Cutting Advises On Interest Rates. Check it out:
(The Monitor (Uganda) Via Thomson Dialog NewsEdge) The banking industry has come under attack for not addressing the prohibitively high interests rates, while continuing to line their pockets with multibillion-shilling profits. Mr David Cutting, CEO Standard Chartered Bank, in this interview with Business Power's Muhereza Kyamutetera elaborates on why the rates are high and the challenges he faces as a baker.
Excerpts:
Standard Chartered Bank has just announced impressive half-year results across Africa. What is the energy behind this good performance?
Our bank is represented in twelve countries in Africa. The results we have just announced for the half-year for our African operations were very strong and we are very proud of it. Our operating income is up by 24 per cent to $315 million, operating profit before taxes of went up by 203 per cent to $91 million.
Wholesale banking system grew by over 600 per cent while consumer business grew by 19 per cent. In other words, all the major components of our business across Africa grew significantly, driven by our Nigerian, Zambian, Ghanaian and Kenyan operations.
I should also say that Uganda's performance, compared to the size and current state of our economy, did well. It is difficult to compare our Ugandan operations with our other businesses worldwide but there are of course standards by which our functional businesses are measured and benchmarked and in this regard, we compare very well.
Standard Chartered are the only international Bank in Africa with a significant presence both here as well as in Asia and the Middle East, which makes us well placed to support emerging trade between Asia, China and Africa.
The final point on that would be to say that we compare with all the rest of the bank in the sense that the functional aspects of our business is that its consumer banking, whole sale banking and the benchmark that we use to compare are the same so when you use those benchmarks, Uganda stands out as everybody else.
The bank has also manifested an interest in Small Medium Enterprise banking in its portfolio in Uganda. Why is that so and what impact does it have on the bank's business and the economy as a whole?
Standard Chartered Bank is enthusiastic about SME [Small Medium Enterprise] banking and this has manifested itself in the attention we have given to that market over the last one-year.
We have re-branded the business that we used to call business financial services and we now use the term SME banking, mainly to create consistence in use of the term across all our markets but also make our interests so clear so that people know what you are talking about.
Recently we announced a commercial mortgage product that was designed specifically for this small and medium enterprise sector and the idea here is to show that we are willing to support small business.
Collectively, we believe that small businesses drive this economy in the private sector and have the potential to make a very significant on sustainable development. The challenge I think is that small and medium enterprises vary in size, sophistication and the quality of management and that is the challenge that banks have in terms of how they are going to support them.
The ones that are most sophisticated and have the best management will probably get the best financial support. What I can say is that as the one of the oldest and biggest banks, the market should expect a lot from us both in terms of new products and back up promotional activities.
As SCBU in particular and the industry in general, how have you been affected by the power shortage?
The banking industry has suffered the same inconvenience that the rest of the players in the economy have suffered. We have experienced increased costs and inconvenience.
As Standard Chartered we have put in place measures to ensure that we can still conduct our business with minimum disruption and inconvenience to our customers but the challenge that the industry has as a whole importantly is to effectively balance the need to support customers in a crisis while at the same time being able to manage the increased risks in the businesses of our clients posed by the energy crisis.
That is the equation that we are balancing now. People have had to cut down production time and are able to carry forward the cost of that production in the price that they offer customers. Some of our customers have had negative impacts on their business. While we want to be supportive of them, we still have to be careful of a risk of continuing to support a company that might be going down.
As an industry, are there any changes especially in your clients banking habits that can be linked to power shortages?
Well, I can't speak for other banks. We have done what we've called a stress test and that is portfolio review of our customers. That is to help us understand how their businesses are doing.
We have found there are some customers that we feel, we have to watch more carefully. There are also other customers that we may decide to put a sealing on how much credit they get exposed to. However, we haven't seen customers whom we are worried that they are going to go out of business but we are watching very carefully.
Despite the competition in the industry, interest rates have not come down significantly for a long time. This issue has been very thorny and at one time the president blamed the banks for not doing enough to deal with this problem. Why do rates continue to be high?
Let me first say that interest rates is a naturally thorny subject. Investors want to maximise their returns and borrowers want the rates to be as low as possible. Banks and other providers of credit are in the middle of that discussion because the challenge is the balance between risk and rewards. There is a lot of emotion in this debate because the higher the interest rates are, the costlier it is to run businesses.
But I think the debate will be less thorny if banks are better understood and our role in mobilisation of funds and costs involved appreciated, then operating costs and the premium that is added to the interest rate by a bank to reflect the risk of the borrower. When you add all those things together, that determines the interest rate but I think most people don't look at it by segmenting those components.
The public should understand how these components are put together and that is when they will be able to have a better appreciation of why interest rates are as high as they are.
I should also add that the actual interest rate charged is customer and situation specific so the interest rate offered to you would be different to the one offered to another person because the risk provided is different. So whereas you may have started in the same place in terms of the mobilisation cost, it is the risk profile that differentiates the price.
Banks in Uganda are making gigantic profits which presents a bit of a mismatch between the difficult operating environment you are painting. There is a feeling that banks are all about their shareholders and not the customer. What do you have to say about this?
I think there is a perception that banks are making unreasonable profits, which should also be put in context. If you for example look at Standard Chartered Bank's results in 2005, we reported a 34 per cent decline in our trading profit. It was actually the worst performances in the industry in terms of the earlier performances and we explained that to the public.
When I look at how this year has gone and all the things I have just told you about.
We don't believe we are performing significantly better than our customers. If our customers are not doing well, we can't do well.
Ofcourse, there is a difference of opinion of how much we should get for the risk that we take and that is a subjective discussion.
Some people will say, 'you are taking too much'. I think each bank has the right to price the margin that is acceptable given the risk that is taken and also, the operating cost of each bank is different.
As SCBU, we don't think that our profit margins are unreasonable. We think that when you consider pricing all the costs of operating and particular in a good environment like ours and then consider the high risk of lending in this market, I think our margins are reasonable.
What causes the high risk of lending?
There are a couple of reasons but the major one is that there is no national identity card, therefore there's high risk in identifying people.
We don't have a credit reference bureau. One is coming soon but at the moment, the data that is available on the extent of indebtedness for individuals is not accurate because we depend on people's personal disclosure and not everybody tells the truth.
When the national identity card project is finished and the credit reference bureau comes into operation there will be reduced risk and this might influence interest rates where the premium associated with risk can probably go down because we will now be dealing with more certain information.
The financial services sector is very prone to fraud. How serious is it here?
I can't give you an accurate figure for the industry and I won't certainly give you a figure for Standard Chartered but I would say that the numbers are going up.
There are higher incidences of fraud and it is a concern for the industry. It's one of the highest risks for industry, particularly cheque fraud.
Distributed by AllAfrica Global Media. (allafrica.com)
Copyright 2006 All Africa Global Media
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