Bankers’ Chairman lays out strategy for greater stability

July 18, 2018 in Business, Finance, Financial Services, Policy by Editor

July 18, 2018—Patrick Mweheire, the current Chairman of the Uganda Bankers Association (UBA) and Chief Executive of Stanbic Bank Uganda Limited, has said linking financial institutions to sustainable supply chains is one way to ensure stability in Uganda’s banking industry.

Below is his speech to the 2018 UBA Conference officially opened by the Prime Minister, Dr. Ruhakana Rugunda on Tuesday this week.

On behalf of the Uganda Bankers Association, I welcome you all to the Annual Bankers Conference 2018.I thank you all for honouring our invitation and putting everything else aside to be here in person.

In a special way, I would like to convey our gratitude to the Prime Minister and Leader of Government Business for accepting to grace our conference with his presence. I also take this opportunity to welcome the Honourable Minister for Finance (Matia Kasaija) and Governor Bank of Uganda (Prof. Emmanuel Tumusiime Mutebile) for joining us at this event.

I want to recognise the presence of Mr Raghav Prasad, MasterCard’s Division President for Sub Saharan Africa as a special guest of the Uganda Bankers Association. Mr Prasad, your physical presence here demonstrates the value you attach to this gathering and MasterCard’s commitment to the goals of our partnership.

I want to thank all our sponsors who have joined hands with us to host this conference. I also wish to extend our gratitude to all the resource persons going to make presentations at the conference and all the authors of the various knowledge pieces in the conference magazine you have on your tables. It’s only through your contributions that a conference can be successful.

 Conference Background

The Annual Bankers Conference is key engagement in our annual calendar that gives us the opportunity to reflect on the sector issues, trends and developments as well as dialogue with various stakeholders on how these issues impact the economy.

In 2017, our theme was ‘The Future of Banking’ and not only did we deliberate on what the future would look like, but also dwelt on drivers of that future.

Building on last year’s theme, our theme for 2018 is ‘Financial Sector Stability: Managing Risk in Growing and Fast Changing Environment’, because when we assessed the key drivers last year, it was obvious that these drivers could be disruptive to many traditional business models, customer needs will keep changing and that the various enablers will make these changes happen very fast.

Financial sector risk has evolved tremendously over the years and continues to change and crystalise from different angles. Owing to the important role that the banking and overall financial sector plays in any modern economy, stability of the sector therefore becomes a key conversation.

The banking sector in this part of the world and in Uganda in particular is currently operating in a challenging environment of high cost to income ratios estimated at 60.1 pc (2017), low coverage and penetration among the bankable population, increasing regulatory requirements and a population hungry for alternatives.

Uganda’s GDP growth rates while on the upward trend from 3.9 percent in 2016/17, to now just under 6 percent in 2017/2018 still requires significant expansion of the economic base from which growth can be derived, as well as building safeguards to withstand shocks from time to time.

It is our intention therefore to use this conference to unpack these realities the financial sector is faced with, but more importantly discuss overall economic growth in a stable environment.

Initiatives by the banking sector

Already as a sector and arising from last year’s conference, we are taking steps to review our cost structures and instead put in place strategies to rationalize resources, leverage shared infrastructure to expand our outreach and penetration and harness benefits that arise from economies of scale which can then be passed on to customers through lower transaction costs.

We are structuring more collaborations with several partners like Fintechs, the Financial Sector Deepening Unit, GIZ, aBi Trust, NITA Uganda, Institution of Surveyors and Valuers, Uganda Law Society, Thomson Reuters and MasterCard among others to build synergies for alternative and cost-effective service delivery.

We call upon all of you to join us in this journey and business model to achieve a much bigger impact.

Gratitude to Government

We want to thank the Government of Uganda for various policy and legal frameworks that have enabled the financial sector register various milestones including legislative and governance frameworks that addressed money laundering and financing of terrorism concerns previously listed as grey. These milestones facilitate growth and advancement of the sector and facilitate more collaboration with more financial markets across the world.

Selected concerns to the banking sector that impact the economy

Rt. Hon Prime Minister and distinguished participants let me however use this occasion to draw your attention to some issues of concern to the banking sector that by extension impact the rest of the economy.

The pressure to extend and enable, access, penetration and reach of banking and financial services to the wider population remains a high-ranking priority.

This position was reinforced by the launch of the national financial inclusion strategy in October 2017, however the fiscal policy directions and signals we have observed since then, could put to risk the aims and reverse the gains achieved from the various combined initiatives being implemented by different partners to achieve financial inclusion and instead reinforce the cost barriers that this strategy was meant to address in the first place. Such un-intended consequences work against our overall common goals.

Regarding infrastructure development, which the banks heavily support, there are specific fiscal policies that risk not only making delivery of projects much more expensive, but are heavily constraining contractors particularly large infrastructure projects based upfront cash flow requirements for stamp duty on bonds and guarantees.

This requirement is not applied in the case of insurance bonds meaning the banking sector is made uncompetitive even when we are keen to support such projects. This matter has been severally discussed with concerned parties with no progress, yet its impact to the economy is huge.

The choice of priorities of Government expenditure and allocation of resources therefore is another concern area for banks.

The banking sector has several borrowers with significant loan exposure due to delayed or non-payment for their services to Government. As result of this, non-performing loans arising from non-settlement of Government arrears has had a bearing on bank non-performing loans.  NPLs can impact interest rates upwards as pricing for risk. This constrains lending appetite, and private sector credit which in turn affects trade and economic growth, since Government is the largest business driver.

Bank appetite for use of the Agricultural Credit Facility (ACF) has also been impacted because banks have yet to benefit fully from the 50 pc guarantee to claim recoveries, simply because of the new and burdensome approval process for write off/claims, yet an MOU was in existence when we started the scheme. As a result, banks have had to carry 100 pc risk on the ACF.

The above trends if combined with the challenges of delayed resolution of recovery cases in the commercial courts for reasons ranging from case backlog to shortage of judges risks crippling banks through capital impairment. Absence of credit growth in the banking system can be a big limiting factor to the growth of any economy.

Linked to the above challenges is the need to support to growth of the agriculture sector. The agriculture sector contributes about 70 pc of Uganda employment, 50 pc of exports and a 100 pc food production increase will be required in to feed the 2050 population. Investment in agriculture sector is critical for driving Uganda economic growth. The issues of food security, increased poverty and overall imbalanced development of agriculture-dependent economies have highlighted the urgent need for development in that sector.

This can be supported through focusing on three main work areas:
• Building capacity of the agribusiness clients through incubator trainings
• Linking financial institutions to sustainable supply chains: promoting access to finance for stakeholders along sustainable supply chains; and
• Linking insurance to agro-finance: bringing insurance products to address production and revenue risks, through the Uganda insurance commission.

Sustainability and growth of the banking sector is built on information security, confidentiality, privacy and resilience in the face of shocks.

Banks are also increasingly depending on ICT and digital platforms to drive their day to day operations the same way other sectors in the economy are adapting to technologically driven platforms including social media. There has however been a slow pace in progressing important pieces of legislation related to Data Privacy and protection. These delays risk exposing financial institutions to legal challenges and loss of customer confidence if they do not feel adequately safeguarded in terms of information risk.

Rt. Hon Prime Minister Sir, the attraction of foreign direct investment is an important growth strategy for any economy. The strategy is typically reinforced with stability signals like adherence to contractual obligations, security of investments, monetary and fiscal policies and overall recourse frameworks. In the recent past, the banking sector has noted statements and events in the market touching sectors like the electricity and telecoms including a security raid of a data centre.

The manner in which some of these actions are undertaken could impact confidence levels and send discouraging signals to long term capital markets and investors globally. They levy of 20% withholding tax on financial investment instruments, which is not in harmony with rates in this sub-region is another tax regime that discourages investors from subscribing to instruments in Uganda.

In addition to this, double taxation agreements are not being properly adhered to. The tax is being charged to some investors who are domiciled in exempted and/or lower tax rated countries. This is despite the fact that Uganda Revenue Authority has issued communication to the effect that entities domiciled in countries where Uganda has executed double taxation agreements, the tax is only taxed in the country of residence.

These signals impact on the flow of foreign direct investment inflows, country credit ratings and overall attractiveness of a country as an investment destination. Our global competitiveness ranking has lately declined from 113 in 2016/17 to 122 out of 190 economies in the 2017/18 financial year.

In the absence of a strong private sector coupled with weak export earnings, growth in an economy may be constrained and the usual first signals are volatility of exchange rates, imported inflation, and large forex loan exposures & risks therein when converted to local currency.

The above are just but some of the banking sector concerns at a macroeconomic level that have a bearing to economic and business risk. There are other risks at a micro level that we will discuss in the course of the conference.

In conclusion

The proceedings today have been structured to enable us to cover the key focal points and it is our hope that the subject matter experts and all conference participants will do justice to the topics to be discussed.

Let this conference continue to be a lighthouse for all of us and provide us with a framework for regular dialogue and knowledge sharing with stakeholders for the growth & development of our economy.

Once again you are most welcome and we look forward to a very resourceful conference.  Thank you.