Standard Chartered Bank Uganda has suffered setbacks in its foray into the country’s small to medium enterprises market with high default rates forcing the lender to raise credit provisions and review its growth strategy.

Anchored in quick turnaround times for loan applications, modest collateral requirements and large borrowing amounts, Stanchart’s aggressive SME strategy took the market by storm two years ago.

But insufficient knowledge about the country’s SME culture and the absence of a vibrant credit monitoring system for SME borrowers has worked against the lender, senior executives say.

Under this strategy, loan application processing times averaged less than 48 hours while maximum lending amounts stood at around Ush200 million ($68,000).

However, default rates recorded on SME loans have increased since 2013, leading to diminished interest incomes from this segment, stunted growth rates and a spike in overall credit provisions.

Insiders said almost 90 per cent of SME borrowers on its loan book have defaulted on loans since 2013. Total loan default costs increased by more than 100 per cent in 2012 from Ush7 billion ($2.3 million) to Ush47.7 billion ($16 million) in 2013, according to the bank’s statement of comprehensive income for the period ended December 2013.

While some borrowers reportedly diverted funds for personal use, others suffered severe shocks from delays in payments for goods and services supplied to the South Sudan government — a direct consequence of the conflict that broke out in December 2013.

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Though the bank’s net portfolio of SME loans could not be verified by press time, the increase in non-performing loans recorded in this segment drove its overall default rates to more than 10 per cent during 2014, according to Lamin Kemba Manjang, regional chief executive officer for Stanchart’s East African subsidiaries.

Rising default rates recorded in SME loans caused a sharp increase in bad loan provisions, which rose from Ush7 billion ($2.3 million) in 2012 to roughly Ush146 billion ($47.6 million) in 2013, according to the bank’s statement of comprehensive income for 2013. During the same period, credit default costs surged from Ush7 billion ($2.3 million) to Ush47.7 billion ($16 million).

The poor performance registered by SME borrowers has also affected major rivals like Stanbic Bank. Sources at the South African-controlled lender claim weak credit controls applied to the SME segment led to delays in detection of failing loans, with some distressed loans taking longer than three months to isolate during 2012.

Tackling the trend

In an attempt to tackle the trend, Stanchart has shifted its focus towards bridging knowledge gaps experienced in the past; establishing a credit monitoring system that tracks borrowers’ cash flows and flags sudden changes in transaction patterns and identifies hidden commercial risks among clients.

“The bank is adopting more effective ways of understanding SME clients and monitoring their transactions. The deployment of a robust surveillance system will assist us in detecting sudden changes in clients’ accounts, which will be referred to the risk management division for swift remedy,” said Mr Manjang.

Even though Standard Chartered Uganda’s 2014 results are yet to be released, analysts are predicting positive growth rates in interest incomes and loan recoveries but are pessimistic about movements in default expenses, mainly because of challenges faced by retail borrowers struggling to make ends meet under weak economic conditions.

While data on SME lending remains scanty, big banks appear determined to gain a foothold in this sector.

“The sector has a lot of untapped potential that suits the bank’s long term growth agenda,” said a source at Stanbic Uganda.
The use of strict credit-control tools has benefitted more experienced lenders in the SME segment, industry sources say.

“One of the locally owned banks applies strict collateral requirements on SMEs, which include taking an inventory of small assets like chairs, tables and electronics and this in turn, has reduced its credit default rates in that segment,” said Phillip Sendawula, a finance manager at Diamond Trust Bank Uganda Ltd.

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