Uganda: Interest Rates Still High Despite Competition

Jan 2009
Kampala, Uganda , January, 08 2009 - Competition for customers and space in urban areas heightened, this year, as new commercial banks opened business in Uganda while old ones have expanded to new locations and all are opening branches across the country. Yet, despite the increased banks, interest rates have continued to be high.

Competition for customers and space in urban areas heightened, this year, as new commercial banks opened business in Uganda while old ones have expanded to new locations and all are opening branches across the country.

The new banks include the acquiring of new partners by Bank of Uganda, United Bank for Africa (UBA) and Equity Bank from Kenya which bought 100 per cent shares in Uganda Microfinance Limited. Other new entrants are Fina Bank from Kenya, which opened shop in Kampala last year and Global Trust Bank from Nigeria.

Equity’s takeover widened its footprint in East Africa to two nations while the other new entrant Fina Bank has already got a presence in Rwanda. Kenya Commercial Bank (KCB), on the other hand which was recently ranked as the number two largest bank in Kenya opened its first branch in Uganda last November.

It has since then opened other branches in Kampala and also recently entered into the Rwanda market while it has for many years now had branches in Tanzania. It plans to enter the Burundi market early next year.

The opening of these new banks has increased the total number of banks in Uganda to 21 –half the number in Kenya but has hardly scratched the surface as the number of un-banked Ugandans continues to grow.

The number of Ugandans with bank accounts has not increased to over three million as would have been expected given the new entrants and the frenzied opening of new branches.

In a recent exclusive interview Mr Phillip Odera, Stanbic Bank’s Managing Director, told this newspaper that the old players didn’t feel much competition from new players but suggested that tougher challenges may lie ahead next year when the new entrants have settled in the market place.

“Yes, we had new competitors but obviously many of them spent much of the year trying to fix the nuts and the bolts of the business and I guess if they are to present any pressure in the industry, it will be in 2009,” Mr Odera said.

Without doubt, it is the new entrants into the market who forced the old players to step up their pace of innovation and widen their reach across the country.. Banks like DFCU, Barclays, Stanbic and Standard Chartered opened branches in up country districts like Gulu, Hoima, Pader, Kitgum while others like Baroda, Crane, Centenary and Diamond Trust Bank increased their presence in Kampala.

Yet, despite the increased banks, interest rates have continued to be as high as 27 per cent per annum and as low as 17 percent because of the government’s external debt and requirement on new banks to give loans after six months from date of establishment.

“Government borrowing has to come down if we are to see any substantial cuts in interest rates. But even then we expect some of the measures like the introduction of the Credit Reference Bureau (CRB) to have some impact,” Mr Odera said. Uganda’s external debt has ballooned by 72.2 percent to $1.9 billion form $1.1 billion in March last year. The loans which some Members of Parliament have labeled unnecessary are used to provide, medical, education services and to improve infrastructure.

The CRB and Financial Card System were this month unveiled by Bank of Uganda in Kampala. The system is also expected to ease and quicken access to finance from legal national lenders besides eventually giving borrowers an opportunity to pay back their loans at lower interest rates.

In general, Uganda’s financial sector remained robust unlike their counterparts in Europe, in more developed African markets and in Asian countries which were adversely affected by the financial crisis which started in the United States of America. Some banks in Ireland and Iceland almost collapsed but were rescued by government bailouts.

America’s financial mess erupted from a weakly regulated mortgage industry that led to a prolonged housing boom which collapsed last year. As a result, of multi-billion dollar write-downs in the US banks, some private banks, like Lehman Brothers and other publicly-backed ones such as Freddie Mac and Fannie Mae, as well as Germany’s Hyper Real Easter almost collapsed culminating into a financial crisis in the global economy.

In September and October, an escalated financial crisis that engulfed the world started to hit home but not as hard as in the West.

Amid the turmoil, most Ugandan bank managers said their banks remain stable for various reasons the most important one being that they never ventured into the complicated products like those in advanced economies. In deed, no Ugandan bank has collapsed or is threatened.

Ms Emma Mugisha the Treasurer for Barclays Bank Uganda told the Daily Monitor in an interview that it was too early to measure the impact of the financial crisis on remittances or capital inflows from Ugandans working aboard but December and January figures could give a sense of the impact.

Mr James Agin, Kenya Commercial Bank Uganda’s Managing Director also said; “At KCB we currently haven’t felt any reductions or impact in our business may be due to the level of infancy. Currently we are not seeing any negative impacts on our business.”

Even as formerly wealthy American and European banks were bailed out by their governments in moves reminiscent of earlier nationalizations due to enormous losses, KCB announced a profit before tax of about Shs120 billion, up by 64 percent in the nine months of up to September.

Despite the sign of stability, Mr Jacob Bainomugisa an economist and lecturer at Kampala International University said the banking sector will definitely not be spared because they make their money out of funds channeled through their systems.

“It’s the banks that normally get hit hard in such cases because; they are the ones that create massive credits by lending out money to the public. So if there’s a scarcity of money it means they will have to lend out money at high interest rates,” said Mr Bainomugisha.

This year also emerged as one with the highest and biggest robberies .in Kampala as banks lost over a Shs1 billion to sophisticated bank robbers. In a controversial case, in October, a Kampala City Tycoon was nabbed and jailed in Luzira Prison on allegations of attempting to withdraw at least Shs10 billion that had been wired into his account at Stanbic Bank’s Garden City branch.

Stanbic Bank Uganda –with the largest spread around the country was the biggest victim. In one case the state contended that robbers walked away with about Shs815 million from Stanbic. Bank of Baroda reportedly lost Shs320 million while four senior bankers of Barclays Bank were also arrested on allegations of defrauding the bank of Shs150 million.

UBA Executive Director Emmanuel Kikoni attributed the robberies to lack of effective investigative capacity among the Police force which could be used to reduce to tame fraud in banks besides corruption in the force. As a result, most criminals end up getting bailed out of prisons and even cases collapsing, allowing them to enjoy the fruits of their scams.

Mr Richard Byarugaba, then chief operations officer of Barclays Bank suggested in an interview that the wave of fraud in the banking industry was the natural corollary to the collapse of ethics and integrity that he said is evident in the Ugandan society.

“There are so many people who want to get rich quickly and that attitude is going to present lots of problems for everyone,” he said.

Mr Sam Owori, the executive director of Institute of Corporate Governance Uganda suggested that there is need to institute a robust, un-failing safety standards. Banks were also urged to strengthen their internal safety mechanisms and work closely with the police in reporting cases and identifying the criminals instead of keeping silent about robberies and fraud an advantage that robbers easily exploit to continue their nefarious activities.

But even as some banks were reeling from these setbacks, others scooped prestigious global banking awards. Banks with a regional and continental presence like Equity and Standard Chartered Bank scooped major awards at this year’s Euromoney Awards for Excellence in London. Standard Chartered Bank won five major international awards in recognition for its high quality products, innovativeness, service and global investments while Kenyan based Equity bagged the award for the Best Bank in Kenya.

Standard Chartered emerged Best Foreign Exchange Bank in Africa, the Best Private Bank in the world, and Best Cash Management Bank in the Middle East. In Uganda, it became the first to introduce phone banking making it possible for its customers to bank by punching short text messages on their phones to the bank.

As it celebrated one year of existence, Kenya Commercial Bank became the fourth bank to successfully be listed on the Uganda Securities Exchange. The bank cross listed 2.2 billion ordinary shares on the Kampala bourse making it the tenth listed company.

When the new banks start to feel at home next year, competition in banking will be scaled up for the benefit of more Ugandans. Low risk profile borrowers could start paying reasonable low interest rates in comparison to their previous loan obligations, following the introduction of a reference bureau. The number of banked Ugandans is also expected to leap over the current three million mark.

Source : Daily Monitor

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