It's that time of the year when banks are required to publish their financial statements for the previous year. Uganda’s banking sector has witnessed exponential growth for the last two decades with the liberalization of the economy. As of last financial year 2012/2013, banking accounted for slightly over 4% of GDP. Private banks have made billions and billions of shillings in profits for their shareholders. Stanbic Bank, Crane Bank and Centenary Bank made profits in excess of Ugx 100bn, Ugx 60bn and Ugx 50bn respectively for the year ended December 2013. The banking sector is dominated by private and foreign owned banks. Uganda’s banking sector is the classic case of a poisoned chalice. On one hand, we’ve had massive FDI in the financial sector, corporation tax revenue charged on banking profits, employment opportunities for Ugandans and technology/skills transfer to Uganda from developed economies like UK, South Africa etc. On the other hand, the bulk of the banking profits have been repatriated.
Uganda’s only government owned bank is the Uganda Development Bank Limited. Its mission is to profitably finance enterprises in key growth sectors. According to their 2012 Annual Report, they indicated that they had developed a strategic plan aligned to the Uganda National Development Plan and the Vision 2040. However, their financial statements for the year ended 2013 and their Annual Report for 2012 tell a whole different story on whether they are aligned to providing development finance to key sectors that will foster economic development (not just economic growth) that is premised on both quantitative and qualitative measures.
The bank’s net profit for 2013 is Ugx 515 million compared to the Ugx 3.67 billion in 2012. This indicates a very huge slump in profitability. This has been due to a Ugx 900m fall in interest income for 2013 compared to the interest income in 2012.Furthermore, the personnel expenses and other operating expenses increase by a combined Ugx 3 billion. It is worrying for a bank with an asset portfolio worth Ugx 147 billion to be making only Ugx 515m a year! That translates to a very miserable 0.35% Return on investments (RoI)!!. That is too bad. The industry average is 4%. For every Ugx 100 worth of assets owned by your average bank, the net income from these assets per year is Ugx 4!
Secondly, for the last two years (2011 and 2012), the UDB has had cumulative fair value gains in investment property and net foreign exchange gains to the tune of Ugx 7 billon and Ugx 5 billion respectively. For the year 2013, the bank suffered net foreign exchange losses to the tune of Ugx 1.4 billion and fair value gains to the tune of Ugx 1.5 billion. Fair value gains are simply a virtual gain or income recognized on the value of their investment property. For example if you bought land in Seeta two years ago at Ugx 100m, you have an option where you would still indicate it in your books at its historical cost/ value of Ugx 100m or you could carry it in your books of accounts at its fair value or market value today which could be Ugx 120m, so the fair value gain would be Ugx 20m. This is the same scenario with Uganda Development Bank. The bulk of their income in the last two years has also come from this fair value gains on their investment properties after revaluation of the said properties. UDB owns investment property (two residential houses in Munyonyo and Commercial Towers in the Central Business District) worth Ugx 29 billion as at 31st December 2012. Furthermore, UDB suffered Ugx 3bn impairment loss on loans and advances made to customers! An impairment loss arises when the book value of a loan is higher than the amount that can actually redeemed from the loan. If you indicate in your books of accounts that your loan book is worth Ugx 100m but the market conditions and real indications are that you will only redeem Ugx 80m, then you suffer an impairment loss of Ugx 20m!
The government owned UDB also has a strange liability and equity structure compared to other many private banks operating in Uganda. It has total liabilities and equity amounting to Ugx 147 billion. Equity accounts for slightly over 70% of this. In many private banks on the Ugandan market, customer deposits are the biggest liability financing the banks biggest asset, the loan book. Uganda Development Bank needs to explore other opportunities for raising funds for long term financing. These may include pension funds from private corporations, savings by cooperative groups and long term loans from regional banks like AfDB.
The other salient issue that needs key focus is the architecture of their loan book. Despite their mission to align long term financing to key growth sectors in the economy, the reality on their financial statements is different. Loans to Trade and Commerce sector account for 50% of the bank’s loan book. That means that for every Ugx 100m that the bank has loaned out, Ugx 50m has been loaned to the Trade and Commerce sector. We all know that the bulk of the business in the Trade and Commerce deals with sales and merchandise of imported finished goods. This has not only led to economic growth that is deficient of jobs but also led to capital flight and foreign exchange losses due to the high import bill. Tourism and Hotels account for 21% of the loan book while, 10% goes to Food processing. A miserable 4% is what is loaned to Agriculture enterprises! This is the paradox. Why isn’t the bank lending majority of its resources to agriculture that offers a competitive advantage in regional market economics and also employs the majority of Uganda’s 35 million people?
The other disturbing detail is that over 60% of all loans are for periods less than one year. This means the bank is putting the bulk of its funds to providing short term loans! Business are going to UDB for financial services that they ought to get from your ordinary bank not a development finance bank! This goes against the spirit of the development financing which should be more focused on medium and long term project financing requirements. Only 8% of the bank’s loan book is allocated to projects with periods exceeding 5 years! There is need for a paradigm shift at the Uganda Development Bank Limited. We need to adopt the China model of state capitalism and create indigenous capital and wealth creation. UDB needs to source long term capital to finance long term projects that foster job creation, economic development and transformation.
Rugaba Capital Limited