By Jeff Mbanga
WEEKLY OBSERVER

Another financial institution is up for sale. Pride Microfinance, Uganda’s most profitable microfinance deposit-taking institution, is being prepared for sale barely a month after Kenya’s Equity Bank bought Uganda Microfinance Limited (UML).

Uganda government owns the company that it took over in 2003. It now wants to relinquish its entire stake to private investors, The Weekly Observer has been told.
“We have been told government is planning to sell Pride Microfinance. The government is showing little interest in continuing to run it,” said a source that is conversant with the matter.

However, the decision to privatize the company has been delayed by a court case filed by some people who claim to have had a stake in Pride Uganda—as the company was previously called before takeover by government.
“Government wants to sort out this problem first before it goes ahead with the privatization,” said another source in the Ministry of Finance Planning and Economic Development, who did not want to be identified.

“Discussions have been held to privatize Pride Microfinance but no clear decision has been reached yet,” the source added.
By privatizing the company, Pride Microfinance would be changing hands and name for the fourth time since its inception.

Pride Microfinance started as Pride Africa in late 1995, but the mainly donor-funded project changed names in 1999 to become Pride Africa Uganda Limited after it was incorporated as a limited company.
The company that was mainly supported by the Norwegian Agency for Development Cooperation was created to offer credit to the poor, targeting those in the agricultural sector.

In May 2001, the company underwent another change when the Articles and Memorandum of Association were amended and became Pride Uganda. Pride is an acronym for Promotion of Rural Initiatives and Development Enterprises.
In 2003, however, government took over the company, changing the name to Pride Microfinance Limited, a company limited by shares.

Pride Microfinance was also supported by AfriCap Microfinance Fund, a private equity fund, which, last year, invested $1 million in the company. By their nature, private equity funds operate in a short time frame, exiting after the company has performed well and can sustain itself. AfriCap also has holdings in Equity Bank of Kenya.

The government has been shopping for a private investor to take over the company for a long time. This has however, been hindered by the current business structure of the company.
“That is why they had to first turn it into a microfinance deposit-taking institution so that it can become attractive,” our source that worked with the company until last year said.

More resistance to the sale of the company is said to have come from the Minister of State for Microfinance, Gen. Salim Saleh, who reportedly wants it to be used for the disbursement of the ‘prosperity for all’ funds.
The Weekly Observer has also been told that the government wants to bring in more players because the law does not permit a single shareholder to own more than 30% stake in an MDI.

Anthony Opio, Bank of Uganda’s director Non-banking Financial Institutions, said he was not aware of discussions to privatise Pride Microfinance.
“I haven’t received any letter from the Ministry of Finance. Or if it is there, I haven’t yet seen it,” he said.

Details of how much government is willing to sell off from its 100% shareholding and at what price remain scanty. What is known is that the company is under restructuring. Jim Mugunga, the Public Relations Officer, Privatization Unit (PU) confirmed the restructuring.

The PU is a statutory body that handles the privatization of parastatals, the statute does not cover Pride Microfinance. this means that PU may not be involved in the process.

He however said that the on-going restructuring was only meant to enable the company operate smoothly and improve its competitiveness in the microfinance business.
Yet, going by its books of accounts, one would think that Pride Microfinance does not need any form of government intervention to become competitive.

Last year, the company declared net profit of Shs 2.8 billion up from Shs198 million in 2006 –a more than 1,200% increase. This is bigger than what some commercial banks made during the same period.
It is anticipated that this good performance would enable the government get a good price if it went ahead to privatise the company.

However, the Shs16 billion of borrowed funds could turn out to be a debt burden for government.
Should the sale happen, and the company changed its current status, it will bring down the number of microfinance deposit-taking institutions (MDI) to two – a blow to Bank of Uganda’s efforts to promote MDIs. The idea of MDIs was mooted four years ago in a bid to improve Uganda’s fledgling saving levels. And the trick has worked.

Concentrating on the lower market segment, microfinance institutions have reached out to many small savers, previously locked out by commercial banks.
This resilience among the MDIs – revealed in their first published books of accounts is expected to rattle banks into refocusing their business strategies.

Using the Microfinance Deposit taking Institutions Act 2003, the MDIs have taken the advantage of maintaining a lower minimum paid up capital than the Shs 4 billion required of commercial banks to widen their services and make remarkable profit.
For example, Uganda Finance Trust more than doubled its net profit – moving up from Shs 437.9 million the previous year to Shs 888 million.

FINCA also had quite a good year, seeing its profit increasing from Shs 742.5 million to Shs 1.3 billion. All three MDIs recorded debt ratios below one – a sign that they are not depending on loans to stay in business.
Such strong performance only emphasizes the profitability that comes with targeting those customers that are left out of commercial banking halls.

Customer deposits from Pride Microfinance increased from Shs 5.3 billion in 2006 to Shs 8.5 billion in 2007, rivaling banks in winning the attention of customers.
Uganda Finance Trust also saw its customer deposits go up from Shs 6 billion in 2006 to Shs 7.7 billion last year.
While client savings within FINCA went up from Shs 5.8 billion in 2006 to Shs 6.8 billion in 2007. The increase in customer deposits represents a growing level of trust in MDIs after they were placed under the supervision of the central bank.

This positive performance also grabs the attention of private investors. Sub-Sahara Africa’s economic growth level that averages 6% and is better than levels experienced by more developed regions, has caught the excitement of investors.

Pride, whose assets now total Shs 50.9 billion up from Shs46.5 billion at the end of 2006, would offer an investor a formidable head-start in doing business in Uganda. It has 29 branches - more than what some banks have spread throughout the country. With the fight for retail customers among commercial banks heating up, buying into Pride would give an investor a good chance to take this battle to the banks’ own backyards.

jmbanga@ugandaobserver.com