Providing financial intermediation to the informal sector is a key but largely ignored aspect of banking in Ghana. Now UT Bank is using its unique business model to fill this crucial gap and showing the rest of the industry how to do it, reports TOMA IMIRHE
Barely a decade ago, the thousands of small and medium sized enterprises scattered around Ghana, had nowhere to go to get formal finance from the banking sector and so were left in the main to informal sector loan-sharks, whose loans were woefully inadequate, and even when available, were too brief in tenor and inordinately expensive. Over the past ten years though; the situation has changed significantly.
An array of micro-finance institutions have emerged, offering financing terms that are better than those of the informal lenders, but not nearly as good as those offered by banks themselves. Increasingly however, Ghana’s banks are beginning to look at SMEs as a new and very prospective business segment.
In the past the banks have ignored the SME sector for good reason. Small enterprises tend to be owner-managed, either sole proprietorships, partnerships or family-run. Thus they lack managerial capacity, just as they are deficient of equity capital. The result is poor financial management making them very risky loan prospects and this has been evidenced by the inordinately high loan default rate of the SME sector.
Thus for most banks that now seek to bank SMEs, it is because increased competition in the banking industry has forced them to look down-market for new business and this has been done with varying degrees of success. The banks that have done best in this regard are mainly the indigenous ones who understand the impact of social and cultural influences on SME entrepreneurship.
uniBank and Fidelity Bank for instance have done very well in this regard, as did the erstwhile The Trust Bank which earlier this year was merged with Ecobank. The foreign banks are trying their hands too. International Commercial Bank regards SMEs as its primary target clientele and even the big ones like Standard Chartered and Barclays Bank have started banking SMEs too.
But easily the most successful lender to micro and small sized enterprises has to be UT Bank, whose expertise and experience in this area stems from UT Financial Services which until its merger with the bank was certainly the most successful lender to the informal sector. Now UT Bank itself has inherited that mantle, having adapted UT Financial Services unique business model to Ghana’s universal banking sector.
It is that unique business model that has made the difference; simply put UT Bank conducts its operations in significantly different ways from the rest of the banking industry. And the rest of the industry would do well to learn just how UT Bank goes about its business and then emulate it, in their financial intermediation with SMEs and micro-entrepreneurs.
UT Bank’s successes in this regard makes its being voted Bank of the Year for 2011 arguably the most poignant selection in the decade long history of the Ghana Banking Awards. SMEs account for about 80% of employment in Ghana and two-thirds of the country’s Gross Domestic Product. They also present the greatest growth potentials and the lowest end of this business segment micro-enterprises, are growing even faster. Indeed UT Bank’s spectacular financial success since re-inventing the troubled foreign bank, Metropolitan and Allied Bank, from which it evolved, derives from its unparalleled ability to tap into the growth potentials of these customer segments which again makes its being voted Best Bank in Financial Performance, so relevant.
UT Bank claims to be the bank for real people and this tag is indeed justified by the fact that its customer-proposition best fits the informal sector which most Ghanaians are in.
The key difference between UT Bank and the other banks in Ghana is its very customer base. While the bank inherited the usual mid and down market type of customer base, the erstwhile UT Financial Services, which then merged with it, brought with it a lower end market segment than what any of the banks had tried to deal with. Being the smallest enterprises able to access formal financial intermediation they also have the highest growth potentials, albeit with the biggest lending risks.
But, unlike the other banks, UT has developed innovative ways and means to ameliorate those risks and thus unleash those growth potentials. As the banking industry in Ghana expands it would do well to adopt UT’s ways which are designed in response to the peculiarities of this target market, rather than traditional banking processes and procedures. This is combined with the quality of modern banking, such as IT driven products and services, that the universal banking industry can achieve but which other financial intermediation institutions such as rural banks and non-bank lenders cannot.
Key to UT’s success in banking SMEs is its rapid response to requests. UT Bank has continued UT Financial Services standard of taking decisions on loan requests within 48 hours of the loan being requested. This is not just about pleasing customers; there is a much more practical reason behind it.
“Small businesses and enterprises tend to get business opportunities which are not open for long because the sector is very fragmented and therefore there is a lot of competition to exploit those opportunities as they arise” explains Prince Kofi Amoabeng, co-founder of the UT Group and Chief Executive of UT Bank. “So when they need a loan to take advantage of such opportunities when they arise and they do not get it quickly the opportunity is taken away. So when they eventually get the money it goes into something else, often something that will not generate the income to repay the loan, as considered in the original loan due diligence.”
Now the bank has even gone one step further and introduced a new product called FON4Loan whereby a customer can start the loan application process by telephone.
Then there is the matter of pricing. While the erstwhile MAB, from which UT Bank evolved, conformed to the rest of the universal banking industry’s interest rates, UT Financial Services had employed an interest rate structure whereby rates on investments (it was not a licenced deposit – taker when UT Financial Services) had to be high enough to attract investors and therefore lending rates had to be much higher than what the banks charged because of the higher cost of funds and also the higher risk levels involved in lending to the informal sector.
Since the merger with UT Financial Services, UT Bank has retained an elements of each interest rate structure; close to the universal banking structure, but high enough to cover both the extra risk of lending to SMEs on the lending side, and to encourage small depositors who do not have the clout to negotiate fixed investment rates on the deposit side.
This has worked eminently. SME borrowers with high growth rates or high value added business transactions to conduct have been willing to pay a little extra interest to get the loans denied them by other banks and more speedily too. And these loans are funded by depositors who can enjoy interest even on their current account balances and the credit balances on their e-zwich electronic payment card balances, which other banks are unwilling to give.
Related to this is a more realistic approach to risk management than other banks apply. For instance collateral security is very well documented, removing the ambiguities that often prevent other banks from applying their execution in the event of loan default. Also, better loan monitoring is engaged, such as ensuring that borrowers give addresses than can be easily traced, a crucial factor in a country where proper residential and office address systems are not in place.
Where loan defaults do occur, UT Bank applies a more aggressive approach to debt recovery than other banks, often employing the services of its sibling company, UT Collections, which is renowned for its enthusiasm in going after recalcitrant borrowers. UT has been criticized over this but its chieftains correctly point out that its first obligation is to the depositors that have entrusted their savings and investments with it, ahead of borrowers who fail to pay up. Importantly though, wherever the bank encounters a borrower with genuine financial difficulties, rather than just reluctance to bite the bullet and pay up, the bank is willing to work out a mutually agreeable and practicable accommodation through rescheduling, and even new lending to such a borrower.
Ultimately, though UT Bank’s success derives not just from having the right policies and procedures, but from ensuring that they are always followed without fail. Even, the bank’s biggest shareholders within management, the two founding owners of the UT Group adhere to those policies and procedures all the time setting an example of self-discipline that every other shareholder and member of staff therefore has to follow.
UT Bank’s act will be hard to follow. It is now being armed with new capital from the International Finance Corporation and DEG, the German finance corporation, which is making it stronger than ever, giving it core capital well in excess of the new GH¢60 million statutory minimum.
Branchless banking, through an array of electronic banking products, is making its products and services available to micro-entrepreneurs and SMEs even in places where it does not have branches. And perhaps most importantly, its reputation as Ghana’s Best Bank will attract more and more customers, depositors and borrowers alike, who are now aware that UT Bank is not only one with a more realistic approach to banking in the peculiarities of the Ghanaian environment, but is also the bank that its customers, as well as industry analysts regard as providing the best value for money products and services as well.
Barely a decade ago, the thousands of small and medium sized enterprises scattered around Ghana, had nowhere to go to get formal finance from the banking sector and so were left in the main to informal sector loan-sharks, whose loans were woefully inadequate, and even when available, were too brief in tenor and inordinately expensive. Over the past ten years though; the situation has changed significantly.
An array of micro-finance institutions have emerged, offering financing terms that are better than those of the informal lenders, but not nearly as good as those offered by banks themselves. Increasingly however, Ghana’s banks are beginning to look at SMEs as a new and very prospective business segment.
In the past the banks have ignored the SME sector for good reason. Small enterprises tend to be owner-managed, either sole proprietorships, partnerships or family-run. Thus they lack managerial capacity, just as they are deficient of equity capital. The result is poor financial management making them very risky loan prospects and this has been evidenced by the inordinately high loan default rate of the SME sector.
Thus for most banks that now seek to bank SMEs, it is because increased competition in the banking industry has forced them to look down-market for new business and this has been done with varying degrees of success. The banks that have done best in this regard are mainly the indigenous ones who understand the impact of social and cultural influences on SME entrepreneurship.
uniBank and Fidelity Bank for instance have done very well in this regard, as did the erstwhile The Trust Bank which earlier this year was merged with Ecobank. The foreign banks are trying their hands too. International Commercial Bank regards SMEs as its primary target clientele and even the big ones like Standard Chartered and Barclays Bank have started banking SMEs too.
But easily the most successful lender to micro and small sized enterprises has to be UT Bank, whose expertise and experience in this area stems from UT Financial Services which until its merger with the bank was certainly the most successful lender to the informal sector. Now UT Bank itself has inherited that mantle, having adapted UT Financial Services unique business model to Ghana’s universal banking sector.
It is that unique business model that has made the difference; simply put UT Bank conducts its operations in significantly different ways from the rest of the banking industry. And the rest of the industry would do well to learn just how UT Bank goes about its business and then emulate it, in their financial intermediation with SMEs and micro-entrepreneurs.
UT Bank’s successes in this regard makes its being voted Bank of the Year for 2011 arguably the most poignant selection in the decade long history of the Ghana Banking Awards. SMEs account for about 80% of employment in Ghana and two-thirds of the country’s Gross Domestic Product. They also present the greatest growth potentials and the lowest end of this business segment micro-enterprises, are growing even faster. Indeed UT Bank’s spectacular financial success since re-inventing the troubled foreign bank, Metropolitan and Allied Bank, from which it evolved, derives from its unparalleled ability to tap into the growth potentials of these customer segments which again makes its being voted Best Bank in Financial Performance, so relevant.
UT Bank claims to be the bank for real people and this tag is indeed justified by the fact that its customer-proposition best fits the informal sector which most Ghanaians are in.
The key difference between UT Bank and the other banks in Ghana is its very customer base. While the bank inherited the usual mid and down market type of customer base, the erstwhile UT Financial Services, which then merged with it, brought with it a lower end market segment than what any of the banks had tried to deal with. Being the smallest enterprises able to access formal financial intermediation they also have the highest growth potentials, albeit with the biggest lending risks.
But, unlike the other banks, UT has developed innovative ways and means to ameliorate those risks and thus unleash those growth potentials. As the banking industry in Ghana expands it would do well to adopt UT’s ways which are designed in response to the peculiarities of this target market, rather than traditional banking processes and procedures. This is combined with the quality of modern banking, such as IT driven products and services, that the universal banking industry can achieve but which other financial intermediation institutions such as rural banks and non-bank lenders cannot.
Key to UT’s success in banking SMEs is its rapid response to requests. UT Bank has continued UT Financial Services standard of taking decisions on loan requests within 48 hours of the loan being requested. This is not just about pleasing customers; there is a much more practical reason behind it.
“Small businesses and enterprises tend to get business opportunities which are not open for long because the sector is very fragmented and therefore there is a lot of competition to exploit those opportunities as they arise” explains Prince Kofi Amoabeng, co-founder of the UT Group and Chief Executive of UT Bank. “So when they need a loan to take advantage of such opportunities when they arise and they do not get it quickly the opportunity is taken away. So when they eventually get the money it goes into something else, often something that will not generate the income to repay the loan, as considered in the original loan due diligence.”
Now the bank has even gone one step further and introduced a new product called FON4Loan whereby a customer can start the loan application process by telephone.
Then there is the matter of pricing. While the erstwhile MAB, from which UT Bank evolved, conformed to the rest of the universal banking industry’s interest rates, UT Financial Services had employed an interest rate structure whereby rates on investments (it was not a licenced deposit – taker when UT Financial Services) had to be high enough to attract investors and therefore lending rates had to be much higher than what the banks charged because of the higher cost of funds and also the higher risk levels involved in lending to the informal sector.
Since the merger with UT Financial Services, UT Bank has retained an elements of each interest rate structure; close to the universal banking structure, but high enough to cover both the extra risk of lending to SMEs on the lending side, and to encourage small depositors who do not have the clout to negotiate fixed investment rates on the deposit side.
This has worked eminently. SME borrowers with high growth rates or high value added business transactions to conduct have been willing to pay a little extra interest to get the loans denied them by other banks and more speedily too. And these loans are funded by depositors who can enjoy interest even on their current account balances and the credit balances on their e-zwich electronic payment card balances, which other banks are unwilling to give.
Related to this is a more realistic approach to risk management than other banks apply. For instance collateral security is very well documented, removing the ambiguities that often prevent other banks from applying their execution in the event of loan default. Also, better loan monitoring is engaged, such as ensuring that borrowers give addresses than can be easily traced, a crucial factor in a country where proper residential and office address systems are not in place.
Where loan defaults do occur, UT Bank applies a more aggressive approach to debt recovery than other banks, often employing the services of its sibling company, UT Collections, which is renowned for its enthusiasm in going after recalcitrant borrowers. UT has been criticized over this but its chieftains correctly point out that its first obligation is to the depositors that have entrusted their savings and investments with it, ahead of borrowers who fail to pay up. Importantly though, wherever the bank encounters a borrower with genuine financial difficulties, rather than just reluctance to bite the bullet and pay up, the bank is willing to work out a mutually agreeable and practicable accommodation through rescheduling, and even new lending to such a borrower.
Ultimately, though UT Bank’s success derives not just from having the right policies and procedures, but from ensuring that they are always followed without fail. Even, the bank’s biggest shareholders within management, the two founding owners of the UT Group adhere to those policies and procedures all the time setting an example of self-discipline that every other shareholder and member of staff therefore has to follow.
UT Bank’s act will be hard to follow. It is now being armed with new capital from the International Finance Corporation and DEG, the German finance corporation, which is making it stronger than ever, giving it core capital well in excess of the new GH¢60 million statutory minimum.
Branchless banking, through an array of electronic banking products, is making its products and services available to micro-entrepreneurs and SMEs even in places where it does not have branches. And perhaps most importantly, its reputation as Ghana’s Best Bank will attract more and more customers, depositors and borrowers alike, who are now aware that UT Bank is not only one with a more realistic approach to banking in the peculiarities of the Ghanaian environment, but is also the bank that its customers, as well as industry analysts regard as providing the best value for money products and services as well.
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