THE UGANDA BANK SURVEY AN EYE OPENER

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?