News Column

Letshego Raises Competition Among Microfinance Firms

February 25, 2014

Alon Mwesigwa



The Botswana firm Letshego has become the latest financial institution to enter Uganda's microfinance industry, after it completed the acquisition of Micro Africa last December.

Micro Africa subsidiaries in Uganda and Rwanda have already changed to Letshego. Letshego, listed on the Botswana stock exchange, has raised eyebrows in the microfinance sector, with some analysts predicting it could stiffen competition. There are plans to have Letshego become a micro-deposit-taking institution.

Sources familiar with the deal told The Observer that Letshego Uganda would now shift from just offering loans to government employees to issuing out other products including mortgage loans, savings accounts, and SME loans to all interested clients.

David Baguma, the executive director of the Association of the Microfinance Institutions of Uganda (AMFIU), told The Observer that customers would benefit from the competition within the industry.

"Competition is good. When it increases, the cost of loans will reduce and institutions will strive to be efficient to keep the old or attract new customers," he said.

He said Letshego's entry into the industry would increase people's confidence in the firm because it would now be regulated. But also, he explained, Letshego has to bring best practices to maintain the former Micro Uganda customers or to attract new members.

"Buying into a microfinance operation will help the company diversify its products into the fast-growing micro lending market. Besides, transforming into a deposit-taking institution is the ultimate goal for money lenders seeking strong long term growth," David Ofungi, the regional executive director for East Africa at Blue Financial Services told the EastAfrican recently.

Asked whether there was still enough space to accommodate new players, our source said: "The space is there; Ugandans are interested in the turnaround time. If an institution can give money at the lowest time possible, people are ready to support it."

Letshego's plans to finally become an MDI could see the firm offer competitive interest rates, almost closer to what banks charge. Indeed, despite MDIs' charging of the highest interest rates on loans - averaging 25 per cent to 36 per cent, some people find them more convenient than commercial banks, which are blamed for rigorous checks and bureaucratic procedures.

Most bank activities are also concentrated around the major towns, with rural customers largely ignored. That is the gap that institutions like Letshego fill. A big number of people acquire financial services from microfinance institutions especially loan facilities because they can borrow small amounts, unlike in commercial banks.

Speaking at the official opening of the Uganda Rural Challenge Fund last April, Bank of Uganda Deputy Governor Louis Kasekende said 62 per cent of Ugandans were not served by any financial institution. Only 38 per cent of Ugandans have access to finance, with a big number of those excluded being rural population.

"The rural population constitutes a large share of the total population. This is, therefore, a large potential market for savings mobilisation, which is yet to be tapped by the financial sector," Kasekende said.

Cheap vs quick

Rates charged by moneylenders and microfinance institutions have averaged 20-36 per cent per annum compared with those of commercial banks, which fell to 22.5 per cent as of December 2013.

Letshego Uganda, now with an estimated loan portfolio of Shs 70bn (including Micro Uganda's portfolio) is expected to gain much from customer deposits. Recently, Uganda Women's Finance Trust, one of the most successful stories in the MDIs industry, upgraded into a commercial bank.

By close of December 2013, the lender's total assets stood at Shs 91bn while its loan portfolio was valued at Shs 58 billion, according to media reports.


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Source: AllAfrica


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