31 January 2018

Uganda: Will Uganda's Bank for Cooperatives Be a Reality?

Kampala — For some time now, Uganda's cooperatives societies have expressed the need to re-establish the Cooperative Bank as their main source of capital for production, processing, diversification and value addition.

Whereas they seem to have made a resolution to start the process of re-establishing the bank that collapsed nearly two decades ago to serve the interest of their members, the question that lingers among stakeholders is how the proposed lender will be financed.

Ivan Asiimwe, the Secretary General of the Uganda Cooperative Alliance Ltd, said during the one -day national dialogue to members of cooperative societies and other stakeholders at Grand Imperial Hotel that they are looking at four financing options to re-establish the bank.

These include; purchase of shares by cooperatives, a joint venture between cooperatives and a strategic investor, a joint venture between government and strategic investor, with the government offloading shares to cooperatives directly at a later stage or government financing the proposed lender and gradually selling its shares to the public through the Initial Public Offerings on the stock market.

However, he was quick to point out that while the government can utilise some of the funds meant for the Uganda Development Bank (UDB) to capitalise the Cooperative Bank, a financial institution dependent on government might face high portfolio risk, sustainability issues and susceptible to unhelpful political influences.

"Of particular concern is high risk of default on loans and favouritism in recruitment of staff when government is involved," he said.

He said it is time for the country's cooperative societies to choose a financial model for the proposed commercial bank.

None of the senior government officials from the ministries of finance, trade and Bank of Uganda were present to respond to the proposed plan even when they were invited and time allocated to present their views.

According to Bank of Uganda (BoU), the core capital to start a commercial bank in the country stands at Shs25bn. This excludes costs with regard to setting up branches, technology and salaries.

The cooperative societies' move to re-establish the Cooperative Bank is based on the fact that whereas the government initiated various interventions to extend financial services through Savings and Credit Cooperative Societies and the Micro Finance Support Centre following the closure of the lender in 1999, there still remains serious gaps in agricultural lending - insufficient funds, high interests rates and loan products not aligned to the peculiar needs.

The cooperative societies argue that the current credit arrangement by the country's 24 commercial banks do not favour rural communities, farmers, most Small and Medium Enterprises due to high interest rates but also due to risks involved in the production and value chains of the different products.

As a consequence, the cooperatives and SME's, say they have failed to reach their full potential due to limited access to financial services.

"We believe that the re-establishment of this bank will deepen financial services, improve financial inclusion, generate revenue for cooperatives, enhance savings and increase ownership of the economy by Ugandans hence helping society for economic transformation and relieve the economy," he said.

Fred Muhumuza, a development economist and former advisor to the Minister of Finance, however, said the options of a government partnering with the strategic investor and the government financing the bank wholly and later offloading shares to the cooperative societies is impractical.

"This government has its own child and for years it has failed to capitalize it'" he said, in reference to Uganda Development Bank.

The government has in the past three consecutive budgets promised to inject huge capital into UDB but nothing has happened, and thus limiting its ability to extend long terms credit facilities to the population.

Muhumuza said the national budget is already overstrained and heavily constrained and that this makes it impossible for the government to take on more responsibilities that require capital.

He recommends that cooperative societies buy shares in the planned bank for ownership and membership as they seek for a strategic investor with the government as a guarantor to mobilise more capital.

"It is at this stage that we shall need government not to bring in money but provide guarantee to this new investor," he said.

Yasin Nnume, the Chairman Board of Uganda Cooperative Savings and Credit Union Ltd agrees with Muhumuza's views. He suggests that the country's 18,000 cooperatives societies buy shares in the bank even as it strives to look for a strategic investor within or outside the country.

"We saw this long time ago," he said. "For instance, when we wanted to open up an insurance company, we partnered with Cooperative Insurance Company of Kenya."

He says the cooperative societies in the country only need to come up with a committee to carry out the feasibility studies, analyse the financing modalities and look for a strategic investor as it was the case with the establishment of an insurance company.

Uganda Cooperative Savings and Credit Union Ltd (UCSCUL) and the Uganda Cooperative Alliance Ltd partnered with the CIC Insurance Kenya in 2015.

UCSCUL and UCAL own 51% of the business while CIC Africa, the parent company of CIC Insurance Kenya, owns the remaining shares.

This new development comes at the time when cooperative societies in Tanzania and Rwanda are also laying down strategies to unveil cooperative banks. Tanzania Federation of Cooperatives revealed end of last year that they are seeking Tshs 22bn to establish a cooperative bank.

TFC Executive Secretary, Willigis Mbogoro, said the lender to be known as, Tanzania Cooperative Bank, was mobilising the funds from its 37 cooperative unions and individual members to raise the funds. This will follow Kilimanjaro Cooperative Bank Ltd that was established in 1996, serving the country's Kilimanjaro region.

Rwanda plans to do the same soon after President Paul Kageme ordered the Trade and Industry Minister in 2014 to establish a cooperative bank to be known as Rwanda Cooperative Bank.

Research carried out by The Independent in the region and the globe indicates that cooperative banks were financed by cooperatives societies and individuals.

For instance, in Kenya, the Cooperative Bank of Kenya, which was initially a cooperative society in 1965, was granted a bank licence in 1968. This was followed up by a directive from the government instructing all cooperative societies in the country to transfer their deposits to the Cooperative Bank of Kenya and that all cooperatives buy the bank's shares. It was until 1989 that the established bank converted to a fully-fledged commercial bank and increased its products menu.

In Ethiopia, the Cooperative Bank of Oromia, registered in 2004, is fully owned by the cooperative societies, individuals, organisations and associations.

Cooperative banks elsewhere

In Europe, savings and cooperative banks started as far as 19th century after communities especially farmers failed to secure capital from conventional banks.

And since then, some of the cooperative banks have been able to prosper and at times even outperform the commercial and purely shareholder oriented banks.

For instance, in Austria, savings and cooperative banks' total assets, loans and deposits stands at around 50% in terms of market share of the entire banking industry, according to a paper presented at Goethe University, Frankfurt/Germany in 2013 dubbed 'Savings Banks and Cooperative Banks in Europe.'

The paper co-authored by Dilek Bulbul says there are two groups of cooperative banks in Austria, the larger group of Raiffeisen banks operating mainly in rural areas and the smaller Österreichische Volksbanken-Gruppe (ÖVB group) with an urban business focus.

In France, Banques Populaires Caisses d'Épargne (BPCE) Group is owned by nine million cooperative shareholders, and serving more than 31.2million customers while Crédit Mutuel (CM), with 7.4million customers, is owned by association of cooperatives. Similarly, Crédit Agricole (CA), sometimes called the "Green Bank" because of its historical ties to farming, consists of 39 cooperatives and small banks.

"Together they hold market shares of nearly half of total banking assets, loans to households and businesses and customer deposits," the paper says in part.

In Spain, the savings and cooperative banks are said have had an impressive and growing market share of around 50 % and were so profitable and efficient that one would not be able to see any difference in their performance to the private banks including the giant Spanish banks Santander and BBVA.

However, cooperative banks have disappeared in some parts of Europe. For instance, in Great Britain, the former public savings bank (TSB) was sold to Lloyds Banking Group, and several cooperative banks, the so-called building societies, were converted into corporations and some of them sold to large private commercial banks.

Similarly in Netherlands, savings banks have disappeared and the formerly independent cooperative banks have been amalgamated into one big national bank - Rabobank. Rabobank is traditionally a farmers' bank and it still holds 85% - 90% market share in the agrarian sector in the Netherlands.

Lessons learnt from the defunct Coop Bank

Charles Kabuga, the former General Secretary, UCA, said cooperatives need to avoid past mistakes similar to those that were made during the existence of the defunct Cooperative Bank.

He pointed out inadequate capital for the bank since it was established in 1964, poor credit management, insider lending and poor repayment culture as some of the reasons that led to the collapse of Cooperative Bank as a result of becoming insolvent.

"There were no credit manuals; credit management was weak as there were no approvals from the Board, no application forms and no financial statements from borrowers, lack of analysis, follow-up and collection efforts," he said adding, "As the loan portfolio grew in mid 1991 given the administered funds, the quality of loans did not improve with 75% of the loan portfolio being classified as Non-Performing Loans."

What next?

Going forward, Stephen Mukitale, who previously chaired the Parliamentary Committee on National Economy and now sits on the National Budget Committee, said there's need for cooperative societies to petition Parliament for the establishment of Cooperative Bank.

He suggests that the money paid to the Youth and Women through the Youth Livelihood Programme and Uganda Women Entrepreneurship Programme can instead, be directed towards establishment of the bank for the benefit of the wider population.

Muhumuza suggests the cooperative societies need to nurture and grow the asset base of the Uganda Central Cooperative Financial Services Ltd (UCCFS) and transform it into a bank rather than starting a new entity.

"Let's find the capital that UCCFS will be required to operate smoothly, because it is already authorized to work anyway," he said, "Then as it grows, we shall have a clear evidence, and we can apply to BoU to become a bank. We already know what the central bank needs."

Started in 2008 as a financial services provider for savings and credit cooperative societies, UCCFS has nearly 400 cooperatives countrywide, with a Shs5bn capital.

Muhumuza said the proposed Cooperative Bank should also not compete with the UDB; instead should form a collaboration to share risks and facilities.

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