How banks can support business growth

By Andrew M. Mwenda

A great business can close in infancy, not because it is loss making but because it cannot get credit to overcome its initial cash flow constraints.

Here is the performance of Uganda’s banks in 2010: Out of the 22 registered banks, 14 made profits, two broke even and six made losses. All the six that made losses are newly registered banks – so that is understandable. And five had their losses significantly reduced compared to 2009 – so they performed better in 2010. Most importantly, non-performing assets as a percentage of total assets in the banking sector are only 1.02 percent – one of the best records in the world (see cover story).

The 2010 results only reflect a trend over the last decade. For example, while in 2000 there were only 17 banks with 122 branches, today there are 22 banks with 394 branches; and while total assets of banks were Shs1.8 trillion, by 2010 they had reached Shs11.3 trillion. In fact, the total assets of Stanbic Bank alone stood at Shs2.4 trillion by December 2010 – higher than the total assets of all banks in the country in 2000. Total deposits have increased from Shs1.3 trillion in 2000 to Shs8.0 trillion in 2010 and profits in the industry from Shs72 billion to Shs270 billion over the same period.

This trend has been driven by three major factors. First, the privatisation of Uganda Commercial Bank removed the dead hand of the state and its corrupt politics from the banking sector, thus opening the way to competition and product innovation. Second, the lessons learned from the bank failures of 1997-1999 led to improved regulation most epitomised by Bank of Uganda’s director of supervision, Justine Bagyenda, nicknamed the “Iron Lady” by commercial bankers. Third, the banking sector reflects the robust growth of the Ugandan economy.

However, not everything is rosy in Uganda’s commercial banking sector. Interest rates have remained high (18 to 24 percent) in spite of the fall in interest on treasury bills. Bank charges are high, constituting a significant part of bank profits. Although the number of employees has grown from 1,099 in 2000 to 8,700 in 2010; and although the total wage bill has also grown from Shs47 billion to Shs330 billion over the same period, per capital earnings of bank staff have declined over this same period from Shs42m to Shs37m – meaning that banks are employing more people but paying them less in real wages.

The market is still dominated by three international banks – Stanbic, Standard Chartered and Barclays. These banks rely on rules designed in Johannesburg, London and Dubai to lend to local Ugandans – rules that make it extremely difficult for many ordinary Ugandans doing business to borrow and invest. It is the presence of the fourth and fifth largest banks in Uganda i.e. Centenary and Crane banks that has made it possible for many Ugandan entrepreneurs to do business.

Indeed, a huge percentage of the business that the three leading international banks get is a result of their brand than their product innovation. This suggests that the dominance of multinational banks has actually repressed the banking sector. I have a friend who holds an account with one of the multinational banks and whose business has a gross turnover of more than Shs1.5 billion per year in the same bank. Yet the bank could not give him an overdraft facility of Shs200m.

The result of rigid banking rules designed in London, Dubai and Johannesburg for the local branches of these multinational banks is to stifle business growth. This lesson came vividly to me when we set up The Independent as a business. Most of our advertisers asked for 75 days of credit yet our suppliers wanted to be paid in advance since we were a new business. Although we were able to make an operating profit with the first five months, the mismatch between our revenue collections and our expenditure placed us is continuous cash flow shortages.

At the time, we were banking with Stanchart, Stanbic and Barclays. However, in spite of a rapid growth of our business almost every month which was giving us large volumes of revenue turnover, these banks could not give us an overdraft to roll over our cash flow shortages. We turned to Crane Bank and they gave us the facility because it believes in its customers and responds to their needs on the basis of its knowledge of them personally and the information it has on the performance of their business and not because of some rigid rules designed in London or Dubai.

I learnt from this experience that even an excellent business can close in infancy, not because it is loss making but simply because it cannot get short term credit to roll over its initial cash flow constraints. But I also learnt that for an economy to achieve its full potential, it needs banks that are rooted in its people’s business realities – not one whose rules are based on ignorance or prejudice of some bankers in distant lands dictating by remote control how a market should operate.

Looking back both as a journalist and as a business person, I believe that although Uganda’s banking sector has registered rapid growth over the last ten years, it could actually have done better for itself and for the country’s people if priority was given to local banks. I agree that local banks misbehaved in the mid 1990s leading to their collapse. But the lesson Uganda took from this experience was the wrong one. Rather than seek to improve central bank supervision of local banks, Uganda decided to discriminate against them in licensing of new banks.

The result has been a safe banking sector most of which is delinked from our business realities. This, I suspect, may have reduced our economic growth by anything between one and two percent. Going forward, Uganda should seriously think of encouraging the growth of local banks as the major drivers of lending. During its early industrialisation, 90 percent of the total banking sector in South Korea was controlled by the government. In China today, government controls over 70 percent of banking. We do not need Uganda government to control the sector. But it can encourage local banks to do so through smart policies.

amwenda@independent.co.ug