Presentation on theme: "1 Centenary Banks Challenges in Moving Up-Market into SME Lending June 26 th – 27 th 2007 at Dar es Salaam Presentation by John R. Giles Managing Director."— Presentation transcript:
1 Centenary Banks Challenges in Moving Up-Market into SME Lending June 26 th – 27 th 2007 at Dar es Salaam Presentation by John R. Giles Managing Director
2 Presentation Topics: Overview: Uganda (Slide 3) Overview: Ugandas Financial Sector (Slide 4) Moving Up-Market or Down-Market – does it matter? (slide 5) Mission & Vision of Centenary Bank (slide 6) Centenarys Loan Products (slide 7 & 8) Why Centenary bank moved into SME/Commercial lending: A short history of Centenary Bank (slide 9,10,11, & 12) Current Loan Portfolio and Deposit Dilemma (slide 13 & 14) Challenges in moving Up-Market into SME lending (slide 15 & 16) Summary (slide 17)
3 Overview: Uganda Population = approx 30 million (13 million adult) Location = north of Lake Victoria, between Kenya and Dem. Rep. Congo. Total GDP Growth = 5.1% Annual underlying inflation (2006) = 9.8% Agriculture = 80% of economic activity Major Export = Coffee Challenges: Energy Shortfall Poor infrastructure Budget is heavily reliant on Donors (42%) Corruption and Governance
5 Moving Up-market into SME lending: Does it matter whether SME loans are a Down- market product or an Up-market product for your bank? From Centenary Banks experience, the answer to that question is definitely YES! There are significant challenges in moving Up- Market into SME and Commercial lending. Lets look at Centenarys operational history and experiences:
6 The Mission & Vision of Centenary Bank: Mission: To provide appropriate financial services, especially Microfinance, to all people in Uganda, particularly in rural areas, in a sustainable manner. The Bank was created as a finance institution to serve the economically disadvantaged people, especially in rural areas, and contribute to the overall economic development of the country. However, to reduce business risk, the bank has, over time. diversified its activities to include lending to small and medium enterprises as well as to large corporations, in order to provide services to sectors that are complimentary to our target market and customers. Although Centenary Bank is a licensed full-service commercial bank, it can be (and often is), described as a Commercial Micro Bank.
7 How does Centenary Bank Classify its Loans? Loan Types*UgxUSD (@1,666 Ugx per $1) Micro Enterprise (includes smallholder agricultural) 100,000 to 5 million$60 to $3,000 Small Enterprise5 million to 15 million$3,001 to $9,000 Medium Enterprise 15 million to 100 million $9,001 to $60,000 Corporate ClientsOver 100 million$60,001 and above * Does not include: Salaried Workers Loans, Staff loans, Home Improvement loans, MFI loans
8 Centenarys Loan products: Micro & Small Enterprise ($60 to $9,000) SME & Commercial ($9,000 to $60,000) Term1 year; can be up to 2 yearsUp to 5 years SecurityMovable; immovable; personal guarantees; legal perfection Immovable (FSV over 100% coverage); personal guarantees; legal perfection Business1 yr experience (no start-ups); within 30 km of branch Assessment Criteria Household repayment capacity (not restricted to financed business); character of borrower Household repayment capacity (not restricted to financed business); character of borrower; audited financial statements if over $30,000 RateFixed (declining balance); plus 2% per mo. monitoring fee for first 3 loans; reducing to.5% mo. PRIME+ (declining balance); grace periods available depending on use of funds Fees$3 application fee; 2% Commitment fee; life insurance
9 Why did Centenary Bank move into SME and Commercial Lending? Not in its mission statement Was it a deliberate decision? Has Centenary reached scale in SME lending, and if not, why not? Lets take a brief look at the history of the bank:
10 A short history of Centenary Bank: YearProfit (Loss)Accumulated Losses 1989(4.4 m) 19901.7 m(2.7 m) 19911.0 m(1.7 m) 1992(275 m)(277 m) Consultants from several agencies brought in to save the bank; additional shareholders with similar vision & mission invited to invest. In 1993 the Trust was transformed into a Commercial Bank 1993(1.4 bn)(1.6 bn) 1994(376 m)(2.0 bn)
11 A short history of Centenary Bank: YearDepositsLoansCash & Invest Loan / Dep Profits 19958.5 bn5.8 bn1.4 bn67%325 m 199610.8 bn6.3 bn2.2 bn58%300 m 199714.0 bn8.8 bn3.6 bn63%260 m 199820.1 bn11.5 bn9.0 bn57%1.0 bn 199940.5 bn15.9 bn26.6 bn39%1.4 bn 200051.5 bn18.2 bn36.4 bn35%3.0 bn 200168.5 bn23.9 bn53.4 bn35%3.2 bn
12 A short history of Centenary Bank: YearDepositsLoansCash & Invest Loan / Dep Profits 200051.5 bn18.2 bn36.4 bn35%3.0 bn 200168.5 bn23.9 bn53.4 bn35%3.2 bn 200291.6 bn42.8 bn56.5 bn47%3.1 bn 2003115.0 bn66.4 bn58.6 bn58%4.7 bn 2004142.8 bn77.0 bn77.9 bn54%7.5 bn 2005179.0 bn93.5 bn107.5 bn52%5.3 bn 2006215.1 bn144.8 bn100.9 bn67%8.6 bn May 2007 230 bn167 bn73%
13 Centenary Banks Current Loan Portfolio: Loan Types*Average $No. of Loans / % Total $PAR Micro Enterprise ($60 to $3000) $55039,300 (52%) $21.6 m (22%) 2.63 Other Loan Types (Salary, HIL, Staff) $1,33032,500 (43%) $43.2 m (44%).7 Small Enterprise ($3,001 to $9,000) $4,0002,700 (3.6%) $10.6 m (11%) 1.24 Medium Enterprise ($9,001 to $60,000) $15,525876 (1.2%) $13.6 m (14%) 1.04 Corporate Clients ($60,001 and above) $150,00056 (.2%) $8.4 m (9%) 25.6 TOTAL Portfolio$1,29275,400$97.4 m3.39
14 Centenary Banks Deposit Dilemma: Ugx# Accounts % of TotalBalances% of Total 0 to 10,000 (USD $6) 224,000 40% 75% 94 % 1.4 bn< 1% 3.5 % 20 % 10,001 to 100,000 (USD $60) 196,000 35% 6.1 bn3% 100,000 to 1 m (USD $600) 105,700 19% 35 bn16% 1 m to 5 m (USD $3,000) 25,500 4.5% 6%173 bn 80% 5 m to 100 m (USD $60,000) 6,700 1.3% Over 100 m 109.03% TOTAL558,009100215 bn100
15 Centenarys challenges in moving up- market: External Challenges: Competing with better-known banks for prime borrowers (some new applicants are the other banks cast-offs) Dealing with new (and unknown) customers (see above) Need to spread the word and change perceptions Need to convince customers of capacity Corporate borrowers need full range of corporate services Commercial banks coming down-market are competing for our traditional customers that we migrated upwards
16 Centenarys challenges in moving up- market: Internal Challenges: Loan Officer Skill-set is different than MF lending Ability to analyze financial statements More complex cash flow and turn-over analysis Longer-term SME loans being supported from a short-term deposit base (Our savings accounts = 71% of our deposits, compared to industry average of 18%) Resistance from Loan Officers to graduate MF customers to SME (loss of incentives) Approval at Head Office = delays Board resistance to abandonment of core market
17 Centenarys challenges in moving up- market: IN SUMMARY: If you are successful in overcoming the internal and external challenges of going Up-Market, and your SME lending begins to accelerate, then you have a new challenge: DEPOSIT MOBILIZATION in an environment where there is a mismatch in funding sources: A bank with a Microfinance background has a large number of small balance accounts (poor peoples money) that are now funding a loan portfolio with a much higher fund- absorption rate. This is where the down-market vs. up-market difference becomes a major issue.
18 Centenarys challenges in moving up- market: Thank You.