Empowering entrepreneurs while enriching lives: An interview with EFC Uganda Ltd MD

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2019 was an eventful year for EFC Uganda Ltd. The MDI made progress on various fronts. In a conversation with Summit Consulting Ltd, Shem Kakembo, the Managing Director shares his excitement about EFC Uganda Ltd.’s future, explains the MDI’s interventions to cope with the shocks of the COVID-19 pandemic and its plans to support her clientele keep their businesses afloat.

  1. Who is Shem Kakembo? How did your early training and roles prepare you to win in your current job as MD EFC Uganda Ltd?

I started my career at Centenary Bank as a Management trainee. I then became an Accountant in the Accounts department.  After 2 ½ years at Centenary Bank, I joined Finance Trust Bank, then called Uganda Women Finance Trust as the Chief Financial Officer. I helped in the transformation of the entity from a non-regulated to a regulated institution. I was later promoted to deputy CEO.

An exciting opportunity came up with World Vision International to work in their local MFI now called Vision Fund. I doubled as the Finance Manager for MedNet and Senior Financial Specialist for Africa at World Vision International’s Vision Fund supervising CFOs across the continent. It was quite an interesting piece of work. It took me around many of Africa’s capitals –  understanding how microfinance is done in various countries in Africa.

EFC Uganda Ltd, Executive Committee

I was then transferred to Rwanda as the CEO of Vision Finance Company, one of the World Vision microfinance institutions. I headed the Institution for four years leading its transformation into a profitable organisation.

I was then posted to Indonesia for two years. I left Indonesia, returned to Kampala, and joined Stanbic Bank Uganda Ltd as the Head of Customer channels. These detailed customer touchpoints i.e. branches, ATMs, online, Call Centre etc. We undertook several projects at Stanbic Bank. The most critical one was improving customer experience and bending the cost curve in terms of managing branches. Other things included digitalizing the bank, rationalizing the branch network which included among others merging or closing less efficient branches.

I was later promoted to Head Personal Markets (Retail). This was my most previous job before I joined EFC Uganda Ltd in April 2018 as the Managing Director to help turn around the institution.

  1. What would you say are the top two challenges you inherited at EFC Uganda? Why do you say so? How did you address them?

We have invested significantly in improving the capacity and capabilities of our people and improved the control environment substantially. EFC Uganda Ltd has been in the market since 2012. Unfortunately, the institution did not post profits till 2019. The main promoter of EFC Uganda Ltd is a Canadian financial services group called DID. They partnered with Uganda Gatsby Trust, an outfit out of Makerere University Faculty of Technology. In 2013, we were joined by other investment partners namely Afric Invest, Oxfam Novib, ASN Bank, Bambo Finance, and the Belgian Investment Organisation (BIO).

We applied for an MDI license which was granted in November 2013 and we are therefore supervised by BOU.

  1. Which opportunities do you see in the financial services industry? How are you taping into them?

We are a unique player in the market. We focus exclusively on the SMEs. This means that at EFC we do not do consumer lending i.e. salary loans. We lend to entrepreneurs. These are the backbone of the economy, and play a critical role in job creation. On the deposit side, we pretty much accept everybody.

  1. In 2019, EFC Uganda Ltd broke even reporting a profit of Ugx574M after five (5) years of loss-making, what did you do differently?

EFC Uganda Ltd had achieved significant growth even in its formative years. In March 2018, the shareholders recapitalized the institution with a UGX 9 Bn injection. We were able to leverage the capital boost. The capital injection came at the appropriate time.

To turn around the Institution, we had to focus on a couple of things. Key among were;

i). Process transformation:– ensuring that the customer experience is smooth and convenient.  We improved significantly on time around time. We engaged Microserve Consulting for a detailed and deeper understanding of the product outlay. They also helped us complete process mapping across the organization.

ii). People:- with a focus on talent especially the middle and tactical management. The objective was to improve sales run rates.  We grew the portfolio to Ugx21bn by the end of 2018 and improved the quality of the portfolio substantially. We reduced the loss over the years from Ugx 2.5bn in 2017 to Ugx 1.6bn in 2018 and by 2019, we were able to break even posting a net profit of UGX574M that year. This was as a result of the huge investment in the loan portfolio.

The key distinction between us and our peers in the industry is we are a secured lender. The financial services industry, dominated by the large players has tended to ignore the SMEs. This is because there is a lack of understanding of Uganda’s SME segment. The SME segment has poor record-keeping practices, no clear separation of roles and something we commonly refer to as key man risk. For a large bank where the risk appetite is driven at the headquarters maybe Singapore or even London, it is very hard to understand such entrepreneurs in the SME and to take a substantial risk on them.

A significant chunk of SMEs prefers money lenders to banks and MDIs. The money lenders bring one advantage to the table – turn around time (TAT). An SME entrepreneur will walk into the money lender’s office at 9:00 AM and walk away with Ugx100M at 9:30 AM. Both sides walk away happy. Each of their expectations has been fulfilled. If the same SME entrepreneur goes to a commercial bank, it might take days if not weeks to have their loan approved. That is the kind of market EFC is playing, and we are set to understand it. We want to improve TAT. Today, we process a loan within four business days that is if the SME has good records. Taken together, we are averaging seven days. This is how we are able to win the market share of the competition.

  1. The banking industry has seen margins come under pressure following the crises of recent years. How does EFC Uganda Ltd intend to achieve growth amidst the current pressures and challenges?

The players in Tier 3 have a different pricing regime from Tier 1 and Tier 2 banks. For example, in Tier 3, we rarely use factors like prime lending rates.

We have product-based pricing. In microfinance, there is the graduation principle. Interest rates keep declining to depend on the number of times you have taken and paid on the previous loans. The pricing does not tend to be pegged to the CBR. We can therefore have a fairly stable pricing regime.

Microfinance pricing is higher than commercial bank pricing. We take on higher risks. We deal with very risky customers, hence the premium pricing on the loans.  We assess the risk embedded in a particular product and in turn the risk on the particular customer we are lending to.

Our focus on SMEs is delivering results. We continued to grow despite the COVID-19 pandemic. At the onset of the lockdown in early April 2020, we offered moratoriums to about 50% of the loan portfolio. Our approval rate was about 95% of the clients who requested a moratorium. We were one of the very first institutions to offer moratoriums because we understood that our customers were under lockdown with limited cashflows.

Charles W. Nalyaali, Board Chairperson

This coupled with the fact that we are a secured lender, the customers have since returned the favour. After the lockdown, we saw collections improving substantially from August to October 2020.

Our monthly collection pre-covid was about Ugx4.2bn. During the four months of lockdown, the amount came down to about Ugx400m. This would have led to substantial liquidity pressure but was negated by the fact that lending operations had slowed down so whatever came in was enough to run the organization. We are also grateful to the board for their decision not lay off or even reduce salaries for staff during the lockdown. Loan repayments are now back to near pre-covid levels and we believe that our financials will be slightly different from our peers.

To achieve growth, we will continue to focus on customer experience and improving the capability of our talent. We will build additional digital capability. The MDI undertook a massive investment in a new core banking platform to digitalize operations.

  1. 39% of EFC Uganda Ltd’s assets are invested in loans & advances specifically to the SME segment, yet it’s considered a very risky segment. How do minimize credit risk management in terms of portfolio mix?

It was imperative to invest in our loan portfolio. We can afford to have a more heightened risk appetite. Once you invest a lot in the loan portfolio, you have little left for other earning assets. We decided to invest a significant chunk of the balance sheet in the loan portfolio targeting SMEs.

As we continued to grow, our capital ratios come under pressure. In early 2020, we engaged a transaction adviser for a new round of equity investment into EFC. We anticipate by end of 2020, we may have 2 or 3 additional investors injecting about US$6m.

Given the niche market that we are targeting, we took another decision to upgrade the license. We have applied to the Bank of Uganda for a Tier 2 license. With this license and the new equity investments, EFC will be heavily capitalized.

  1. EFC’s cost to income ratio stands at 93.8%, above the average industry at 83%. What is EFC Uganda Ltd Management doing to overcome this challenge?

For 2018, 2019, and 2020, we have focused substantially on bending the cost curve. Sometimes, cutting costs could mean you are not investing enough in the business. For our case, it’s different. The huge investment in the new core banking platform will give us the springboard for the future. We have cut our coat according to the cloth. We will be running a more efficient organization.  For 2020, we project to come down to 75%. As we scale, we will see the cost to income ratios drop down further.

  1. IFRS9 is said to have hit hard many financial institutions in Uganda. What’s been the experience at EFC Uganda Ltd?

The Central Bank issued a Circular at the end of June 2020 with guidance on the implementation of IFRS9 on financial instruments. In reading that circular, the spirit of the Central Bank is advising the Supervised Financials to be prudent with respect to their capital. Before covid, if a loan was restructured and the client failed to meet their obligations, it would be 100% provided for. The guideline relaxed some of those regulations around loan restructuring.

We will see an increase in IFRS9 provisioning across most financial institutions. For EFC particularly, we will see possibly double in provisions due to the impact of COVID-19. But thanks to the growth we have achieved in 2020. We will still report a higher profit after tax  (PAT) than in 2019.

  1. EFC Uganda Ltd made a write-off of Ugx871M and Ugx441M in 2018 and 2019 respectively. How does the MDI absorb such shocks on the loan book?

Write-offs speak to the quality of the underwriting in the organization. We reduced the write-off in 2019 because of improvement in the quality of our underwriting and the fact that we are a secured lender offering short term facilities. Our maximum loan period is 60 months.

It was quite exciting for us to see the loan portfolio grow up to Ugx 39bn in 2019 from Ugx 21bn in 2018. This was also a result of substantial investment in our people.

For 2020, we could see another write off of about Ugx 400m. However, this will not tell the full story. As part of the COVID-19 credit relief measures, the Central Bank extended the time limit in which a facility is supposed to be written. Since April 2020, financial institutions will not make write-offs until the end of the year. This speaks to the impact of COVID-19. We will see the impact of the pandemic unwind for 3-5 years. For MDIs, the full impact will probably be felt by the end of 2022 due to the short term nature of facilities.

  1. Do manual processes account for the biggest percentage of the high cost to income ratio at EFC Uganda Ltd. What is the MDI’s strategic plan on digital service delivery?

Part of our strategy is to digitalize the lending operations to get the lending time to two  (2) days. At this rate, even the money lenders will be significantly threatened. The entrepreneur has to make a judgment call – do I go to the moneylender and pay 15% per month or go to EFC Uganda Ltd and pay 25% per annum? We can now begin to charge a premium for our services.

By Q4 2021, we will be landing a digital lending capability via an App for EFC. The App will be integrated to support SMEs in accounting and record-keeping. It will use Artificial Intelligence capabilities to guide the SMEs on stock purchases, invoice settling, and when to get extra capital for their business needs. The customers will be able to run their business better.

By Q1 2021, our loan officers will have an app on their tablets for loan assessment. This will reduce manual paperwork. The loan officers will collect Know Your Customer details, which will be uploaded and processed in the back office. The App will enable credit risk assessment to determine how much we can offer to the entrepreneur.

How does EFC Uganda Ltd promote local content in terms of Managerial posting?

From the onset, EFC ran a management contract DID, the Canadian financial services group. The Executive Committee of the Management team were expatriates ie the Managing Director, Executive Director, Chief Commercial Officer, and Chief Financial Officer. That contract ended in 2017, and the Board decided it was time to have local management.

At Top Management, we have locals running the organization. We have a few foreigners at the Board level to protect the interests of shareholders.

  1. What would be your advice to a new chief executive officer in your kind of industry?

Focus on the people. Gone are the days when a loan used to be a privilege. The customers are savvy and have lots of options at their disposal. Your staff must articulate the business environment to provide relevant services. The talent will influence the customer experience.

Digitalise to minimise risks embedded in the manual process and strengthen the control environment.

Thanks for your insights

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