and working social services, but they pay 43 percent of GDP in taxes. In Uganda we are only touching 14 percent.

And finally while we mobilise more and more resources via government paper – to bridge the gap between our expenditure and tax collections, it is happening at the expense of the businessman. The treasury bond coupon rates are currently in double digits, which means it is impossible to have lending rates lower than that.

The theory is that if more of us paid our taxes government would have less appetite for borrowing locally, lowering bond rates and forcing banks to lower their rates to borrowing public. It is all connected.

"An argument against paying taxes will always be a popular one, but if a more developed country is heaven, while we all want to get there one day we do not want to die – pay our taxes...

UGANDANS ARE POOR BECAUSE THEIR LAND IS UNTITLED

Last month a report came out that Rwanda had reached the milestone of titling 12 million plots of land. This accounts for nearly all land in Rwanda.

The interesting subtext to this was that there are more women title owners than men, which will have far reaching ramifications for the distribution of wealth and the way the country will develop. This process of land regularization has been on for the last two decades.

In Uganda it is estimated that between 20 and 30 percent of land is titled.

This is very important for anybody interested in our country’s development.

All wealth is derived from land. Even the tech companies have to locate their administrations and servers in offices or residences or wherever. It therefore follows that to the extent that your land is formally recoginised is the extent of your wealth...

If we are to start from first principles, if our land is formally recognized, that is titled, a land market can be formed around it, unlocking its wealth either by outright sell, lease or mortgage.

So for example you want to invest a billion shillings in an enterprise and need land for the endeavour and there are two land owners, one with titled land and the other whose land is untitled, who would you deal with? The text book answer would be the titled land guy, because you know what you are getting and can establish some indicative price for it, which you will then register on your balance sheet.

Of course the street smart answer would be to deal with the untitled landowner, bargain him down to a meagre sum and organize the titling of the land. The point is that this land owner would not realise the market value of his asset and would be the poorer for it.

Extrapolating this example, the Ugandan land owner is more likely to be shortchanged than his Rwandan counterpart by investors, if the disparity in titled land is anything to go by. It is in the nation’s interest to have all its land titled as a means to fight poverty and also to ensure we get credible investors not fly by night cowboys.

Is it no wonder that whereas we pride ourselves with being an agricultural economy, poverty is most resident among our agricultural communities? Is it any wonder that the greater Kampala region which has the most titles in the country per capita accounts for more than 70 percent of GDP?

Taking the argument further, who are the major beneficiaries on the agriculture value chain? The farmer on his untitled land or the factory or ware house owner who has his enterprise on titled land? Which allows him to mortgage it for working capital or further development from credible financial institutions, while the farmer can only deal with money lenders or smaller institutions that cannot take him to the next level of development.

While it is true that there are also poor people who own titled land, they are poor probably for lack of financial literacy or are risk averse.

Economist Hernando De Soto in his seminal book the “The Mystery of capital” made this point and attempted to regularize land ownership for the poorest in his native Peru with some success. The interest groups that had galvanized around the informal land situation did not take too kindly to his meddling and hampered progress. Is that the case in Uganda?

That being as it may, if all Ugandan land was titled it could be taxed to raise more revenues to finance security, health, education and infrastructure development, improving the people’s capacity to lift themselves out of poverty, creating jobs and bettering access to market and the general  business environment in the process...

People argue that the poor in the rural areas cannot afford taxes, which is not true. There used to be graduated tax levied on all adults and people paid. And because they knew they had to they were more productive. Now our rural trading centers are good for producing ludo experts.

To pay their tax dues, people will either worker harder on their lands – stopping to work when the sun is high in the sky is so 20^th century; lease or sell the land to others who can make better use of it and pay the tax. It serves no one any good to have square miles of land to roam scrawny cows that are not good for milk or beef.

The news that finance ministry was threatening to halve parliament’s budget, while it will not happen, the savings from such an audacious move could be spent on titling all our land as a first step to lifting us into the 21^st century.

PRIVATISATION: THE GIFT THAT KEEPS GIVING

Last week two of Uganda’s most successful privatization companies, Stanbic bank and power distributor Umeme, released their 2023 results.

 A bit of background on both to put this into context.

In the heat of the privatization process in the 1990s it was clear that two companies had to be privatized if they were to provide the ripple effect the economy badly needed – Uganda Commercial Bank (UCB) and Uganda Electricity Board (UEB)...

UCB was the biggest bank with more than 100 branches and controlling more than 80 percent of deposits. This dominance had a net negative effect on the industry and the economy, as UCB was inefficient – it took up to three months to cash check from one branch to another and was seating on a mountain of bad debt that threatened to bring the whole sector down and the economy with it.

Detractors of the bank’s eventual sale argue that by the time of its sale it was profitable – it made sh19b in its last year, but what they neglect to say is that most, if not all, of the income came from treasury bills and bonds. Government had forbidden the bank from lending because every time they did, the stock of bad loans only increased.

Any fool can be profitable by buying government paper, but that is not the role of a commercial bank. A good commercial bank collects deposits and passes them on as loans to people who need capital. This intermediary role is critical in growing any economy.

Since UCB’s sale to Stanbic in 2002, the South African based bank has exceeded the wildest dreams of the government or its new owners.

Stanbic reported that revenues were up last year to sh1.3 trillion up from sh1.1trillioni n 2022. Profits followed suit coming in at sh421b from sh366b the previous year.

But two things stood out for me from last week’s results and in my mind cement the benefits of the banks privatisation.

To begin with bank’s lending to customers stood at sh4.2trillion, made possible in no small part to sh6.3trillion in customer deposits the bank holds. In the year Stanbic took over the bank had sh500b in assets against total liabilities of sh470.3b.

"No doubt a lot of this growth comes from momentum, the economy has averaged six percent growth over the last three decades, but you have to give the managers at Stanbic some credit because their asset base has shown a compounded average growth of aboutr 15 percent since 2002...

The second thing that stood out for me is that the bank paid the tax man sh132b. This is important because the government sold the bank for $20m or sh76b at today’s exchange rate. Going by the current trajectory of the banks growth, in five years they will be paying the equivalent of two UCBs in taxes.

These two, that they are lending multiples of what UCB did and paying increasingly more tax, seal the deal for me. This is before you go into how many people they employ, the businesses they have supported and grown over the years.

I shudder to think what the economy would be like if UCB existed with all its deficiencies to this day. Would it have been turned around? Maybe. We had all the qualified human resource at the time to do it—it was not run down by village bumpkins. But it would take time – I doubt we would have sorted ourselves by now, time we did not have then or now.

 On its part Umeme took over the distribution arm of the former UEB and its results have been just as amazing, if not more so.

Connections to the grid are touching two million accounts from less than 300,000 when they took over the concession. It helps of course that power generation capacity is three times more at about 1400MW than when they took over, but the efficiencies they have brought to the sector are not to be huffed at. They collect almost all their billings and have reduced technical losses by more than half to the current 16.2 percent.

In addition, they have joined mobile phone company MTN – another poster boy of the liberalization process, in earning revenues of more than sh2trillion and have made a few Ugandans wealthier by sharing in their success on the Uganda Securities Exchange (USE), not unlike Stanbic.

And finally over the last decade alone they have invested nearly two trillion shillings or $526m in rehabilitation and expansion of the network.

And that last point was a major consideration for privatization. Because not only were these companies hemorrhaging money, government  then or now, did not have the money to make the necessary investments to see these companies achieve their full potential.

By bringing in credible investors with access to the deep pockets of the west, government was able to hit two birds with one stone; one, expand services to more people and two, get paid while doing it.

Have the investors of Stanbic and Umeme made money along the way? Of course, which is as it should be. It was the best of both worlds. By aligning foreign capital with our strategic goals – strengthening the financial sector and expand electricity coverage respectively, the people were the winners.