A study conducted by the National Planning Authority (NPA) on Reducing the Cost of Credit in Uganda has recommended government to invest Shs2.5 Trillion in the 3 public banks in order to dominate the sector.
Government is the majority share holder in all its three banks with Housing Finance Bank (HFB) 51%, Pride Micro Finance (PMF) and Post Bank 100%.
According to the study, once government financial institutions dominate the sector which has been taken over by private players, the cost of credit will be easy to regulate and reduce.
“The government of Uganda needs to invest Shs 2.5 trillion in the Public Banking Institutions to achieve a market share of 20% in 7 years. This will strengthen the public banks to become market leaders and influence the lending culture and pricing in the industry,” reads part of the study report.
“Banking is all about sharing best practices and as market leaders, the private banks will adopt the successful best practices of the public banks,” it adds.
The study further highlighted how this money can be invested with Post Bank taking the lion share of Shs1.4Tn, PMF Shs733Bn and HFB Shs293Bn.
For Post Bank, Shs12Bn should be invested in Software for digitization, Shs360Bn in Recapitalisation, Shs1.05Bn in line with credit and Shs45Bn in PPE.
For PMF, Shs6Bn should be invested in Software for digitization, Shs180Bn in Recapitalisation, Shs525Bn in line with credit and Shs22Bn in PPE and lastly for PHFB, Shs2Bn should be invested in Software for digitization, Shs72Bn in Recapitalisation, Shs250Bn in line with credit and Shs9Bn in PPE.
“This total investment amount was allocated between the three public banks based on the expected impact on the economy by each bank. Factors considered include the market share (customers, revenue, & loan portfolio), NDP III allocation, and composition of its customer base,” it added.
Speaking at the dissemination of the findings at Serena Hotel in Kampala, Dr. Joseph Muvawala, the ED of NPA said that this shall reduce lending interest rates by 5% in seven years.
“Government investment is also projected to generate 55,000 new jobs, increase SME revenues by Shs1 trillion, increase the customers by 2.2 million, and the public bank’s loan portfolio is projected to grow from Shs1 trillion to 5.3 trillion in the same period,” Muvawala said.
Why Gov’t should invest in Public Banks
According to the study, the justification for government presence in the banking sector is to address persistent market failures, extend credit to sectors where the private sector is not investing, enforce economic development goals, and support countercyclical lending (increased lending when the economy is down).
“Among others, these important roles can be achieved by using public or state-owned banks as channels for implementing these government’s priorities,” it reads.
Such opportunities, however, the study says, are limited in Uganda because the country’s public banks are undercapitalized and too small to create the desired impact in the economy.
“This has resulted in an oligopolistic banking sector controlled by private and foreign owned banks which rightfully prioritise profitability by lending to lower-risk and high-returns sectors at the expense of NDP III priority sectors and charging premium interest rates as opposed to increasing the customer base.”
For comparison, the study says Uganda has invested the least in the public banks compared to other East African States.
Kenyan public banks have a market share of 22%, Tanzania is at 27%, while the Ugandan public banks share is only 7%.
“Increasing access to credit will require a significant change in Uganda’s lending culture to enforce lending to the majority in the country, prioritize national development and the best interest of the borrowers,” it reads.
Muvawala said that this will, however, require strengthening Uganda’s public banking institutions through government investment to become market leaders, and influence behavior and pricing in the industry.
“Results from an in-depth financial analysis on public banking in Uganda indicated that for government investment in the public banks to be effective in creating a ripple effect in the economy, the public banks should become market leaders and achieve a combined market share of 20% within seven years,” he said.
The targets for each public bank are to increase the market share by 13%, 3% and 4% for Post Bank, Pride Micro Finance, and Housing Finance Bank respectively within a seven-year period.
The target areas of focus at each bank will be lending to NDP III Priority sectors for Post Bank, group lending products through SACCOs and VSLA loans for Pride Micro Finance, and housing, urban infrastructure, and other infrastructural projects for Housing Finance Bank.
Adding: “For Post Bank achieving the 13% market share within seven years will require digital transformation of this bank and this would only be effective if Post Bank is converted into a Tier 1.”
Speaking at the function, Ramathan Ggoobi, the Permanent Secretary of the Ministry of Finance Planning and Economic Development commended NPA for commissioning this study which he said will help us address the first major constraint to do with the business.
“We are committed as the government to pursue a strategy in line with our debt sustainability strategy of conventional borrowing so that we reduce reliance on domestic borrowing,” he said.
“We hope that when we enhance the efforts towards export promotion and import substitution, we are likely to increase foreign currency inflows and reduce outflows,” he added.