High interest rates a risk to growth

Tuesday October 27 2015

High interest rates, if prolonged, will have

High interest rates, if prolonged, will have diverse impact on the economy and could reverse the current gains in the banking industry. 

By Mark Keith Muhumuza

Do you think you are the choice for this job?
Definitely yes! I have been part of the Bank of Africa growth and I am fortunate that I have an understanding of the particular levers driving the creation of value to our stakeholders.
Secondary, I fully recognise that I am taking charge of an organisation that is comprised of a new fascinating generation that is more forward-looking and extremely innovative. They are more digitally native, more multi-faceted and are eager to have authority and ability to organise their work. In many ways, I identify with this generation and I feel that I am suited to harness optimal value from it.

How do you plan to keep Bank of Africa profitable at a time when technology appears to be a threat?
My role is to work with my team so we can be able to continuously transform and stay relevant to clients, employees and the public, through use of technology.
We already understand how integration of our operations with technology can help us to be relatively differentiated and competitive. This is evidenced by some of our innovations in the marketplace.

But also one of the competitive advantages is we are a bank with an indigenous history - started by Ugandans in 1985, but also now part of a bigger Pan African banking group – Bank of Africa Group, which is itself a subsidiary of Moroccan BMCE Bank with a total asset base of more than $30b and present in 30 African countries, Europe, Asia, and North America.
The performance of the bank has been mixed in terms profits. Profitable 2011 and 2012, then a blip in 2013 and then profitable in 2014. What are you going to do to ensure the bank remains profitable?
It is worth noting that Bank of Africa - Uganda’s annual return on equity over the last twelve years has averaged 21n per cent which is significantly above the country’s average annual headline inflation rate of 8.8 per cent over the same period. This achievement should by no means be taken for granted as it indicates the bank’s inherent agility that enables it to preserve and grow shareholder value in real terms over time.

Naturally, the economy, the banking industry, and as such the bank, may experience cycles of growth and decline over time. It is simply because these cycles have no more severely been evident than in the last five years that their impact on corporate profits has been noticeable to the public, which, in part, explains the recent fascination with bank performance.

The dynamics of the marketplace will continually change; however, my role is ensuring that the changes impact on the bank’s profitability. This will involve maintaining due care and skill in assessing what kind of business opportunities we can be part of as we carry out our intermediation mandate, through gradual adjustments in risk appetite.
To achieve this, we shall make sure that we identify, develop, and retain talent through careful recruitment as well as motivating individuals to perform and succeed in challenging roles that are aligned to the bank’s strategic goals.

What are your thoughts on the outlook of the banking sector?
As is the case in most African economies currently, the high interest rate environment has the potential to limit the number of credit worthy opportunities. Consequently, bank balance sheets are likely to see a shift towards investments in the risk-free and reasonably yielding government securities, further reinforcing the ‘crowding out’ effect to private sector credit.

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If this phenomenon is prolonged, it may pause downside risks to economic growth since the alternative avenues of raising domestic capital are still expensive and Uganda still has a low savings culture.
However, there are signs of gradual improvements that mitigate prolonged high financing costs including the introduction of the national IDs to reduce the cost of due diligence on customers, better client coverage and behavioral analysis, widening the range of assets acceptable as collateral through the chattels securities bill, liberalising the pension sector, and improved bank due diligence processes that may result into lower cost of risk.

Market insights
Arthur Isiko bank of Africa managing director
Background. The father of two was early this month appointed the new Bank of Africa managing director. Isiko is a certified public accountant who holds an MBA from the University of Warwick and Bachelors Accounting from Makerere University. He has previously worked at PricewaterhouseCoopers before being appointed the Bank of Africa executive director in 2010. He has also served in different capacities at the bank.

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