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?
