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.
