Uganda’s microfinance sector spreading out

Saturday February 08 2014

Microfinance services in Africa have enjoyed massive growth among rural, low end clients like this maize farmer. Photo/FILE

The recent acquisition of Micro Uganda by Letshego Holdings of Botswana, coming on the back of micro-lender Finance Trust getting a commercial banking licence in November last year, backs an emerging trend towards consolidation in the country’s microfinance sector.

Analysts attribute Letshego’s acquisition to Botswana’s Public Pension Fund, a big shareholder with deep pockets.

The Fund owns 90 per cent of listed shares on the country’s stock exchange, and its assets grew to roughly $3.6 billion in 2012. Letshego also acquired Micro Africa Ltd of Rwanda last year.

Whereas money lending institutions are excluded from tight supervision that is applied to deposit-taking ones, lack of access to cheap deposits has led to high funding costs and lending rates.

Lending rates charged by money lenders have averaged 20-36 per cent per month compared with those of commercial banks, that fell to 22.5 per cent in December 2013.

This poses a threat to the former, eager to compete against big banks for middle class and low end clients that have exhibited high demand for credit in the past few years, observers say.


Besides tapping into cheap deposits, the takeover deal is expected to widen Letshego’s product portfolio through the provision of microfinance services, a segment that has enjoyed massive growth among rural, low end clients in Africa.

“Buying into a microfinance operation will help the company diversify its products into the fast growing micro lending market. Besides, transforming into a deposit-taking institution is the ultimate goal for money lenders seeking strong long term growth,” said David Ofungi, the regional executive director for East Africa at Blue Financial Services, a money lending firm that targets government employees.


But sources at Bank of Uganda (BoU) sound pessimistic about Letshego’s venture into the microfinance market.

“The move will not help Letshego’s ambitions of becoming a deposit- taking institution because of unfriendly credit policies applied by several money lenders — which conflict with our supervision standards. This situation is likely to affect some clients of the former Micro Uganda in the short term. However, consolidation trends anticipated in the banking sector might not affect overall penetration of the banking sector due to the potential impact of agency banking services that are provided for in proposed amendments to the Financial Institutions Act of 2004,” said  Benedict Sekabira, BoU’s director for commercial banking.

Finance Trust’s decision to venture into commercial banking is mainly attributed to the entry of an American investor in its boardroom in 2013. Details about this investor remain unclear.

As of December 2011, Uganda Women Finance Trust held the majority shares of 29.8 per cent followed by Oikocredit of the Netherlands with 24.1 per cent among others, according to online sources.

By close of December 2013, the lender’s total assets stood at Ush91 billion ($36.4 million) while its loan portfolio was valued at Ush58 billion ($23.2 million). Total customer deposits stood at Ush43 billion ($17.2 million) and its retail network comprised of 32 branches during the same period.

Though Finance Trust’s potential to compete against peers in the micro finance segment looks big, banking executives feel its entry might erode some players’ market share without generating new business opportunities.

“That bank is likely to eat into Centenary’s base that is driven by low end clients, who take small loans. But heated competition could force it into ‘poaching’ high end and middle class customers from established rivals in order to boost revenues. This approach benefits individual players but does not yield strong future growth for the industry,” argued Phillip Sendawula, a finance manager at Diamond Trust Bank Uganda.