BUSINESS: Future of banking

If it looks so gloomy, why is everyone seeing it as bright?

KAMPALA, UGANDA | JULIUS BUSINGE | The banking industry in Uganda appears to be facing an uncertain future. Most banks are recording a mixture of good and bad performance, sluggish growth in private sector credit, rising non- performing loans (that hit a Shs 1 trillion mark in 2016, the highest in the last many years), and rising dormant accounts. There is also bad corporate governance, high cost of operations, and low levels of financial inclusion (where only 52% of Uganda’s adult population has access to financial services and 51% of adults preferring to keep their savings at home and in form of things like animals and land).

At the recent inaugural Annual Bankers Conference in Kampala, the extent of how the banking sector is grappling for solutions became clear.

By 08:30am on July 19, car parking lot of the Serena International Conference Centre in Kampala was full. Bankers, financial sector executives, and fin-techs were visible.  Outside the conference hall, fliers of most of Uganda’s 24 commercial banks added a celebratory feel to the event. But the look was deceptive. The bankers inside were far from celebratory mood. Organised by Uganda Bankers Association (UBA), an umbrella body for 24 commercial banks and one development bank; Uganda Development Bank, in conjunction with the Uganda Institute of Banking and Financial Services, the conference was tackling a serious theme; `The Future of Banking’.

Inside the hall, the bankers were joined by international development partners and multi-lateral agencies, investment advisors, regulators, research associates and academia, legal experts, legislators, policy makers, technocrats from governments, and private sector players from key sectors like agriculture, energy, tourism, housing, education, health and telecoms. There were an estimated 250 participants.

There was no cheering when Bank of Uganda Governor, Emmanuel Tumusiime Mutebile said “I believe that the future of the banking industry in Uganda is bright”.

Instead, from the discussion, it was clear the bankers are designing and implementing strategies on four major areas; innovation in a more digitised industry, deepening financial inclusion, high operating costs, and competition for the few well trained and skilled employees.

And it was clear Mutebile, captured the general view in his speech when he said that banking in Uganda faces one major challenge – high operational costs which consume 11% of the banks’ total annual income.  “This is very high by international standards,” he said, adding that high costs are partly the reason behind the high interest rates in the market, which is currently at an average of 22%. Mutebile said this leads to slow growth in private sector credit. He said the focus should be on designing strategies of lowering operational costs.

Role of policy

There was general agreement when former Central Bank Governor of Kenya, Njuguna-Ndugu, who was the keynote speaker, said the future success of banking in the East African region will depend on how governments work towards easing liquidity shocks for banks. He said the governments must pay their debt obligations to local suppliers on time. He said this, together with improvement in the saving culture of citizens, will ease the liquidity shocks for banks.

In terms of regulation, Ndugu said regulators and bankers must work towards expanding operations using digital tools and new forms of banking to increase financial inclusion and deal with liquidity challenges.

Ndugu said public policy should help banks boost their capacity to mobilise customer deposits, increase savings in the formal financial sector. He said financial inclusion will reduce poverty sustainably since it increases savings which fund economic activities and grow the economy.