14 June 2011

Uganda: Banks Should Rethink Expansion Strategies


With nearly 30 years since the financial sector was liberalized, access to financial services still elude many Ugandans. The FINSCOPE report of 2010; financial services access strand; a paltry 28 per cent of 16 years and above are formally served, 42 per cent are informally served and 30 per cent remain excluded.

In 2007, when the same study was under-taken, 62 per cent of Ugandans were reported to have no access to either formal or informal financial services. Commercial banks and regulated Microfinance Institutions (MDIs) only contributed 16 and 2 per cent respectively of the 38 percent that had access to formal financial services at the time. The 20 per cent was contributed by informal financial service providers as SACCOs, Village Savings and Loan Associations and other unregulated MFIs.

In 2007, commercial banks and regulated MFIs access to financial services was only 18 per cent. Three years later, the population served by these institutions grew by a meager 3 per cent to 21% in 2010. However, the informal financial services sector contributed an enormous growth to reduce the excluded Ugandans at 62 per cent in 2007 to a merely 30 per cent in 2010.

Although the banking sector has grown in asset size and number of commercial banks the growth has not steadily translated into an increment in financial access. The strategy by banks can explain low access despite the banking sector growth.

Commercial banks have much of their operations centered around Kampala and major upcountry trading centres with little focus on upcoming, busy and promising business towns. We have seen some banks concentrating 70% or so of their operations in Kampala, with their branches in the city 200 - 300 meters away from each other. The over concentration of banks in Kampala has heightened competition with one promising trader being visited by nearly 15 banks (Sales force) to market their products each-day.

However, opportunities exist elsewhere outside Kampala that can support growth and expansion for banks. Small and up-coming towns are such an option. Hither-too small towns such as Kagadi in Kibaale district have considerably grown. A couple of months when I visited the town, I was told a week prior to my arrival, 7 traders had been robbed of 650 million while transporting it in a commuter taxi to the nearest bank about 65kms. These are just a few who trot long distances to save their money. But if a financial institution opened in such a town, the volume of savings it can collect would be enormous especially including small traders who keep their cash in the bush, and piggy banks.

Other small & promising towns are highway-trading centres. Such an example would be Bweyale. Bweyale is one of the busiest trading centres along the Gulu highway. A couple of years ago while doing a feasibility study for a commercial bank that wanted to start operations in the town, I discovered that during the maize season and harvest of cassava the town receives cash inflows to farmers especially from traders in southern Sudan way above a billion. As the farmers receive this cash, they have nowhere to keep it. Few travel to Luwero while others go to Lira.

Other growth options could include downscaling to serve micro-savers and borrowers. There's a lot of business outside Kampala for banks especially for micro-savers. Strategic identification of small but promising towns could be a good starting point to guide expansion and growth.

Developing the financial system will require that banks spread out to reach the excluded. A deliberate policy by the central-bank to direct banks seeking expansion to areas and towns with good prospects but under-served can be key.

Mr. Were is a Market and Product Specialist.

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