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AfricaAugust 31 2008

Big names reeled in by Ugandan rebirth

A rush of new banks, rapid branch expansion by established banks and an emerging mortgage battle are among developments that are enlivening Uganda’s banking scene.
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What a difference a decade makes. Back in the late 1990s, Ugan­da’s banking system was in a mess. Bad loans, many to the well-connected, were running at more than 30%. Several local banks collapsed. One international bank, Barclays, closed 25 branches outside Kampala and was considering pulling out of the country.

Reflecting the prevailing lack of governance, major general Salim Saleh, brother of president Yoweri Museveni, caused a storm with the disclosure that he had secretly purchased government-owned Uganda Commercial Bank, the largest bank in the country by far, through Greenland Bank. In the ensuing debacle, Greenland Bank was put under state management and subsequently closed by the Central Bank because of insolvency and bad debts.

“Local banks were not managed properly and there was a lack of governance structures and adequate supervision,” says Grace Semakula, a securities analyst at stockbroker African Alliance in Kampala.

On the rise

The contrast with today’s environment is striking. Banks are now well capitalised – Uganda follows Basel I capital adequacy requirements – with an average ratio of liquid assets to deposits of 51%. The level of non-performing loans dipped below 4% by March 2008. The Central Bank, which has been led by governor Emmanuel Tumusiime-Mutebile since 2001, is highly rated by bankers for its strict supervision, its emphasis on risk management, and for keeping inflation low until recent months.

Far from retreating, Barclays is now expanding aggressively. It bought 16-branch Nile Bank last year and has expanded its total branch network to 53. But perhaps the biggest sign of renewed confidence in Uganda is that seven new banks – including six foreign banks – have been licensed in the past few months since the Central Bank lifted its moratorium on new banks. The influx lifts the number of commercial banks to 22.

Kenya Commercial Bank and Fina Bank are from Kenya, while United Bank of Africa and Global Trust are from Nigeria. Ecobank has a presence in 25 central and western African countries and is expanding to eastern and southern Africa. Toom Bank is a unit of the Abu Dhabi Group. Housing Finance, a credit institution and Uganda’s sole mortgage provider for decades, also opened as a commercial bank in January.

The increased pressure on margins comes at a time when fast-rising inflation and worsening international conditions make 2008 a much more challenging year than 2007, a banner year in which deposits and loans soared on the back of 8.9% inflation-adjusted gross domestic product growth. In his budget speech in June, Ezra Suruma, the minister of finance, planning and development, announced that bank deposits increased 26% and loans jumped 49% in the year to March 2008.

The open-door policy raises competition in a market still dominated by a handful of banks. The ‘big four’ international banks – Stanbic, Standard Chartered, Barclays and Citi – owned 65% of total commercial bank assets at end-2007. With the addition of two of the biggest local banks, Crane and Centenary, the share rises to 77%. “The aim of increased competition is to improve efficiencies and outreach to people and to bring down high bank charges and interest rates,” says David Opiokello, act­ing deputy governor of the Bank of Uganda.

High costs

Indeed, the costs of banking remain high, partly bec­ause the coun­try’s poor infrastructure – roads, com­munications and electricity – makes it expensive to build and operate branches outside Kampala and partly because of the size of the economy. Of a population of 30 million, more than 85% are subsistence farmers and only two million have bank accounts.

Despite the costs, banks are rapidly expanding their networks and bank branches have mush-roomed from 180 to 300, says the Central Bank. Fast-expanding trade with southern Sudan and eastern Congo is making the north more attractive, especially since a devastating civil war has greatly subsided, with rebel leader Joseph Kony in hiding across the border. In the west, the Albertine Rift is another potentially luc­rative area, following promising oil and gas finds.

Competition has blurred the lines between the broad market segments – corporate, small and medium-sized enterprise (SME) and consumer – that banks used to carve up between them. Among the big four banks, for example, Stanbic, Standard Chartered and Barclays have made inroads into the retail market, while Citi currently prefers an exclusively corporate clientele.

  Six years ago, South Africa’s Stanbic transformed itself from a two-branch corporate bank into the largest retail bank with the acquisition of Uganda Commercial Bank and its 65 branches. Of last year’s net income of Ush53bn ($33m), managing director Philip Odera says: “It was a perfect book from a revenue point of view, with a 50-50 split between corporate and retail.”

Retail interests Standard Chartered, the country’s oldest bank, is second in assets. It has recently focused on expanding its retail interests, especially after it lost non-governmental organisation and dev­elopment agency accounts following a ruling that such accounts should be held by the Central Bank.

Standard Chartered added three branches in 2007 and, though it has only 10 branches compared with Stanbic’s 72, it grew both after-tax profit and total assets faster last year at 52% and 37%, respectively, compared to Stanbic’s 34% and 4%.

Like others, Standard Chartered is also looking for growth through automated teller machines (ATMs) and mobile phones. The bank is adding 15 ATMs in 2008 making a total of 25 and plans to launch mobile banking services in the last quarter. Managing director Lamin Manjang says organic growth is the strategy, but does not rule out the possibility of an acquisition.

Barclays, third in assets, also shifted heavily into retail, but has paid a price for rapid branch expansion. Its after-tax profits fell 57% to Ush6.5bn in 2007, which Treasury head Emma Mugisha attributes largely to the costs of acquiring Nile, merging the IT platforms of the two banks and building new branches.

Significantly, Crane, with the biggest assets among the middle-ranked domestic banks, jumped into third place in after-tax profit last year, with a 50% rise to Ush18.75bn.

  This performance reflects the opportunities Uganda has offered in the past two decades. Crane Bank founder Sudhir Ruparelia left for the UK in 1972 when the then president Idi Amin expelled Asians from the country. In 1985, Mr Ruparelia returned and started his first business with $25,000.Today, Crane Bank, which grew out of a foreign exchange enterprise in 1995, is one of 15 companies in the diversified Ruparelia Group.

Some 65% of Crane Bank’s earnings come from SMEs, and Mr Ruparelia says he is making inroads with both corporates (10%) and “the small guy” (25%), with whom he believes the future lies.

Microfinance expansion

  Another middle-ranker, Centenary Bank, is owned by Catholic interests and focuses on providing microcredit to the poor. Since American John Giles took over as managing director two years ago, it has expanded corporate lending, mainly to increase its deposit base in order to lend more to the poor. “Most of the other banks are commercial banks that went downmarket,” he says. “We are a microfinance institution that went up market.”

Mr Giles’s main concern is competition from Kenya’s Equity Bank, which recently bought Uganda Microfinance Limited, one of the country’s largest microfinance deposit-taking insti­tutions. With the rapid expansion of credit, especially in unsecured personal loans – or ‘salary loans’ as they are often called – the number of defaults is rising. To mitigate this, a credit reference bureau began on a pilot basis in July and is expected to be in full operation soon. A fledgling mortgage market is another arena of contention for banks. Spurred by a growing middle class, demand for home ownership and land prices have risen markedly in recent years. Davis Gathaara, head of sales at stockbroker MBEA, notes that Ugandans are keen to invest their money in houses.

Mortgage war

A flurry of construction activity for the Commonwealth heads of government meeting last year was followed by several residential projects and Mr Gathaara says a “mortgage war” is in the offing, despite the constraint of a severe housing shortfall.

Housing Finance, set up after Ugandan independence as a joint venture between the government and CDC of the UK, had long been the only provider of mortgage finance, targeting the middle and low end. In 2003, one of its shareholders, DFCU, which had also started as a development financier, broke off to start a rival mortgage business that offered speedier processing.

Today, according to managing director Nicholas Okwir, Housing Finance has at least 60% of the mortgage market and has helped bring interest rates down from 20% to 16%, with 20-year maturities. DFCU, firmly in second place, is planning to increase market share with a $25,000 to $50,000 mortgage product, where the bulk of the demand is, according to managing director Juma Kisaame.

Through their shareholders, Housing Finance and DFCU have access to long-term finance, an advantage denied many local banks.

At the high end – and analysts say a bubble is evident in the wealthier suburbs of the capital Kampala – the stage is set for battle between the international banks. Stanbic is off to a good start, offering mortgages in dollars well as Ugandan shillings, and plans to issue a Ush30bn bond for mortgage finance. Standard Chartered, which last year launched a 17% mortgage with a 15-year maturity, already has a $4m mortgage portfolio.

The new banks also intend to contest the mortgage market. Kenya Commercial Bank (KCB) aims to use the expertise of its mortgage subsidiary, Savings and Loan, to penetrate the Ugandan market and knows it has to be competitive, says managing director James Agin. KCB has already shown its teeth, opening three branches in six months, and enticing new customers with offers to finance 80% of share purchases in the Kenya Safaricom initial public offering last March. Analysts note that, though this might have been an innovative marketing ploy, clients saw share price appreciation erode when the Ugandan shilling depreciated against its Kenyan counterpart.

East Africa focus

Perhaps a more significant sign of the times, KCB aims to become the first indigenous regional bank for east Africa. In land-locked Uganda, whose banks depend on financing trade with its neighbours, KCB’s branches in southern Sudan and Tanzania could prove a telling advantage. The bank also plans to open in Rwanda and Burundi.

In addition to a growing economy, banks can look forward to taking part in a much-heralded oil and gas discovery around Lake Albert in the west. Brian Glover, general manager of Tullow Oil, one of a handful of oil companies in Uganda, says as a result of onshore discoveries, a mini-refinery is due to be built next year at the government’s request to produce 4000 barrels a day (bpd), mainly for heavy fuel to produce much-needed electricity.

Oil hopes

The big hope, he says, is that offshore deposits might contain 400 million barrels or more of oil, or eventual production of 100,000bpd to 150,000bpd. Not only would this reduce Uganda’s dependency on oil imports, it might enable banks to get involved in financing infrastructure as well as new activities such as fabrication and welding.

  Shirish Bhide, managing director of Citi and chairman of the Uganda Bankers Association, says there is also the prospect of banks managing some of the massive funds held by the National Social Security Fund. The pension fund receives 5% of workers’ salaries and 10% of employers’ contributions and is currently sitting on about 30% of the system’s liabilities.

“We’ve been pressing the government to allow private players a role in the pension fund sector and it is setting up a framework for pension fund reform that will allow this,” says Mr Bhide. With intensifying competition, however, some market participants see further mergers and acquisitions as inevitable. “In the long run, you will see consolidation,” predicts Stanbic’s Mr Odera.

“There are small players I don’t see around for long as the cost of participating is too high.”

Doubtless Uganda’s banking authorities will be relieved that the next round of bank reductions should be due to consolidation rather than liquidations.

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