Regulated Institutions Highlights
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Bank of Uganda Chapter Two Regulated Institutions Highlights 39 2.1 Centenary Bank’s Agriculture Lending: 1 The Story A Centenary Bank client Section 1 Mission of Centenary Bank Introduction The Mission of the Bank is to provide Centenary Bank Ltd was started as an appropriate financial services, especially initiative of the Uganda Lay Apostolate microfinance, to all people in Uganda, in 1983 in conjunction with the Catholic particularly to those in rural areas, in a Church Authorities in Uganda. It began sustainable manner and in accordance with as a microfinance trust to provide a range the law. of financial services to the rural poor, so as to contribute to the overall economic In more detail, the main objective of development of the country. Centenary Centenary Bank is to promote and enhance Bank was subsequently licensed as a full development in Uganda through providing service commercial bank in 1993 with just secure savings facilities, together with loans 8 branches. Its target clients include among for farming, small-scale industries, fishing, others, economically active rural micro- processing of agricultural products and other entrepreneurs and smallholder farmers. income generating activities. These groups were historically under-served by traditional commercial banks.2 1 Author: Abdul Kyanika Nsibambi, Manager of Agricultural Lending in Centenary Bank Head Office Credit. 2 Ref: Sekamwa, Irene ‘Trends in Agricultural Finance in 2008’ pp. 48-50 in Roberts and Ocaya, (Eds.) Agricultural Finance Year Book 2008, Bank of Uganda and Plan for Modernization of Agriculture, Kampala 40 Figure 1 Ownership of Centenary Bank gulated Institutions Highlights Re Chapter 2 Catholic Dioceses 38.5% Uganda Catholic Secretariat 31.3% SIDI 11.6% Stitchting Hivos-Triodos 18.3% Individual 0.3 Section 2 in agriculture. The commercial production of a number of crops in the mountains Agricultural Lending in and also cereals on the flat plain created a Centenary Bank suitable environment for the product.The overall strategy was to provide agricultural The success in agricultural lending in financing to smallholder farmers involved Centenary Bank is entirely attributable in livestock and crop production for to the innovative approaches employed. commercial purposes. In pursuance of its mission, five years after its inception, the Bank developed in One year after the introduction of the 1998 an appropriate agricultural lending product the Bank faced its first challenge methodology that enabled it to lend to - low prices of vegetables due to a bumper smallholder farmers in Uganda. harvest. This resulted in high default rates which at some time stood at 50 percent for Introduction of agricultural some loan officers’ portfolios. lending in Centenary Bank Some causes of poor The Bank piloted agricultural lending from performance: its Mbale branch. Mbale was chosen because of its location near the fertile volcanic soils 1. Poor loan appraisals due to inexperienced of Mt. Elgon, an area that usually enjoys officers and rough terrain. The officers reliable rainfall. The Bank started with only also were not sufficiently conversant with four agricultural loan officers, all graduates the area to enable them to screen their clientele very well. 41 2. Poor credit culture by clients who always has 36 branches, 71 ATMs, and 3 lending thought that any form of credit to farmers offices, making it the biggest locally-owned is like a gift. bank. Centenary currently has a total loan asset portfolio of USD 174 million, 3. The poor terrain in some parts of the which comprises predominantly loans of a area made recovery very difficult because microfinance nature. The agricultural loan of inaccessibility. The locals used this portfolio makes up 15 percent of the total mountainous terrain to their advantage to portfolio as at the end of 2009, but the Bank’s hide from loan officers. target is to see this grow to 20 percent, giving room for growth. The Bank has continued A year later the Bank embarked on tough to expand its deposit base and now has recovery procedures, which sent a warning approximately one million depositors. signal to other clients that the loan funds were not handouts from Government or Centenary has one of the highest numbers donor agencies. The Bank also employed of banking customers in the industry. Its more agricultural loan officers to assist in popularity is due to its good branch network, recovery and also to expand the product to coupled with low bank charges and flexibility other branches. in credit services. Although handling a wide range of people and firms, it particularly Implementation of this policy was the turning appeals more to low income folk, who form point for the product. Agricultural lending the majority of its clientele. started spreading slowly but surely to other branches. The Bank now has more than With its low ledger fees and payment of 100 well-qualified agricultural loan officers. interest on savings accounts, the Bank sets Agricultural lending is operational in all out to attract depositors. The Bank has branches in the country and indeed is one of Uganda’s lowest ATM withdrawal charge of the major products for branches upcountry. UGX 300 compared to others which range These depend heavily on agricultural from UGX 600-7003. Its micro loans are activities. The inclusion of agriculture has charged monthly interest of 1.83 percent also enabled Centenary Bank to operate on the reducing principal balance, making profitable and self-sustaining rural branches it much cheaper than most Ugandan MFIs, in remote areas like Kapchorwa, which were Moreover, repayment schedules are flexible traditionally unbanked, without relying on and geared to expected cash flow. a clientele comprising salaried or business clients. Customer deposits, which consist of Current Accounts, Saving Accounts and Time Performance of Centenary Bank Deposits, make up the Bank’s chief source of funding (ref: Centenary Bank Annual Centenary Bank is one of the fastest growing Report 2009). financial institutions in Uganda. It currently 3 Editors’ Note: It is understood that as of 2011, a number of Financial Institutions have scrapped their ATM charges 42 Figure 2 Centenary Bank Branch Network Kitgum Arua gulated Institutions Highlights Gulu Re Nebbi Lira Chapter 2 Masindi Soroti Kapchorwa Hoima Mbale Wobulenzi Bugiri Kiboga Jinja Kyenjojo Wakiso Tororo Fort Portal Mubende Kasese Mukono Mityana KAMPALA Namirembe Road Masaka Corporate Branch Ishaka Entebbe Road (Headquaters) Bwaise Ibanda Nateete Kyotera Rukungiri Mbarara Nyungamo Kabale 43 Figure 3 Centenary Bank Financial Performance 600,000 500,000 400,000 300,000 200,000 100,000 0 2002 2003 2004 2005 2006 2007 2008 2009 Gross Loans Deposits Total assets Section 3 • Aggressive strategy of the Bank in opening branches in rural areas. Specialized staff Expansion of the Agricultural in agricultural lending; Portfolio • Appropriate agricultural lending practices Since its inception in 1998, though facing which include among others, specialized some tough times in the beginning, as agricultural loan products targeting all explained above, the Bank’s Agricultural activities along the value chain. Loan Portfolio has been growing very • Willingness to innovate; this is covered in steadily. This has been entirely attributed to greater detail in the section that follows. the Bank’s mission and focus - extending financial services to people in rural areas, • Between 1999 and 2001, the agricultural where the majority are farmers. loan portfolio trebled from UGX 324m to UGX 1.1billion, with over 1,800 clients. In Agricultural lending is one of the major 2000, the program was rolled out to other sectors for financing in the Bank’s Business branches with the support of a guarantee Plan and the portfolio continues to grow. As from ACDI/VOCA. Since then the mentioned earlier, the target for agricultural agricultural portfolio has steadily grown loans is 20 percent of the total loan portfolio. and is now (end 2010) estimated to be Features of Centenary Bank that will assist it UGX 60 billion3. in reaching this goal include: 3 Ref: Roberts & Ocaya, (Eds.) 2008 Agricultural Finance Year Book 2007, Bank of Uganda and Plan for Modernization of Agriculture, Kampala 44 Figure 4 Agricultural Growth Trends to Date Agricultural Loans 60,000 50,000 40,000 gulated Institutions Highlights Re 30,000 20,000 Chapter 2 10,000 2002 2003 2004 2005 2006 2007 2008 2009/10 Not published The Bank relies on interest income on loans other farmers, by doing contract farming or for most of its income. Microfinance loans, by selling to nearby markets or traders. making up 70 percent of the total loan asset portfolio, are especially important. Self-liquidating loans based on cash flow statement Section 4 The Bank employs a cash flow approach in analyzing the repayment capacity of the Centenary Bank’s Innovations farmers; the objective being self liquidating in Agricultural Lending agricultural loans. The Bank gives grace periods to farmers equivalent to the maturity Focus on commercially oriented period of the enterprise being financed. farmers The loan payments are greater or equal to 50 percent of the monthly surpluses. The The Bank is very careful in selecting scheduled payments can be either regular or commercially-oriented farmers, irrespective irregular, depending on the cash flows of the of the size of their operation. The farmer enterprises financed. must have experience of at least one season, with evidence of surplus incomes from Holistic approach agricultural production and other sources. The farmers must target a specific market, In order to determine the repayment either through collective marketing with capacity of the farmer the whole of his or 45 her income is evaluated to come up with a ages for commercial farming. The Bank is consolidated cash flow. Payment plans are targeting Eastern and Northern Uganda and designed considering monthly surpluses South Western parts of Uganda, areas with from all household sources of income.