Skip to main content

FINANCING OUR ENTREPRENEURS, A CHALLENGE WE CANNOT IGNORE


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Across the border in Kenya a cap on bank lending rates has been repealed.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.




Comments

Popular posts from this blog

GOOD BUSINESS SENSE WILL HELP OUR AGRICULTURE

The recent drought has at once alerted us to our deficiencies in our agriculture production and reawakened a drive to revitalise the sector. How is it that a country with half the arable land in the region has people suffering starvation? How is that our crops dried up in the fields when a fifth of our land mass is under water? And on a macro level how is it that the 70 percent of our people who rely on the land directly for a living, account for 30 percent of our economic output or GDP? Given our natural endowments in land, weather and manpower it is obvious that we are performing well below our potential. Reversing this trend of affairs should be the concern of everybody in the country. A lot of the debate has revolved around increasing production, value addition and market access locally and internationally. And rightly so. Taking one example the Uganda Coffee Development Authority says that the average yield per hectare is half a ton of coffee. But meanwhile with...

BEWARE OF THE CON MAN

I read with a mixture of horror and sympathy for the victims of the latest Ponzi scheme gone bad in town. Last week a company, Global Cryptocurrencies Ltd, collapsed and along with it went billions of shillings, by police estimates, of their clients’ money. The company working out of an obscure office on Namirembe road, managed to rope in all manner of clients with the promise of magical returns – 40% a week! I have been in business for most of my life, if I could be guaranteed 40% week I would sell everything I own and jump in with both feet. Or maybe not. And this is why. They say if anything is too good to be true, it is. If you can get an annual return of 40% on your investment you will be doing extremely well. So if you put in a million shillings in your business and walk away at the end of the year with sh400,000 after taxes you have found a good thing, and I would like to be your friend. I have seen my share of scam artists and con men. Below are my fast an...

HOW TO RECOGNISE A PONZI AND NOT FALL VICTIM

Another Ponzi scheme has come crashing down around the ears of hundreds of “investors”. Unsurprisingly. In its recent reincarnation poor Ugandans were lured into a scheme where they bought computer tablets. This entitled them to a monthly pay off, $100, and a Christmas bonus for their children. In this case the unsuspecting investors -cum -victims were being given a share certificate. Meaning you accept to take the part of the risk in this project. Which was inadvertently reducing their burden of risk and liability for the issuing company. I leave that area to smart lawyers to handle.   As is always the case with these things, it’s not quite clear where the pay-out will come from. A common characteristic of these schemes is that you might get initial payments before you starting missing a few and the stories begin. The promoters of these schemes or scams often use the money from the latest entrants to pay the older “investors” until one of two things happen. Either...

THE GOOD THAT CAN COME OF THE NEW UGANDA AIRLINES

I have fond memories of the Old Uganda Airlines. As a secondary school child, I took advantage of ticket concessions (my mother worked for Uganda Airlines) to fly to the UK to buy clothes and other goods for sale to my friends at school. These trips were a great adventure and served as a good foundation for the businessman I am today. It has been reported that the first two planes of the revived Uganda Airlines will be landing in the country within the month. The finance ministry has been presenting to parliament their needs to pay off deposits on the first two of six planes they are to take possession of in coming months. The project has its equal share of supporters and critics. I am a qualified supporter of the project. In business nothing is certain. We deal in probabilities. When getting into a venture we often must weigh the risks versus the returns of a project. If the risk of failure outweighs the potential profit we stay away, otherwise you are gambling...

WELL DONE UGANDA REVENUE AUTHORITY BUT …

Over the weekend President Yoweri Museveni commissioned the new head office of the Uganda Revenue Authority, an imposing structure that is set to dominate the Nakawa skyline for some time to come. Congratulations are in order to URA for the construction of such an aesthetically appealing building, which I hope wills set the pace for other developments not only in the area but in Kampala and even Uganda as a whole. I know the pride that comes with having completed such a massive build for the initiators and implementors. The new 22-story structure has allowed the tax man to fold back all his offices from around the city back to the head office, a move they estimate will save them sh7b annually. Using simple math the sh140b will pay for itself in 20 years. The move is seen as precursor to a government move to build a ministerial compound in Bwebajja, where all ministries will be relocated sometime in the future. I have seen comments that such actions are evidence that...

NOT ONLY THE HARDWARE BUT THE SOFTWARE TOO

In the middle of September the United Nations released its annual Human Development Indicator (HDI). This index serves as an indicator of the quality of life of a country’s people by measuring the health, education, inequality, poverty and security standards. Aside from the statistical measures of development like GDP growth, this is obviously a better measure of how people are actually doing. In this year’s HDI report Uganda was ranked 162 out of 189 countries with a HDI score of 0.516. The index goes from zero to one, the nearer you are to one the better. Our score puts us in the low human development category. But as bad as that sounds we have been worse. In 1990, the earliest year that these figures were compiled our score was 0.311 even the UN recognises that we have improved 66 percent in the last three decades. According to the UN figures life expectancy has risen to 60.2 years   from 45.5 in 1990; expected years of schooling has doubled to 11.6 fr...

THE MUKWANO I KNEW

We have lost the greatest Ugandan entrepreneur of our time, Mr Amirali Karmali, more popularly known as Mzee Mukwano. I have known Mzee Mukwano for more than 40 years and most of what I am today is due to him. And I am not alone. "He has helped countless people through school – as he did me. Helped countless more in business – as he did me. And he has been a steadfast friend and source of support to countless more – as he was to me.... I first met Mukwano around about 1977. My mother was the secretary for the chief of operations at Uganda Airlines, a man I knew only as Hamid. Mukwano had come to charter the Uganda Airlines’ Hercules plane and I happened to be around the office then. He was a short man, an unassuming man, but clearly a serious businessman who would charter the plane to bring in goods that were in high demand here. He run a popular whole sale shop in Nakasero – Egesa Commercial Agencies, a beehive of activity and the go-to place for anythin...