Transcript Document 7672464

Centenary Bank’s Challenges in
Moving “Up-Market” into SME
Lending
June 26th – 27th 2007 at Dar es Salaam
Presentation by
John R. Giles
Managing Director
1
Presentation Topics:
Overview: Uganda (Slide 3)
Overview: Uganda’s Financial Sector (Slide 4)
Moving “Up-Market” or “Down-Market” – does it matter?
(slide 5)
Mission & Vision of Centenary Bank (slide 6)
Centenary’s Loan Products (slide 7 & 8)
Why Centenary bank moved into SME/Commercial
lending:
1.
2.
3.
4.
5.
6.

7.
8.
9.
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)
2
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:
1.
2.
3.
4.
5.
6.
7.




Energy Shortfall
Poor infrastructure
Budget is heavily reliant on Donors (42%)
Corruption and Governance
3
Overview: Uganda Financial Sector
Regulated Commercial banks = 15

146 branches; 12 sub-branches; 5 agencies

$1.9 billion deposits (61% Demand; 21% Time; 18%
Savings)

$1 billion Loans & Overdrafts

Loan-to-deposit ratio = 52.5%
Regulated Microfinance Deposit-taking Institutions (MDI’s) =
4

$13.7 million total deposits

$45.4 million in Loans
Where Ugandans (adult population) Save:

BoU Regulated = 21% (Urban = 35%; Rural = 15%)

MFI’s / NGO’s = 2%

SACCO’s = 2%

Informal groups = 17%

None = 58%
4
Moving “Up-market” into SME lending:
Does it matter whether SME loans are a “Downmarket” product or an “Up-market” product for
your bank?
From Centenary Bank’s experience, the answer to
that question is definitely “YES!”
There are significant challenges in moving “UpMarket” into SME and Commercial lending.
Let’s look at Centenary’s operational history and
experiences:
5
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.”
6
How does Centenary Bank Classify its
Loans?
Loan Types*
Ugx
Micro Enterprise
100,000 to 5 million
$60 to $3,000
Small Enterprise
5 million to 15 million
$3,001 to $9,000
Medium
Enterprise
15 million to 100
million
$9,001 to
$60,000
Corporate Clients
Over 100 million
$60,001 and
above
(includes smallholder
agricultural)
USD
(@1,666 Ugx per $1)
* Does not include: Salaried Worker’s Loans, Staff loans, Home
Improvement loans, MFI loans
7
Centenary’s Loan products:
Micro & Small Enterprise
($60 to $9,000)
SME & Commercial
($9,000 to $60,000)
Term
1 year; can be up to 2 years
Up to 5 years
Security
Movable; immovable; personal
guarantees; legal perfection
Immovable (FSV over 100% coverage);
personal guarantees; legal perfection
Business
1 yr experience (no start-ups);
within 30 km of branch
1 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
Rate
Fixed (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
$3 application fee; 2% Commitment
fee; life insurance
8
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?
Let’s take a brief look at the history of the
bank:
9
A short history of Centenary Bank:
Year
Profit (Loss)
1989
Accumulated Losses
(4.4 m)
1990
1.7 m
(2.7 m)
1991
1.0 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)
10
A short history of Centenary Bank:
Year
Deposits
Loans
Cash &
Invest
Loan /
Dep
Profits
1995
8.5 bn
5.8 bn
1.4 bn
67%
325 m
1996
10.8 bn
6.3 bn
2.2 bn
58%
300 m
1997
14.0 bn
8.8 bn
3.6 bn
63%
260 m
1998
20.1 bn
11.5 bn
9.0 bn
57%
1.0 bn
1999
40.5 bn
15.9 bn
26.6 bn
39%
1.4 bn
2000
51.5 bn
18.2 bn
36.4 bn
35%
3.0 bn
2001
68.5 bn
23.9 bn
53.4 bn
35%
3.2 bn
11
A short history of Centenary Bank:
Year
Deposits
Loans
Cash &
Invest
Loan /
Dep
Profits
2000
51.5 bn
18.2 bn
36.4 bn
35%
3.0 bn
2001
68.5 bn
23.9 bn
53.4 bn
35%
3.2 bn
2002
91.6 bn
42.8 bn
56.5 bn
47%
3.1 bn
2003
115.0 bn
66.4 bn
58.6 bn
58%
4.7 bn
2004
142.8 bn
77.0 bn
77.9 bn
54%
7.5 bn
2005
179.0 bn
93.5 bn
107.5 bn
52%
5.3 bn
2006
215.1 bn
144.8 bn
100.9 bn
67%
8.6 bn
May 2007
230 bn
167 bn
73%
12
Centenary Bank’s Current Loan Portfolio:
Loan Types*
Average $
No. of Loans
/%
Total $
PAR
Micro Enterprise
$550
39,300
$21.6 m
2.63
($60 to $3000)
(52%)
(22%)
Other Loan Types
$1,330
32,500
$43.2 m
.7
Small Enterprise
$4,000
2,700
$10.6 m
1.24
Medium Enterprise
$15,525
876
$13.6 m
1.04
Corporate Clients
$150,000
56
$8.4 m
25.6
TOTAL Portfolio
$1,292
75,400
$97.4 m
3.39
(Salary, HIL, Staff)
($3,001 to $9,000)
($9,001 to $60,000)
($60,001 and above)
(43%)
(3.6%)
(1.2%)
(.2%)
(44%)
(11%)
(14%)
(9%)
13
Centenary Bank’s Deposit Dilemma:
Ugx
0 to 10,000
(USD $6)
#
Accounts
% of Total
224,000 40%
10,001 to 100,000
196,000 35%
100,000 to 1 m
105,700 19%
(USD $60)
(USD $600)
1 m to 5 m
25,500
4.5%
5 m to 100 m
6,700
1.3%
(USD $3,000)
(USD $60,000)
Over 100 m
109
.03%
TOTAL
558,009
100
75%
6%
Balances
94
%
1.4 bn
% of Total
<
1%
6.1 bn
3%
35 bn
16%
173 bn
215 bn
3.5
%
20
%
80%
100
14
Centenary’s challenges in moving “upmarket”:
External Challenges:

Competing with better-known banks for prime
borrowers (some new applicants are the other
bank’s ‘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
15
Centenary’s challenges in moving “upmarket”:
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
16
Centenary’s challenges in moving “upmarket”:
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 people’s money) that are
now funding a loan portfolio with a much higher fundabsorption rate.
This is where the ‘down-market’ vs. ‘up-market’ difference
becomes a major issue.
17
Centenary’s challenges in moving “upmarket”:
Thank You.
18