By Prof. Waswa Balunywa

On January 30, I was talking to the CEOs of Insurance companies in Uganda about the managing change in their industry. What I had read to prepare for my presentation, I looked at the PriceWaterhousecoppers report for the Insurance industry globally for 2013.

Prof. Waswa Balunywa
Prof. Waswa Balunywa

The report had predicted risk, talent, motor industry and general economic conditions as the drivers of change in the coming years including 2014. While these were global drivers of change in the sector, they were to some point appropriate for the Ugandan Insurance Industry.

As a developing country with about 90% of the population outside mainstream economics, 80% of the population involved in agricultural production, the sector has challenges of bringing that part of the population into the mainstream economics to that extent, the drivers of change in the Ugandan insurance sector include the changes in those factors. Nonetheless, the sector has been growing with a large number of players joining the industry. This is a normal occurance in any industry. As the industry grows, it attracts startups. As one researcher said, fools rush in as they see the sector grow. The rush is to capitalize on the high margins that are typical in a new or high growth industry. But this profitability attracts more and more players and the longer they stay in the industry, the harder it is for those who can’t manage their operation efficiency. These are the high cost producers or those that have to give a high dividend to their shareholders.

Competition reduces margins and the weak players are shaken out. Those with cost advantage or niches stay in the market and make a profit. This is typical in any industry. There is always a shakeout as margins drop. This shakeout especially in an industry where exit barriers are high does not lie in business closure but in mergers and acquisitions. Those with stay in power take on those who are struggling. Small companies by global standards lie BMW who have a niche could afford to buy British Motor Vehichle companies. The British Mini was brought by the German BMW.

The huge companies like Microsoft swallowed small companies like Hotmail to enable them consolidate their position in the industry.  This is likely to happen in the banking and insurance sectors in Uganda. As margins dry up, there will be mergers and consolidation.

The following article however reveals an interesting trend. Technology is the primary driver and enabler of change. Mobile technology has been changing things globally and in the developing countriies, it is redefining banking. The telecommunication companies like MTN are collecting more money than banks and yet they are not in the banking business. It is not surprising therefor if MTN will become the biggest bank in the country. Can MTN abandon its cash cow, mobile telephony and grow into the darkness of areas where it has no expertise. In this world, anything can happen. Enjoy the article below;

MTN could be the shark that eats up small banks

It was one of those rare cocktails that a company had thrown at the Kampala Serena hotel poolside – dull and hardly anything to write home about.

The conversation with Gary Watson, the former boss at African Alliance Uganda, was interesting though. This was around 2006.

Over glasses of wine, we talked about the stock market and all. Gary then asked me what I thought was a trick question: “What do you think will be the biggest bank in 10 years?”

I thought the answer was simple. From the Serena poolside, you can see at least two big banks – Stanbic and Barclays. So, I shot off quickly. Stanbic. Gary said no! Barclays?

He insisted it was not the answer either. I must have whispered Standard Chartered before Gary interrupted. “Think,” he implored me.

Worried that I would give a silly answer, I gave in and told him I did not know the answer. Gary then pointed at what he believed would be the biggest bank in a decade. The building was the MTN towers, which is sandwiched between Stanbic and Barclays along Hannington road.

I had interviewed Gary a few months earlier, after African Alliance had set up shop here, and was promoting then a rare product called Unit Trusts. I had no doubt he was a brilliant man. But for a brief moment after he pointed me to the MTN towers, I thought he had had enough to drink for the night.

Gary had got wind of Safaricom’s M-Pesa, a money transfer service in Kenya, which was set to kick off some sort of revolution in their economy. MTN would follow up on that in 2008. The rest, as they say, is history.

Today, you can practically pay for anything over the mobile phone – from settling your electricity dues, borrowing money, to paying a police fine!

That builds into a bigger question: will MTN make it to become the biggest bank in Gary’s target year of 2016? And what does that mean for the banking industry?

I thought about Gary in light of Nigeria’s GTBank’s takeover of Fina bank and the fact that we have 26 banks in Uganda, too many if you ask me. How do banks like GT intend to make money in this country? How do they intend to survive the mobile money onslaught? How about the competition among the banks?

There are at least two factors that should partly explain the entry of new banks and the perseverance of those that have been around but are not making money. Oil and the East African integration!

It is a long way before Uganda produces its first barrel of oil, probably sometime in 2020 or 2021. Few banks can wait that long. Perhaps, it is only those banks that can arrange fairly large loan sizes, $2m – $5m and above, that are likely to benefit from the oil, which will spur economic growth. The East African integration is moving so fast with retail giants such as Uchumi and Nakumatt expanding aggressively. But that’s just about it.

So, what makes banks think they can make money in Uganda? It is high time we thought deeper about laundered money. Corruption remains rampant in Uganda, and banks offer some bit of glue in the flow of stolen funds from public coffers.

Uganda also has a number of companies with jurisdictions in tax havens. These companies are the masters of moving money around as they skirt taxmen, with, again, banks playing a key role in making it possible.

So many dubious NGOs have been formed, simply to steal from unsuspecting donors. The money comes through banks. For how long will this go on?

As global pressure builds up, with donors and the public demanding for more accountability, banks are likely to find it difficult to tap into these funds. Banks will still make some money through offering credit to a growing middle-class, but there is little evidence to suggest that the risks in the market have declined, with bad loans still a little high.

Pension firms will also probably be looking to channelling funds to the private sector, while investment clubs will grow too, and possibly lend out money too. The regulator could raise the minimum capital requirements, putting more pressure on smaller banks.

And then, of course, technology will play a role. Going to banking halls will be left to those who need to make large purchases. Ultimately, the market will turn to mergers and acquisitions. Big banks could swallow up small banks. It will be survival for the fittest.

MTN, might not be your conventional bank, but it accounts for the biggest amount of money transactions, and is making it hard for some banks to make money. Gary could have been right.

Prof. Waswa Balunywa is the Principal of Makerere University Business School. This post first appeared on his personal blog.