Equity purchase of UML rattles banks, ups sector competition

Monday, 05 May 2008 By Edris Kisambira

A veteran and keen analyst of the microfinance sector in Uganda said in an interview last week that the apparent push by commercial banks into the retail segment of the market will result in more takeovers, mergers or part purchases.

Mr. David Baguma who is the executive director of the Association of Microfinance Institutions of Uganda (AMFIU) told East African Business Week that commercial banks have in the past defined clients that do business with micro finance institutions (MFIs) are un-bankable.

“That attitude has changed now because customers of MFIs or indeed a population that was considered un-bankable are bankable,” Baguma said.

“I will not be surprised if other commercial banks don’t take over other microfinance institutions.”

A week ago, Equity Bank, one of the largest commercial banks in Kenya took over Uganda’s largest MFI, UML, a fully-fledged, regulated micro-deposit taking institution - one of only four in Uganda.

The transaction will catapult UML into the top tier of financial institutions in Uganda given that by both market capitalisation and performance, the two entities are either on top or near the top of the rung in industry ratings.

Equity Bank reached a market capitalisation of $1 billion on the Nairobi Stock Exchange (NSE) and according to reports, a statistic that makes it the largest company in Kenya by market capitalisation.

On the other hand, UML according to industry analysts has been profitable from day one.

Last year, UML, one of two micro-deposit taking institutions in Uganda operating 28 branches across the country raked in revenues of Ush3 billion ($1.7 million).

Faced with increasing competition and shrinking margins on lending, Kenyan banks are eyeing the regional market for growth and spreading of risks, with Kenya Commercial Bank already present in the Uganda market.

Fina Bank, another of those financial institutions that have specialised in micro lending has been granted a licence to open shop in Uganda.

According to Baguma, Equity’s decision to take over UML is an indication of how well UML has been doing and the realisation of the opportunities and potential that exists in the Uganda.

“When you look at the financial position of Uganda Microfinance Limited, they have been doing well. Last year alone, they made Ush3 billion,” Baguma said. “UML had enough resources to do a lot of outreach. For them to make Equity take an interest in them and then result in a takeover is something. For us at AMFIU, it is a new day in the microfinance sector.”

Baguma said the takeover will lead to an increase in efficiency, outreach and expansion of the branch network.

The biggest beneficiary in the transaction Baguma said is the client, as the coming into the market of Equity will see new products introduced as well as the coming down of interest rates, though not immediately.

Centenary Rural Development Bank is the other micro-deposit taking institution and according to Baguma, the transformation of UML into a commercial bank will result in a healthy micro finance sector.

Baguma said Equity’s presence in the market will change the game in the retail segment of the banking market considering that commercial banks are pushing heavily into the retail market with branch expansion.

According to Baguma, there is a lesson in the takeover of UML for the other MFIs.

“This shows you that a microfinance institution that starts small doing things professionally can reach great heights, and that is what has happened with UML,” Baguma said.

Baguma believes the take over of UML should help expand the vision of other MFIs considering the benefits that would accrue from running a successful entity.

UML grew out of Uganda Microfinance Union (UMU), having started off as a research project for its chief executive, Mr. Charles Nalyali in 1997.

It later evolved into a non-governmental organisation (NGO) that provided financial services to micro-entrepreneurs who could not access a loan at the commercial banks that were at the time focusing on Kampala where the big businesses are situated.

In 2005, a debt and equity investment by Aureos East Africa Fund (AEAF) of $1 million enabled UMU to transform into UML.

Due to its low-income banking strategy, Equity Bank currently boasts of having 41% of all the bank accounts in the Kenyan banking system with the bank claiming to have opened its 2 millionth account in March.

Through the acquisition of UML, Equity Bank hopes to replicate the success of its microfinance model which has won global accolades for its success, translating in triple digit growth in earnings for the bank in the last five years.

Equity more than doubled pre-tax profit to Ksh2.4 billion ($35.6 million) in 2007 and received a capital injection of Ksh11 billion ($163.2 million) by foreign investment group Helios EB Investors in exchange for a 25% stake.

According to the Equity chief executive officer Mr. James Mwangi, the takeover will be completed by June 30 in readiness for the rollout expected by July. The transaction is pending regulatory approvals from both the Bank of Uganda and the Central Bank of Kenya.

source: www.busiweek.com