Presentation on theme: "World Bank/FSDT-Workshop on SME Financing"— Presentation transcript:
1 World Bank/FSDT-Workshop on SME Financing Leasing: The DFCU ExperienceMoses K. KibirigeExecutive Director, DFCU Ltd.-UgandaDelivered by Juma Kisaame - July 27th. Dar es Salaam-Tanzania
2 History of DFCU DFCU Founded in 1964 Survived the turmoil of the 70s and 80sUganda Leasing Co. established in 1994 (by DFCU,IFC,DEG,CDC and Nile Bank)July 1999 – acquired Uganda Leasing, became DFCU GroupSept 1999 – acquired 63% of Rwenzori Properties Ltd.May 2000 – acquired 100% of Gold Trust Bank, renamed DFCU BankListed on Uganda Stock Market in October 2004
3 Who we are Established 1964 Shareholders Include: CDC (60%) - Britain Norfund (10%) - NorwayNSSF (11%) – Uganda’s Pension Fund4,000 other Private & Institutional Shareholders (19%)Listed on the Uganda Securities Exchange,October 14th, 2004.Sound, reputable shareholders, good brand, sound track record and respectedShare price at listing shs.230/= October 2004Share price currently shs.400/= June 20074th. Largest bank group in Uganda
4 DFCU GROUP -FINANCIAL ENTITIES DFCU Bank100% subsidiaryLoans/ OverdraftsDeposit takingFinancial AdvisoryATMsInternational transfersTreasury servicesDFCU LtdHolding Co.Mortgage FinancingLong/ Medium term loansLeasing
5 STRENGHTHS OF DFCU GROUP Support from strong shareholdersGood Corporate GovernanceStrong Management TeamDiversified Product RangeRapid GrowthInnovative FundingHuman Resource DevelopmentListed on the Uganda Securities ExchangeDiversified Financial Institution-Bank and non Bank operations
6 IMPORTANCE OF SMES Private sector is key engine of development Majority of businesses are SMEs > 90%SMEs provide jobs through which people can acquire skills and raise income (50%)SMEs contribute 2/3 of national incomeStrong developmental impact - bottom upPowerful force for poverty reductionFoundation for a middle class
7 CHALLENGES OF FINANCING SMES Start ups with limited or no credit historyLack of suitable collateral – LEASING is appropriateUnder capitalizedCorporate GovernanceHigh costs of monitoringRed tape and regulation of businessFragile sector – informal, no strong voice, lack of sustainability/survival
8 OVERVIEW OF LEASING IN UGANDA Under developed – less than 1% market penetrationAccounts for 4.8% of total private sector creditCurrently with three players;East African Development Bank (Mkt Share 20%)DFCU Leasing (Mkt Share 45%)Stanbic Bank (Mkt share 30%)Uganda Microfinance Ltd. (MFI New entrant 5 %)Simple finance leases – ( 2- 5 yrs)Focus on SMEs - $5,000 - $500,000
9 ATTRIBUTES OF A LEASE Agreement between the lessor and the lessee. Lessor transfers the use (but not the ownership) of the asset to the lessee. Lessee compensates the lessor for the use of the asset, usually in the form of rent. After the pre-determined period of use (the lease term), which should not exceed the asset's economic life, the lessee returns the asset to the lessor or, depending on the arrangements, may have an option to purchase it or lease it for a secondary period at a lower rental.
10 Benefits of Leasing For Lessees Accessibility; especially to SME’s Minimal collateral - leased equipmentDuration - medium termAlternative source of financeMinimum capital outlayEasy budgeting.Rentals tailored to lessee cash flow (structured)Flexibility and process timeFunds usage - effective credit delivery
11 BENEFITS OF LEASING (cont’d) For the EconomyDeepening of domestic capital marketsSupports development of SMEs –GDP, Widens Tax BaseTechnology transfer- Increase productivityCreates employment opportunities, skills development, growth of service industries (mechanics, artisans).Increased access and usage of banking systems
12 Challenges of Leasing in Uganda/Africa 1. Enabling environment – Tax, Regulation and Legislation2.Court system improvement.3.Market awareness for leasing.4.Building capacity and local expertise in leasing.5.Suitable and appropriate funding-local currency with a long tenor6.SMEs – Quality, Size, Trustworthy and Management
13 DFCU LEASE FINANCE SME Finance Most DFCU Leases tend to be US $ 5,000 to US$ 500,000. The target sectors areMainstream economic sectors; Transport, Manufacturing, Construction, Agro-processing and value added exports.Education, Health and MFIs (wholesale lending & Support)Consumer Leases – individualsFinance and Operating LeaseInnovative Schemes
14 STRUCTURE OF A DFCU LEASE FACILITY Size of facility: between Ush 10 million and Ush 500 million. Transactions outside this range are considered on a case by case basisLease currency: UGX and/or US$.Repayment period: Normally between yearsCash collateral: deposit between 10-20% of amount financed.
15 STRUCTURE OF A DFCU LEASE FACILITY No grace period after commencement of the lease.Pre-delivery interest: Finance charges accruing between disbursement and delivery may be paid at the time of delivery or added to the cost price.Nature of equipment: durable and identifiable.Lessee identifies the asset(s)
16 STRUCTURE OF A DFCU LEASE FACILITY Title of ownership of the asset can pass to the lessee at the end of the lease period.Value Added Tax is not part of the amount financed.Maintenance is by the lessee at all times during the lease period. Assets is insured by the lessee at all times during the lease period.
17 Funding Lease Operations Funding sources;1. Lines of Credit-EIB, IFC, FMO, KfW etc.2.Borrowing from local financial institutions3. Cash guarantees from clients cash deposits.4.Donor grants – DFID, USAID, Shell FoundationOthers;Bonds, IPOs, and securitisation
18 Funding Challenges High cost of funds - Libor Inappropriate tenor Currency RestrictionsSector RestrictionBorrowers – SMEsBDS providersEconomy - statusEnvironmental Risk
19 Operational Efficiency Innovations introduced;1. Flexibility of Deals2. Upcountry branches3.Financing second hand Assets4.Leasing software – IT and MIS5.Cash deposit by clients6.Risk Management
20 SUCCESS OF THE DFCU MODEL Responsive to Small and Medium Enterprises (SME)Innovative products (harness supply chain)Leverage Donor FundsOperate profitably to attract FundingEconomies of scale – optimum sizeBuild local skills/expertiseInvestment in IT