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Avalanche of banks

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Customers in Crane Bank. The full benefits of competition are yet to be achieved.Rising competition worries older players but experts say there is room for more banks

With the recent addition of two new banks, Uganda currently has 25 commercial banks. Does Uganda really need all those banks? Can the market sustain them? Will Ugandans benefit from such a large number of banks? Some analysts say the more the better because competition is good for customers but some of the industry players are a little apprehensive.

On February 15 and March 22, Bank of Uganda licensed two new commercial banks - NC Bank Uganda Ltd from Kenya and Bank of India from India, respectively.  Currently, there are over 455 bank branches across the country, while the population to bank ratio stands at one bank to 1.3 million or one branch for every 72, 000 people. On the other hand, Kenya, the region’s largest economy, has 43 banks and about 1,000 branches.


A top NC Bank official said they have prepared well for the competition and they know what this market needs, which their rivals are not providing.

John Okulo, the managing director, told The Independent in a recent interview that they “have come with solutions” to the problems that are facing businesses in Uganda. “We are going to specialise in asset financing for the start and in future, after we have fully established ourselves, we will embark on other products,” Kulo said.

Okulo said their coming to Uganda has been prompted by their outlook on the economy, which he described as one with a lot of potential. Their strategy initially is to introduce corporate banking, a portfolio that hitherto has not been getting exclusive attention from the older banks.

“We are starting as a corporate bank and our intention is to add value to the economy through supporting companies that need financing in assets,” he said.  In Okulo’s assessment, Uganda is not any different from Kenya in that numerous businesses lack financing to expand their businesses through the acquisition of capital assets.  That is a gap they want to bridge.

Bank of Uganda early last year raised the minimum paid-up capital for commercial banks from Shs 4 billion to Shs 25 billion, a requirement that all commercial banks operating in Uganda must comply with by March 2013. However, it is a requirement for every new bank to comply with have the Shs 25bn requirement before getting the licence.

According to Bank of Uganda, the minimum capital requirement of Shs 25 bn was intended to provide additional cushioning against potential risks arising from the unfavourable economic developments that were witnessed during 2011.

Jan Tibamwenda, the Bank of Uganda director for communications, said the Central Bank has created an enabling environment that makes it easy for banks to operate across the country.

But if or not all the 25 commercial banks will be able to raise the hefty capital requirement in less than a year; remains to be seen. Analysts say it is highly probable that the market could see a few mergers or even acquisitions in the next few months.

“We are confident we can make it [in this market],” Kulo said, adding that the bank had shown that it had the mandatory Shs 25 billion minimum capital investment, while their asset base is equally strong too.

Emmanuel Turyamuhika, the executive director of Uganda Bankers Association (UBA), said banks are being attracted to Uganda because the country’s economy has potential.

“It is good that more banks are coming. There is a lot of money that needs to go into the financial system and there are still many people who are yearning for products from banks,” Turamuhika said. He did not think that competition would be a problem for the new banks but argued that new financial institutions should first do feasibility studies before launching their operations in the market.

Competition impact

Older banks often receive the coming of new banks with apprehension for two reasons – taking their customers and snatching their treasured employees. There is a limited number of skilled manpower on the market and banks spend lots of money to train their staff. But if another employer comes around with better terms, banks are almost helpless to keep their employees. Because of this, the turnover in the financial services industry is one of the highest in the economy. Indeed, Okulo was formerly the head of corporate and investment banking at Stanbic Bank prior to being ‘snatched’ by NC Bank.

Phillip Odera, the managing director Stanbic bank and the chairperson of Uganda Bankers Associat    ion (UBA), told The Independent in a recent interview that as long as the economy is liberalised, one would expect new companies to start.

He however, said that it is not good for a country to have many commercial banks because it reaches a point when the banks cannot afford to continue due to competition which may force some of them to pull out. Odera cited Nigeria, which he said had about 100 banks but the number has declined by almost a half.

But on the positive side, he said as the number of banks keeps growing, also, more innovations and new products offered by the industry are expected to come.  While competition is healthy, the concern for him, is that the rural areas are being marginalised.

“The problem is that most banks want to concentrate in Kampala and most have neglected the rural areas. Banks should come with products that not only target the urban areas but also the rural,” Odera said, “I don’t see competition. It depends on the products and the strategy a bank uses. Above all competition is healthy.”

A.R Kalan, the Crane Bank managing director, expressed a similar view. He said it was unfortunate that all banks are looking at Kampala and not the other areas of the country.  However, he said Crane Bank - currently the country’s largest indigenous bank - does not feel any pressure over the rising competition. “We have over Shs100 billion capital invested and billions more in assets. We are expanding our branch network in Uganda and in the region,” Kalan said.

Financial services is currently one of the most profitable sectors in the Ugandan economy. For instance, Stanbic Bank made Shs 121 bn in profit after tax in 2011 compared to Shs 73 bn the previous year. Crane Bank’s profits after tax soared to Shs 66.76 bn compared to last year’s Shs 51.59bn - a 30% increase. Centenary Bank’s profit after tax surged to Shs 47.9bn in 2011, up from Shs 29.4 bn in 2010.  It is not surprising therefore more foreign players are picking interest in this apparently lucrative market.

However, industry analysts argue that rural communities are being left behind because banks are reluctant to open branches in rural areas where they are not sure of profitability. The trend they argued could only change with affirmative action by the government.  Also, despite the rising competition in recent years, bank charges and interest in Uganda are still some of the highest in the region, an indication that competition might not translate into lower charges for customers in the short term.

Untapped potential

Javier Suarez, the coordinator of World Bank support to Financial and Private Sector Development in Uganda, Tanzania and Burundi, said there is little doubt that there is significant scope for commercial banks to increase their outreach.  He said The Independent in an interview that there is a huge untapped potential of clients, which other banks, including incumbents like Crane, through their Crane Access products, or relatively new entrants like Equity Bank are also trying to tap into.
“Competition has certainly intensified in recent years, particularly among the medium-sized banks,” he said.  He added that concentration in both loan and deposit markets has declined, driven by greater contestability in the form of new entry and aggressive growth by middle tier banks.  Suarez though concurred with the view that banks have responded to increasing competition in both lending and deposit markets by growing their branch networks and expanding services to locations outside Kampala, particularly around trading posts and industrial clusters.

“The impact of the new entrants on the sector will largely depend on their specific strategy, and how successful they prove,” he said.  “I am sure Bank of Uganda reviewed the licensing applications thoroughly and is confident that new entrants will not only try to contest the existing market segment but have a clear strategy to reach out to the underserved segments of the population and contribute to financial outreach,” he said.

By all accounts, Suarez said the Bank of Uganda has so far been very effective in managing the growth and development of the financial sector, and has been proactive in fostering the outreach of financial services by licensing new banks with an explicit retail strategy and enabling development of innovative mobile payments products.   
He argued that numbers do matter although they are definitively not the only thing that does. “Whether you are looking at the degree of competition, efficiency, or depth of a given market, the number of firms per se serving that market has very little informative value,” he said.   “And you cannot reduce the discussion to the single dimension of whether you need one more or one less.”

As foreign banks move into the Ugandan market, Ugandan indigenous banks are also looking outside by exploring ways of expanding into regional markets. For example, Crane Bank has already acquired operating license from the DR Congo and will soon acquire similar licences in South Sudan and Rwanda. Centenary Bank is already operating in South Sudan where it is partnering with Ivory Bank to extend its operations in the new country.

Fabian Kasi, the Centenary Bank managing director, was not perturbed by the new competition, saying the bank has over one million customers while more are expected to join in the coming months. “I am sure we will remain one of the best banks in Uganda,” he contended.

But customers appear to want more.  Emmanuel Katongole, the founder and managing director of Quality Chemicals Ltd, one of the largest drugs manufacturing company in the region, said banks are necessary to deepen financial services in the country. “This economy is growing year after year, it needs financing from commercial banks in many sectors including agriculture on which over 80% of the total population depends,” Katongole said in his speech at the launch of Centenary Bank’s new branch at Rubaga Cathedral on April 27.

Katongole appeared to push the argument that banks must address the needs of the market if they are to survive. He said any bank that will not respond to the needs of the people will have “no space” in future and as such businesses should look at these financial institutions as their partners, which can help them to expand their operations.  How the rising competition will shape market confidence and ensure affordability of financial services is what remains to be seen.

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