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Micro-finance companies under big threat as banks raid their market

Commercial Micro-finance Limited (CMF) has been taken over by a recently licensed commercial bank, Global Trust Bank, in yet another buyout in the financial sector.

Global Trust Bank is owned by Industrial and General Insurance Company Limited (IGI), the Nigerian company that in 2005 acquired a 60% stake in the former state-owned National Insurance Corporation.
By acquiring 100% ownership of one of Uganda’s biggest micro-finance institutions, IGI seeks to expand its presence in Uganda’s competitive financial sector only three years after it bought into the country’s leading insurance company.

A source close to the deal said negotiations had been concluded and a formal function to announce the deal was expected soon. CMF would then be transformed into a commercial bank with new products by August and will trade as Global Trust Bank.

The sale of CMF, Uganda’s second largest credit institution in terms of assets and branch network, comes less than three months after Kenya’s Equity Bank bought Uganda’s biggest micro-finance company, Uganda Microfinance Limited. It also comes on the hills of a plan by the government to divest its entire stake in Pride Micro-finance Limited.

The sale of the three largest MDIs will punch holes in Uganda’s successful experiment that allows such financial institutions to accept deposits that they could lend to the low-end market borrowers. The World Bank, according to a senior banker in Uganda, has been studying Uganda’s micro-finance model with a view of introducing it to other developing countries to help mobilise savings and provide credit to poor people.

A top official of the Central Bank who did not want to be named said that Bank of Uganda—the industry regulator - had already approved Global Trust Bank’s acquisition of CMF.
Global Trust Bank, originally registered as Continental Trust Bank, is the 19th commercial bank in Uganda. Its entrance that comes shortly after two others—the United Bank of Africa (UBA) and Equity Bank - is likely to jolt Uganda’s already competitive banking sector with all players targeting the retail segment of the market.
With Global Trust Bank inheriting a network of about 14 interlinked branches and some ATM outlets, the battle for customers can, but only become stiff.

With two credit institutions bowing out and another about to go in another buyout, the rapid growth of the micro-finance sector appears to have been curtailed by the interest of commercial banks in micro-finance.
“It is going to be difficult for MDIs to operate because they borrow the money that they lend to their customers from commercial banks; yet banks can now lend to the same people at lower rates,” said a banker with Centenary Bank. 

Under the deal, CMF owners have sold off their entire shareholding to Global Trust Bank.
Patrick Bitature of Simba Telecom, Bob Kabonero of Kampala Casino and Frank Katusiime are some of the major shareholders of CMF.

The amount of money Global Trust Bank has paid to acquire CMF remains under wraps at this stage, but the price cannot exceed the value of the company’s assets with depreciation effect and its liabilities taken into account, according to a financial expert.

CMF’s books of accounts for the year ending December 2007 showed that the company had assets valued at Shs 33.2 billion—a 26% increase from the previous year. The company’s biggest assets are in property and equipment whose value depreciated from Shs 2.4 billion to Shs 2.2 billion, according to official figures.
CMF, which was incorporated in March 2000, is among the four credit institutions licensed by the Central Bank, under Tier II of the non-bank financial institution.

The buyout reduces to three, the number of credit institutions licensed by the Central Bank under this tier. The others are Post Bank, Mercantile Credit Bank, and Capital Finance Corporation Limited.

According to the Bank of Uganda official, Global Trust Bank has already complied with the statutory requirements to operate by depositing the mandatory Shs 4 billion minimum paid up capital. According to the law, this money would be used to pay off creditors in case the company goes bust. Global Trust Bank also intends to conform to the rules of maintaining a favourable amount of money for operations, which is 8% of the risk weighted asset. 

To Global Trust Bank’s disadvantage, however, it finds CMF grappling with a poor balance sheet—presenting a challenge of turning it around. With its financial might, this however poses little challenge, industry analysts said. According to CMF’s financial statement, the credit institution made a loss of Shs 193 million in 2007, an increase from the Shs 173 million loss in 2006.
CMF was also weighed down by a huge expense bill that went up from Shs 173.9 million in 2006 to Shs 193 million in 2007.

Customers however continued to show their loyalty by saving their money with CMF as deposits went up by 62% to Shs 20 billion. The company slashed the amount of loans it extended to customers by 11%.

Perhaps CMF’s move to shut out borrowers was driven by defaulters who left the institution battling with a huge backlog of bad loans. According to the company’s figures, CMF’s provision for bad loans and doubtful debts (credit that might not be recovered) grew from Shs 403 million in 2006 to Shs 1.7 billion in 2007.   Global Trust Bank’s entry underlines the growing interest of Nigerian financial institutions in Uganda’s financial sector.

Another Nigerian bank, the United Bank of Africa, launched operations in Uganda last year.
Africa’s largest oil producer experienced an unprecedented contraction of banks two years ago from 89 to 25 through mergers and acquisitions.

It is believed that these mergers have driven profits upwards. This in turn has enabled the profitable banks to seek to invest in new markets. Indeed, at least two more West African banks have declared intentions to invest in Uganda.

Nigeria’s Access Bank ACCE.LG recently acquired a 75% equity stake in Bancor Bank of Rwanda and 90% in Banque Privee du Congo in the Democratic Republic of Congo. It is believed that the acquisition of Rwanda’s 4th biggest bank in terms of customer deposits and branch network will provide a springboard for the bank’s expansion to Uganda and Tanzania. Analysts say that by venturing outside West Africa where they are dominant, Nigerian financial institutions are looking at Eastern and Southern Africa as the best place to invest some of their “huge” cash inflow from capital markets.

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