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Uganda: Banks Rush for the Salaried But at a Cost

Elias Biryabarema

28 October 2008

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Kampala — Even as credit markets elsewhere slip into doldrums, competition amongst Ugandan banks for the blossoming personal loan business has lately picked up intense energy.

One of the latest marketing innovations by some of the banks to expand their share of this business has been pitches to potential customers to allow them to buy their existing debt, euphemistically called transferring your loan.

Once a customer transfers his loan to a new bank, he's allowed to take on new debt even as he is still clearing the old one. But even as the various banks scramble to control a larger chunk of the nation's personal loan portfolio, there has been little shift in the interest rate--averaging 24 per cent--said to be among the highest in the world.

This has stirred mounting apprehension that the ongoing reckless rush for these loans, at the current price, could in future produce a sudden rise in default rates and possibly spark an industry-wide credit crisis.

However, DFCU Bank Managing Director Juma Kissame said he didn't see what was going on as a rush but rather a well-thought and calculated strategy to extend credit to people to fulfil their individual ambitions and aspirations.

All banks, he said, take painstaking efforts to calculate their risk and that lending under the heightened competition for the personal, unsecured loan business still stringently conform to the standards of risk assessment and control. "I think it's just that banks are looking for new ways to get into new markets but certainly every bank still attaches great importance to assessing the risk of potential customers and calculates its premium on the basis of that risk," he said.

Salaried loans have recently become the most dynamic growth area for most banks, spurred in large measure by the rapidly growing ranks of formal, salaried workers and interest rate that guarantees a hefty return.

And notably, the traditional cash cow for banks--medium and large companies--has become unenviable as the number of players has risen sharply, with each retaining only a tiny slice of sector. Uganda now has more than twenty banks from 14 in less than a year ago.

Mr Kissame suggested that banks would eschew the risks embedded in the unsecured loan market by grading their customers on the basis of risk such that the premium charged on a loan is commensurate with the weight of risk a particular customer is perceived to carry. "For instance here we grade our customers and those in the top grade are blue chips (less risky) and for those we charge the minimum of interest rates," he said.

Although in any marketplace stiffer competition tends to produce lower prices, observers of the banking industry have been baffled that interest rates generally have stayed unchanged even as banks jostle to shove unsecured loans in customers' faces. Mr Kissame said contradiction should be largely blamed on the central bank which maintains high interest rates on its treasury bills, thus undercutting credit flowing into the private sector. Additionally, he said, commercial disputes resolution mechanisms in Uganda remain fluid, which makes unsecured loans even more risky, thus carrying maximum premium.

The industry though expects the establishment of the credit reference bureau currently underway to help identify and weed out risky customers and subsequently lower the lending rate. The bureau will provide all the banks with the credit history of any one applying for a loan. But even if firmer disputes resolution mechanisms were instituted and properties properly registered, the BoU would still be the ultimate determinant of the lending rate through the treasury bills.

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