African Union launches s 

Sunday, January 19, 2014 

Mixed bag of banking stars

KAMPALA, UGANDA – Uganda’s financial sector is made up of 24 commercial banks, three credit institutions and four Microfinance Deposit-taking Institutions. This would ideally mean that many Ugandans now have bank accounts.

However, a  2013 FINSCOPE Survey on Uganda’s financial sector reveals that the number of Ugandans owning bank accounts has actually declined since 2009.The report notes that 47% of people said they did not use formal banking services because they did not have income to save. Savings therefore with formal banks remained low at 19 per cent. It also adds that the total number of people using informal services increased to 74% from 60% in 2009. 

The low level of using formal institutions (that is commercial banks, MDIs and credit institutions) that the survey reports mirrors the recorded low levels of savings, borrowing and access to formal insurance.

An eye opener for instance is that the report states that only about 12 in 1000 adults in Uganda with accounts had a loan with a financial institution in 2013. The number of adults not accessing loans of any kind increased from 55% in 2009 to 65% in 2013. The proportion of adults accessing credit through formal banks remained almost unchanged from 5 per cent in 2009 to 6 per cent in 2013.

A shocker is that majority of the people accessing credit received it in form of goods and money (24%), followed by goods only (17%) and then money only (14 per cent). The report also reveals that people mainly borrowed for consumption purposes.

“The most cited reason for borrowing was financing education for children (20%), emergencies such as illness (15%), then the need to meet daily expenses (14%),” said Dr. Sarah Sewanyana, the Executive Director Economic Policy Research Center while releasing the findings.

The other major issue the report highlights is that the largest proportion of borrowers (73%) took up small loans that did not exceed Ush500,000. Only 14% indicated that they received loans in the range of Ush500,000 and Ush1m while those who received in excess of Ush1m were only 13%. Also among those obtaining credit, a substantial proportion (16%) did not read the terms and conditions.

According to analysts, banks are right to exercise caution when giving out loans given the fact that Industry Non Performing Loans (NPLs) almost doubled to 4.2% for FY12 from 2.2% for FY11.

The analysts had also projected that there would be Mergers and Acquisitions (M & A) in the sector as “there is a likelihood that the smaller commercial banks could be ‘swallowed’ up by the larger banks.” They made their projections based on the increased minimum capital requirement by Bank of Uganda (BoU) to Ush25b that every commercial bank was supposed to have met by March 2013. Indicators from BoU however reveal that the banking sector is currently stable.

In 2013 however, savings with formal banks remained low with about 19% of the adults countrywide reporting to have saved with a bank. 

A report released by African Alliance Uganda last year notes that though the country’s banking sector is very competitive, it is dominated by the ‘Big Five’ commercial banks; Stanbic Bank, Standard Chartered, Barclays Bank, Crane Bank and Centenary Bank.

These banks dominate both in terms of the commercial banks’ market share of deposits as well as the commercial banks’ market share of advances. 

Stanbic Bank commands a whopping 20.11% of the entire banking sector’s market share of deposits, followed by Standard Chartered Bank has 16.32%, Barclays Bank 8.11%, Crane Bank at 8.06% while Centenary Bank commands 7.84%. These banks hold over 60% of the industry share of deposits. 

In terms of the market share of advances, Stanbic Bank again commands a 19.33% share, Standard Chartered Bank 16.87%, Crane Bank 7.78%, Centenary Bank 7.37%, DFCU Bank 7.34% while Barclays Bank commands a 6.44% market share. 

Furthermore the report shows that the commercial banks lend mostly to Building, Mortgage, Construction and Real Estate (24%), followed by trade (21%), Manufacturing (14%), personal and household loans (13%), Agriculture (7%) and others.

The research breaks Ugandan banks into three tiers, classified according to their assets. Tier I banks include those with assets above Ush1 trillion or simply put the ‘big five’ followed by those in tier II with assets between Ush999bn and Ush500bn, whereas the third tier banks have Ush499bn and below. 

In terms of market share of assets, the top five banks still remain ahead of the pack; Stanbic Bank with 20.3%, Standard Chartered Bank 16.2%, Barclays Bank 7.8%, Crane Bank’s aggressive expansion plans see them own 7.7% of the total bank assets while Centenary Bank owns 7.4%.

The report reveals that in the FY12/13, tier 1 banks performed better than the smaller banks in the industry recording an average ROA (Return on Assets) and ROE (Return on Equity) of 5.3% and 34.6%. Tier II banks recorded a ROA and ROE of 3.3% and 22% respectively. All the new industry entrants are still in the Tier III section.

In particular, the West African Banks namely Global Trust Bank, Ecobank and United Bank of Africa (UBA) have continued to struggle registering losses for the fourth year. The Kenyan banks; Equity and Kenya Commercial Bank though categorized in Tier III were in the profit zone for the second time in their five years of operation. Selected top Kenyan banks recorded an average NIR as a percentage of total income of 35% for FY12 compared to the Uganda commercial banks’ industry average of 28%.

Tier I banks were also more competitive when it came to liability costs, considering they hold up to 60% market share of the industry bank deposits. The cost of deposits for the Tier I banks were just 2.9% compared to 6% and 7% for Tier II and Tier III banks respectively.

“During times of low liquidity in the industry, group support was one source of accessing cheaper liabilities and avoiding the high cost local funds. The existing large customer deposits with the bigger players availed cheaper deposits,” the report reads.

Tier III banks further had higher Cost to Income (CTI) ratios in the sector, estimated to be in the range of 101% “due to the high costs of deposits for most of these banks,”

The continued aggressive expansion drive for the Tier III banks as they continue to struggle for market share could also have increased their CTI. 

The projection is that the big five will have improved deposit taking in the FY2013/14 as the economy improves and the CTI could rise in the medium term as large banks continue to struggle for deposits. 

However, a major threat to commercial banks is the rise in the non-bank formal service scheme that the FinScope reports which shows a steady from 7% in 2009 to 34% in 2013 because of the coming on board of mobile money services. Some 5.1 million adult Ugandans now use mobile money services to send and receive money.

The findings of the FinScope III survey report reveal that in rural areas, people use more informal financial service providers like village saving schemes and mobile money (35%) than the non-bank formal institutions (32%).  

However, the good news for commercial banks is that the proportion of financially excluded adults in Uganda reduced from 4.3million (or 30% of adults) in 2009 to 2.6million in 2013 (15%). The report goes on to state that in 2013, 20% of the adult population (3.4million) operated an account with a financial institution. The corresponding rate in 2009 was 18% (2.5 million persons). 

The number of adults having accounts with SACCOs on the other hand increased by about five fold – from 128,000 in 2009 to 622,000 by 2013. From the report, there is a growing appetite for non-bank formal institutions because among other reasons “One in five adults without a bank account reported the cost of operating an account as the key reason for exclusion.”

This therefore means that banks have to find more innovative means of harnessing the power of the non-bank formal institutions so as to remain relevant in the financial sector. Already some banks have merged their ATM transactions to mobile money platforms. But most of these platforms are mainly geared towards withdrawals and not savings. 


By Emma Onyango, Sunday, January 19th, 2014