Introduction to financial services 6
- 1. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Introduction to Financial Services1
- 2. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Types of Financial Institutions and their Respective Roles Uganda Retail Banks The Structure of Financial Markets The Credit Reference Bureau Trends in Financial Services Industry Personal Financial Services MODULE COVERAGE 2
- 3. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Trends in the Financial services Industry In the financial services industry as is in other vibrant sectors of the economy, there is a need to keep abreast with trends. You must know what is going on both at local and global level. There are a number of factors which drive change in the financial services industry and we will be looking at some of them in this section. We hope that this will give you a general oversight of where the sector is moving as well as some of its challenges. 3
- 4. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Competition In the past banks were few relative to the population and therefore largely operated in a sellers’ market. This has changed. There are now more banks with an array of service points including branches, points of sale and ATMs 4
- 5. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Customer awareness – While on the supply side competition intensifies, customers are becoming ever more aware and educated about banking services and therefore they are demanding more than they did in the past in terms of customer care, better pricing and better product features. In Uganda, banking has been demystified and thus the service providers have to strive for excellence. 5
- 6. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Products innovation – The last decade has seen swift moves in the area of product development and refinement as many banks try to outdo competition by offering products which are responsive to their customers. – In the banking sector, there has been less in innovation than a mere copying of products. All this is done in an attempt to capture more customers through more responsive offers. 6
- 7. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Differentiation Attempts at product differentiation by banks do not as yet seem to have produced advantages for the respective banks. Often, differentiation attracts swift imitation from others. Rather than strive to differentiate their products, it appears that the real competitive space for Ugandan banks still lies in excellence of customer care (which all financial institutions give lip service in advertising and mission statements but very few translate into daily operations). 7
- 8. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Regulation – On the international scene, deregulation over the past two decades culminated in the credit crunch (2008) which arose out of reckless lending. – In Uganda, the risk-based supervision that BOU adopted after 2004 has ensured that the financial sector, though it still has challenges, is largely safe and sound systemically. – Whereas the rest of the world was relaxing regulation, Uganda instead tightened (having learnt bitter lessons with the rapid bank failures of the late 1990s). – This was part of the reason that the credit crunch did not severely affect Uganda earlier. 8
- 9. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Collaboration In some cases, banks collaborate to tap mutual synergies and beat other players. Examples include ATM access sharing, agency in branch operations, joint financing of customers’ business projects and, more recently, involuntary collaboration through information to the CRB that can be freely shared. 9
- 10. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Leverage of technology • Increasingly, banks are using electronic technology both to reach more customers and to lower their cost of service. Examples are internet banking, point-of- sales (POS) devices for remote/ rural customers, and banking through mobile phones. It is evident that in the future, technology will play an increasingly vital role in banking operations. 10
- 11. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Consolidation Growth drives have led to some acquisitions, among them the following: • Nile Bank by Barclays • UCB by Stanbic • Commercial Microfinance by Global Trust Bank • Uganda Microfinance Ltd (MDI) by Equity Bank • Faulu Uganda by Opportunity International, now Opportunity Bank 11
- 12. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED END 12
Editor's Notes
- #4: At the end of this unit, you should be able to explain some of the recent trends in the financial services industry locally and internationally. As banking and financial services become more commoditized and less distinct from the rest of the business sector, dynamics of banking are fast changing. Competition from previously unexpected sources, recent experiences with the credit crunch, increased customer awareness, intensifying competition within the banking industry and a drive to capture ever more market share by each bank are all producing emerging trends that can be summarized as follows:
- #5: As is the case with in other economic sectors, bank customers/ clients now reign in the banking sector. Customers have wide and increasing choices and banks are in ever increasing intense competition for deposit, lending and other products. After BOU lifted a moratorium for new banks in 2007, a number of foreign banks entered the market, intensifying competition further. Among these was Equity Bank, Kenya Commercial bank, Global Trust Bank, Ecobank, UBA, ABC Capital Bank, Imperial Bank and Bank of India. Competition is also emerging from previously unfamiliar sources. The Micro Finance Institutions (MFIs), which used to be considered as sidelines of the financial markets, are fast mainstreaming into the financial services market. Mobile phone companies are now offering both savings accounts (albeit called by other names) and fund transfers, and they are proving to be far more convenient and efficient than most banks.
- #7: The MFIs and MDIs have, generally, done a better job of this than most banks by focusing their new product development on customer needs and realities. The MFIs have, generally, developed their products after objective market surveys to really understand what the market needs, wants and will buy.
- #9: The main causes of the high default rates were over-indebtedness of borrowers in the developed markets in comparison to their repayment capacity and collateral. This resulted from increased borrowing as financial institutions aggressively sold loans to the public. Apparent incentives encouraged people to take out difficult mortgages with the intention of refinancing them in future. With the fairly high interest rates and sudden drops in housing prices, however, it became difficult for home owners to refinance their mortgages. A downward spiral began that rocked the international economy. Thus deregulation, which is good in the case of price setting, was also a cause of the global financial crisis. The regulatory framework failed to keep pace with financial innovation; the laws were changed and enforcement weakened in certain parts of the financial system. Keener prudential regulation, including aspects that protect the consumer, is therefore necessary although direct price regulation is not desirable.