In recent weeks the issues of financing for business has been in the news, in one form or the other.
We have seen the challenge a past minister is facing with having to hang onto his home. The case is in court, so we can’t discuss its merits and demerits, just to say he may have fallen prey to some predatory practices, with the lender skirting dangerously on the edge of the law.
Across the border in Kenya a cap on bank lending rates has been repealed. Three years ago Kenya’s parliament passed a law restricting lending rates to two percentage points above the rate at which the central bank lent money. In reaction banks pulled back their lending to businesses, depressing the economy and prompting the reversal. So now banks can “properly” price their loans, often to the discomfort of small and medium sized businesses.
The two incidents are related and speak to the availability and cost of credit.
“In my business career I have benefitted immensely from credit. It is next to impossible to expand or take advantage of opportunities that come up without the availability of credit. Onlookers may counsel against borrowing, but growth, which the lending facilitates is a means of survival in the business world. If you are not growing to take advantage of economies of scale, it’s only a matter of time before a bigger shark enters the market and brushes you aside or swallows you whole.”
In my mind there are two major and interrelated reasons for our current state of affairs.
To begin with our banking sector is dominated by commercial banks. Commercial banks are tailored to serve companies that have strong cashflows, in need of short term funding to tide them over temporary difficulties. Hence their high lending rates and short loan recovery periods.
Where does that leave start up entrepreneurs or promoters of long term projects like manufacturing or for farmers, whose finance needs are unique?
“In theory there is no place for them in this market. In practice they tend to risk taking on short term loans to finance long term projects, hoping to refinance or square the equation along the way. Many times it does not work out.”
Government should find a way to encourage financiers along the whole length of a business development cycle.
Can we have small business finance providers? Can we have venture capital funds to come and take these small businesses to the next level? Can we encourage private equity funds to set up shop here to take established businesses to an even higher level? Investment bankers who can broker bigger deals here and abroad? Development finance institutions to underwrite the mega infrastructure and manufacturing deals? What about an agricultural bank?
There needs to be a way that government can proactively encourage these players to come here. They would not only provide tailored financing but would even improve our business practices.
The second challenge for our banking sector is that it is dominated by foreign institutions.
“As it stands now the top ten banks account for just over 70% of After tax profits in the 24-bank industry, while a third of the banks controlled 77% of the operating assets. This points to a highly concentrated market where a few players control a disproportionate share of the assets and take home most of the profit.”
This picture is aggravated further by 80% of these dominant banks being foreign. In Kenya the situation is not as lopsided with Kenya Commercial Bank, Equity Bank and Cooperative Bank among the top banks.
This is not ideal nor desirable. The logic is a simple one. Local banks or companies tend to retain more of their monies in country. This particularly important in the case of banks. With stronger balance sheets local banks are likely to innovate more – they can’t have that money lying around doing nothing and even invest more locally. Foreign banks report to offices abroad for which Uganda is often a small part of a much larger picture.
“There are historical reasons for this, government had run down the Uganda Commercial Bank (UCB) and had to flog it to save it and the industry as a whole, as well as the challenges faced by indigenous bank owners to stay afloat in a highly competitive sector.”
That should not stop government from encouraging locally financial institutions. Efforts over the last decade to boost Uganda Development Bank’s share capital – the target is to build it up to sh500b, are welcome although painstakingly slow.
One other thing is that government needs to encourage them mobilisation of savings. NSSF is doing a commendable job and its strategic role in the economy notwithstanding, a leveling of the playing field for other players may attract more savings and lower the cost of money generally.
It’s hard to over emphasise the need for greater availability and affordability of credit in any economy and we shouldn’t wait for disaster to strike before we do anything.
Dr Patrick Bitature is the chairman of Simba Group of Companies, an East African conglomerate, with interests in telecoms, energy production, mining, media, real estate, travel, and leisure.