Business
Equity’s Entry into Uganda Raises Stakes
By TOM MAGUMBA, Daily Nation (Uganda), 11/5/08
May 12, 2008 - 4:33:25 PM

The Kenyan bank last month extended its tentacles into the neighbouring country with the acquisition of Uganda Microfinance Limited in a deal expected to shake up the banking sector.

Whereas the deal, according to the chief executive officer of UML, Mr Charles Nalyaali, is yet to be completed pending regulatory clearance from Bank of Uganda and the Capital Markets Authority of Kenya, there are indications that industry players are positioning themselves for fierce competition.

“It is not only a stimulus to the whole market but also an opportunity for us in the industry to fine-tune our operations and increase our market share,” Mr Mathias Katamba, head of business development at Pride Microfinance said of Equity Bank’s entry.

He acknowledged that Equity’s micro finance model had revolutionised banking in Kenya. He, however, said Uganda is a different market meaning Equity would have to chart its own way. This, in other words, suggests that the bank may not have a soft landing in the country’s banking industry.

As if aware of what lies ahead, the bank is prepared to inject USh70 billion into UML that already has 7 branches in Kampala and 20 others up-country.

Mr Daniel Nsibambi, the communication manager of Stanbic Bank Uganda said the coming of Equity Bank would reawaken players to diversify their marketing drives towards customer retention and more product solutions.

He, however, sounded upbeat on Stanbic Bank’s position. “Stanbic Bank already has an unshakable foundation in commercial banking,” Mr Nsibambi said. “We can only become keener on introducing more customer-tailored solutions depending on the prevailing market forces.”

Equity Bank is the second Kenyan Bank to make entry in the Ugandan market in a span of  six months. KCB opened its doors to the public in November last year and has since opened two more branches and promised to open five more by year-end.

Competition in the banking industry took a new dimension after the Bank of Uganda (BoU) lifted a moratorium on licensing banks in 2005 and has since registered five new banks in a span of one year.

The banks include United Bank of Africa and Continental Trust Bank from Nigeria, KCB and Fina Bank from Kenya, and Housing Finance of Uganda, which has started commercial banking.

Created gap

Banks in Uganda have been reluctant to lend to low-income earners, creating a gap that microfinance institutions have exploited to reap big mainly from high interest rates. It is estimated that Uganda has about 166 microfinance institutions registered with the Microfinance Association of Uganda.

Equity Bank’s business model of focusing on low-end customers is largely cited as critical in banking Kenya’s low income population. If replicated here (in Uganda), the model could jolt the microfinance industry besieged with exorbitant loan interest rates of between 30 and 40 per cent.

The fast-rising bank deeply rooted in agriculture financing is also likely to bring hope to farmers who have often struggled to secure credit. The Ministry of Finance has continuously lobbied commercial banks to diversify into lending to the agricultural sector, which employs about 80 per cent of Ugandans. Banks have cited high risks in that sector as the reason for their shying away.

Equity recently partnered with Alliance for a Green Revolution in Africa to provide smallholder farmers and small agricultural enterprises with the advance financing they need to break out of poverty and build viable businesses.

At a press conference in Kampala during the announcement of the acquisition CEO, Mr James Mwangi, said the Ugandan market was still virgin offering many opportunities for financial investment. “Medium income earners are the cornerstone of our business so our strategy would be based on giving lower interest rates,” he said. Mr Elly Twineyo, a development policy expert on budget expressed reservations on the assertion that Equity Bank will shake the entire market.

Not afraid

“It is true that Equity Bank will ruffle some feathers in the market but I don’t think existing players are afraid of its entry,” he said.
 
He said it may only compete in the retail market depending on how it promotes its services. Mr Twineyo said foreign banks are eying Uganda because it is a free market economy offering the highest interest rates of up to 22 per cent.

The ultimate touch button for Equity Bank, he said, would be zeroing in on significantly lowering interest rates on loans and building on the existing goodwill of UML to win more customers.

While Ugandans await the entry of Equity, Mr Twineyo says Ugandans should celebrate cautiously as the current wave of foreign firms into the market could lead to “massive capital out flow”.