BUSINESS: Workplace Saving schemes

The workplace SACCOs can now also use their increasing financial management knowledge and joint bargaining power to earn big interest from their deposits in commercial banks.

For now, banks might not be feeling the impact of the SACCO’s because, as Kityo who heads the biggest of them all at URA says, the SACCOS do not hold substantial amounts in savings and banks are still the main source of loans for their members who need big money. Kityo says URA staff members have outstanding loans of approximately Shs20 billion with commercial banks.

But he says, “if the SACCO had enough money no staff would borrow from commercial banks.”

Many recall that when mobile money was first introduced, many commercial banking strategists dismissed its potential. They reasoned that mobile money could not take off because the Mobile Network Operators (MNOs) running them do not have licenses to receive deposits from the public.

Currently, however, latest data from the Uganda Communication Commission shows that mobile money users surged from 19.5million in the second quarter of 2015 to 19.89 million in the subsequent quarter, representing a 0.02% growth, with value of transactions increasing from Shs7.6 billion to Shs8.8 billion during the same period.

The above instances serve as demonstration that commercial banks are not at risk of losing substantial amounts of revenues to mobile money operations.

This is partly because mobile money operations serve the bottom of the pyramid clients who are mainly engaged in transfer payment while commercial banks service the working middle class and corporate clients.

The situation may however change dramatically for commercial banks in the retail banking segment if mobile money operators continue to innovate products that keep the bottom of the pyramid customers out of banking halls.

Needed innovations

Jimmy Ochom is a typical mobile money user. He is 28 years old, without a Credit Reference Bureau (CBR) accreditation, and therefore, unable to borrow from mainstream commercial banks.

When he needed to borrow Shs50,000 recently, he turned to a new micro-lending and saving platform operated by a telecom company.

He was happy to get the loan instantly. Ochom does not appear to mind that he is paying an interest rate of 9% a month or 108 per year – which is way higher than the 24% p.a. charged by commercial banks. The main attraction for him is the simplicity in terms of access to the service when compared to doing the same in banks.

“Banks tend to request for so many documentations to access their loans unlike this service. It is simple and easy to access quick loans repayable within a short period,” Ochom says, “this can’t happen in banks.”

Because of growing competition from developments like Workplace Saving Schemes and mobile money, commercial banks need to innovate if they are to remain profitable.

“They need to come up with products targeting informal, rural based and urban low income earners,” says Benjamin Mukiibi, a senior research and sector development officer at the URBRA.

He says saving schemes or SACCOs and telecommunication companies transacting in billions of shillings are a threat to banks long term profitability.

“Saving schemes are cheap to run compared to banks,” he says. He adds that the huge capital base required to operate a bank is partly responsible for the 40-50% interest rate charged on risky borrowers.

Prof. Erisa Ochieng, an economist and consultant at a regional multidisciplinary firm; International Development Consultants, agrees that banks are costly to run, he argues that they need to wake up and respond to pressure from mobile innovations and group saving schemes if they are to remain in business.

“Banks should wake up, compete, and create new or similar products,” he told The Independent in an interview on Nov. 17.  Ochieng says one way would be for the banks to undertake partnerships with other financial sector players, including workplace SACCOs.

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editor@independent.co.ug