The Independent (Kampala)

Uganda: Banks Rolling in Profits

Commercial banks are making profits that would make any CEO envious. Crane Bank's 2010 annual statement, published recently, announced phenomenal growth in profits, deposits, lending, assets, paid-up capital and loan repayments among others.

According to Crane Bank's audited results for 2010, its profits grew by 62.7%, from Shs41.9 billion in 2009 to Shs68.1 billion in 2010. Deposits rose by 38.6%, from Shs418.7 billion to Shs580.2 billion; loans and advances to customers increased by 70.8%, from Shs240.3 billion to Shs410.6 billion; assets grew by 47.4%, from Shs531.5 billion to Shs783.6 billion. Shareholder funds rose over Shs142 billion.

Managing Director, A.R. Kalan, said the bank was one of the best capitalised in the Ugandan financial sector, with paid-up capital of Shs100 billion, more than five times the statutory minimum established by the central bank. He predicted that profits would be even bigger by the end of this year.

The surge in profits is partly due to the bank's bold expansion plans, with 12 new branches to be opened in Uganda this year to add to the existing 15, and across the border, new branches to be opened in Rwanda and DR Congo. The bank is also planning to open mobile money services to meet the rising need for financing outside the reach of banks.

For a locally owned bank that started out in a non-descript shop-front a few hundred metres down the road from its opulent current address at Plot 38 Kampala Road, this is impressive.

Having started out lending mostly to Kikuubo traders, the bank has growing with its customers, who are now owners of growing formal businesses in real estate, manufacturing, education and other sectors.

Crane's performance last year was not a one-off occurrence, but part of a consistent 15-year record of growth. In 1997, Crane Bank made profit of Shs1.5 billion. It has now risen to Shs68.1 billion in 2010.

Kalan attributes the growth to the bank's focus on innovation to keep up with the changing needs of its customers. It certainly has been helped by its status as a local bank, with local directors who are active business people in Uganda and are known in the social circles of their customers.

Gaster Lule, managing director of Ntake Bakery who is a long-time customer of Crane Bank, says the main reason he has stayed with it since the 1990s is because they always give him money as and when he needs it.

"I call the chairman in the morning, he calls the directors by noon and the next morning they call me with an answer," Lule told The Independent.

"This is different from [foreign] banks where the officers in Uganda don't have authority to approve lending and it takes a long time to make a decision," he added.

Crane Bank is not an exception. It's part of a wider trend of growth in the banking sector. About 5 banks have announced performance results for 2010 over the past couple of months and all - except the Kenyan banks Equity, Kenya Commercial Bank - have reported profits.

DFCU Bank, which is listed on the Uganda Securities Exchange under DFCU Group, made its shareholders happy last month, reporting a profitable 2010, with a Shs7 billion dividend cheque to be paid out in May.

The "poor man's bank" Centenary Bank, last week announced profit of 25% for 2010, up from Shs23.5 billion in 2009 to Shs29 billion.

"Even though we do not pursue maximisation of profits as our business goal, we have operated profitably over the last decade- a sign that serving the poor is indeed good business whichever way you look at it," the bank's Managing Director, Fabian Kassi, said at a press briefing last week.

Centenary, also a microfinance provider that focuses on areas often shunned by bigger banks - small business, agriculture, home improvement - attributed its growth to its branch growth; new technologies including ATMs, SMS and internet banking; prudent lending, especially given its target market of the poor, and new partnerships with organisations like real estate developers Jomayi Estates, water equipment manufacturer Crestanks and the public utility National Water and Sewerage Corporation. These factors are not unique to Centenary but are driving growth in the whole industry.

More banks will publish results over the next couple of months, and preliminary reports indicate that the majority are profitable and growing.

2010 profits

Bank of Uganda's analysis of 2010 performance in the banking sector shows that Crane was the leading bank in terms of growth in absolute profits. Barclays Bank made a profit of only Shs10 billion, but saw the highest growth in percentage change of 150%, having climbed from a loss of Shs21 billion the previous year. However, big brand banks like Stanbic and Standard Chartered Bank saw a reduction in profits. Stanbic's profits fell by 25%, from Shs95.4 billion in 2009 to Shs 72 billion in 2010, while Standard Chartered Bank's profits fell by 14%, from Shs103 billion in 2009 toShs 89 billion in 2010. The two recorded the highest actual profits in the sector and said they will announce their full results by the end of the month.

Deposits

The highest growth in deposits was recorded by Fina Bank at 184%, from Shs16 billion in 2009 to Shs47 billion, followed by KCBK at 123% and ABC Capital Bank at 100%. However, the highest actual deposits were recorded by Stanbic, Standard Chartered, Barclays, Centenary and Crane Bank, respectively. Stanbic showed 26% growth in deposits, from Shs1.4 trillion in 2009 to Shs1.8 trillion in 2010. Standard Chartered Bank's deposits grew by 64%, from Shs775 billion to Shs1.3 trillion. Barclays' deposits grew by 18% to Shs858 billion.

Assets

The fastest growth in assets is reported by ABC Capital, which was new in the sector and grew from zero to 100% assets worth Shs12 billion in 2010. The highest asset worth is held by Stanbic, Stanchart, Barclays, DFCU, Centenary and Crane Bank respectively. Stanbic's assets grew by 17%, from Shs1.9 trillion to Shs2.4 trillion. Stanchart's also grew by 42%, from Shs 1.26 trillion to Shs 1.86 trillion. Barclays' assets grew by 2% to Shs 1 trillion.

Positive predictions

Bank managers predict that the growth trend will continue into 2011. Kalan told The Independent that Crane Bank will grow even faster this year, driven by investment into new branches (12 more expected this year) and expansion into the regional market in Rwanda and Burundi.

Centenary's Kassi said despite a slowdown in the economy last year, opportunities like oil, increased spending on infrastructure, an increasingly stable Northern Uganda and Southern Sudan, the telecom and internet growth that is driving e-banking, mushrooming bank branches and outlets, the opening up of the East African market, and the newly raised capital reserves will stimulate further growth.

"The Ugandan economy is poised for good growth, and so is Centenary Bank," he said.

Uganda Investment Authority reported last month that between January and March, it had licensed 16 new financial services projects worth US$ 49.7 million, expected to create 1,300 jobs. These projects will not reach maturity until 2012, but indicate that further growth and competition in the sector is expected.

A positive decade

The banking sector has undergone tremendous growth and transformation over the past 15 years, in terms of size and number of banks, amount of deposits, assets, reach, tax revenues, employment, etc.

Profits have risen from Shs10 billion in 1995 - including an industry-wide loss of Shs8 billion in 1998, to Shs269 billion in profits in 2009, and the sector's corporation tax payments have more than doubled, from Shs45 million in 1995 to Shs95 billion in 2010.

Total deposits have grown more than ten-fold, from Shs383 billion to more than Shs8 trillion in 2010. Assets of all banks have also increased from Shs724 bn in 1995 to more than Shs11 trillion in 2010.

While the number of banks fell from 19 in 1995 to 15 banks in 2007, as part of the sector's restructuring, they have now risen to 23, and more are being licensed. Bank branches have more than doubled in the 10 years between 1999 and 2010, from 118 to 394, and are headed for further growth as rising competition drives investment into more branches for all banks. For example, Crane Bank plans to open 12 new branches this year alone and to expand to 50 branches by 2015.

Bank of Uganda's Director of Communications, Elliot Mwebya, says increasing competition has taken services to areas previously not served by banks.

"Before 2000 Arua town only had Stanbic and Centenary. Now it has over 10 banks," Mwebya said. "The town has become a clearing centre for business in Sudan and DR Congo. The return to peace in Northern Uganda is a big draw. While DFCU used to be concentrated in Kampala, it now has branches in Lira, Gulu, Kitgum and Pader, some of which had never seen a bank before."

Employment in the banking industry has also grown from 493 employees in 1995 to 8,700 by 2010.

Non-performing loans have been reduced from 39% of total lending in 1995 to just one percent by 2010, a significant improvement in loan repayment that has led to a dramatic increase in lending. In the 15 years between 1995 and 2010, commercial bank credit grew from Shs303.4 billion to Shs5.5 trillion. This is partly due to general economic growth and expansion of the private sector and the financial sector's restructuring, which saw the privatisation of public-owned banks like Uganda Commercial Bank and Cooperative Bank, which were notorious for bad lending. It is also thanks to the Credit Reference Bureau which, while new, has begun to establish accessible customer credit profiles, so that any bank can understand the "reputation" of a loan applicant before giving them money. As more borrowers are registered on the CRB, it is expected that banks will be more encouraged to lend, and that borrowers will get loans that they can afford to pay back.

But how is the growth in banks possible in the midst of persistent inflationary pressures, with the rate up from 6% to 11% in just a month, oil prices continue to rise, food prices have sky-rocketed up to 200% in less than 6 months and the global economy is stagnant? Mwebya said such interruptions, while not to be ignored, have not stopped Uganda's economic growth at the average of 6%.

"GDP growth has been consistent and business is growing," said the central bank's Communications Director, Elliot Mwebya.

Mwebya said big industries like Mukwano, housing estates, importers and exporters - all funded by banks - were recording high turnover, reflecting the growth of banks.

"Shopping malls are coming up everyday filled with small and medium enterprises whose growth is very high. No single shopping mall in this town stays unfilled for a month because commerce is booming," Mwebya said.

"Go to any car import depot. They are overflowing. Banks have opened up credit desks and appraise potential borrowers from right there in the depot."

The only question, Mwebya said, is whether this growth is reaching everyone. "How many people are part of this growth?" he asked.

A new age in banking

The Executive Director of the Uganda Bankers' Association, Emmanuel Turyamuhika Kikoni, calls the last few years "the age of the customer".

"The period until the late 1990s and early 2000s was the bankers' round. Banks could dictate their terms to the customer, who had little or no say," Kikoni said. "Today is the customers' round. The banker must come out to look for the customer, who has so much to choose from, and now has the power."

The banking experience has changed. With the combined advantages of telecommunications and competition, the current bank customer can open an account, make deposits, transfer money, go shopping and borrow, without ever stepping in the bank.

With e-banking, mobile money and SMS, the internet and mobile phone have changed banking in a way that makes the ATM (automated teller machine) - pretty sophisticated a few years ago - seem ancient today. With growth of internet usage, almost every bank now provides e-banking. Within a year, telecommunication companies have signed up almost 2,000,000 mobile money account holders, most of whom are outside the reach of banks. Compared to the combined base of 5.5 million bank account holders, telephone companies may soon have more financial customers than banks.

By storing money on a mobile phone, a person can pay for water, power, groceries, and other bills from the remotest location, as long as they can find a mobile money agent.

"Hundreds of billions of shillings have been routed through mobile money, and there has been no complaint or breakdown so far," he said. This is impressive in an industry that is largely unregulated, falling in the no-man's-land between financial services and telecommunications.

Currently three banks are running mobile money services alongside telecoms and more are negotiating to do the same. Bank managers say they do not see mobile money as competition but as partnership. In fact, by holding collection accounts through which this money is channelled, they see it as profitable. Mwebya says with further innovation and expansion, mobile money will be taken from the telecoms and become the full business of banks.

Competition has forced bankers out of their plush comforts to come out on the street to better understand their customers and tailor products to their needs. This has popularised some previously unorthodox packages like school fees loans; home improvement packages; funeral and wedding loans, you name it.

Banks are also striking partnerships with real estate companies, service and utility providers, retail outlets, etc, to ease the payment and make money available just when customers want to spend it. Banks like Barclays are scrapping ATM charges as their clients withdraw money. Others like Equity and Eco Bank send SMS updates to their customers' for every transaction they make.

Welcome East Africa

Integration of the East African market is the newest frontier of business in the region and it is no wonder banks have followed it - as have bank regulators. The first of this wave were Kenyan banks, Kenya Commercial Bank, Equity Bank and Fina over the past 3 years. Equity Bank officially opened shop in 2009 and grew fast, establishing 40 branches across with 480,000 customers, having bought the assets of the former Uganda Microfinance. The bank's managing director, Francis Robertson, says being relevant and flexible to the needs of customers has propelled the bank's rapid growth.

"We give inclusive customer-focused financial services. We are harnessing the power of technology to meet the needs of customers. We have internet banking, Visa ATM cards, and offer a number of banking services that range from personal, retail, corporate and SME banking."

Unfortunately Equity, KCB and Fina have made losses and undermined the group profits of their mother banks in Kenya. Last week Equity Bank also closed its corporate branch in Kamwokya, because it was not "managing itself properly", according to Robertson. One member of staff revealed that the bank had been making losses and it had become hard to supervise.

This may have dampened the expansion fervor of these banks, but has not stopped the regionalisation drive.

Crane Bank is opening branches in DR Congo and Rwanda early next year. Centenary says it is striking partnership with other banks in neighbouring countries, but did not reveal details.

While easing banking for cross-border businesses will be a blessing, regional expansion will be a test of the capacity of the central banks to regulate the success of the sector.

Mwebya said for a bank to be allowed to open a subsidiary in another country, it must be financially solid to avoid straining its mother operations.

"The central bank of the destination country comes to us to verify that the bank can dedicate sufficient share capital for its subsidiary, shows consistent profit over a period of time, that it has adequate management capacity to run the expansion," he said.

Mwebya said that the recent increase of capital limits to Shs10 billion now, and Shs 25 billion starting 2013, is an attempt to mitigate the risk banks face and pose to serving customers who are traversing across the borders.

"The risk profile of the financial sector is increasing and banks must invest in IT, skilled staff, and definitely increase their capital buffer to avoid crises like happened in the US and Europe in 2001, where banks took huge risks against which they are not adequately capitalised," he said.

Exploiting consumers?

Complaints from consumers raise the question over whether as Kikoni says, this really is the customer's round. The cost of banking - in terms of interest rates on loans, and routine charges on transactions - remains high and has drawn the ire of consumers through the Uganda Consumer Protection Association (UCPA).

To mark the International Consumer Rights Day, UCPA last week issued a statement condemning bank tariffs as exploitative of consumers. This is especially in relation to routine charges of school fees, taxes to Uganda Revenue Authority, purchase of tender documents from public institutions, passport fees and government fines, all of which attract a bank charge of between Shs2,000-2,500.

"It remains unclear where this high and fixed tariff across all banks originated, but since the regulator leaves it in operation, it can be safely interpreted that banks operate this unfair tariff with backing from Bank of Uganda," said the statement, signed by the UCPA Executive Director, Sam Watasa. "This is equivalent to price fixing and is unfair to financial services users," he said.

Watasa said cumulatively, the charges make a big contribution to the rising profits of banks, and constitute exploitation of consumers, which the central bank must address.

Unfortunately Uganda does not regulate prices of goods and services, and that includes banking, said Mwebya. "Yes, they may be right, but what is cheap in Uganda? Food, rent, services, everything is expensive," he said.

"But if Bank A is overcharging, try another one. In the process, the consumer will become king," he reasons.

Similarly, lending interest rates have been consistently high (20% - 30%), and have contributed significantly to the banking sector's profits and the losses of business.

Mwebya said banks are justified to charge high interest, because while repayment rates have improved over the years, inflation remains high and it's still quite risky to lend. He said with savings low at 15% of GDP and the majority of Ugandans living a subsistence livelihood, the financial sector has low capacity to raise money through savings and must satisfy demands for credit through more expensive and riskier investments.

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