Strategic insights
Deposits growth is strategically critical for financial institutions success. The cheaper the deposits, the more the bank’s competitiveness. Banks that lend more, get more deposits in return. As a financial institution executive, streamline your lending processes value chain and convenience, to ease loan access which tends to encourage customers to deposit more.
Mobile money has driven deposits up, due to convenience. Some recipients of mobile money don’t withdraw all of it when they receive it. Those with bank accounts, transfer the money directly from the mobile to the bank account. Banks must therefore make the mobile to bank process seamless as a strategic imperative to win.
Alternative channels take banking closer to the customers and thereby give convenience, are scalable and deliver a favourable jaws ratio (the rate at which revenue increases relative to the rate at which costs increase). Branches continue to be high-cost operations and we see winning banks further rationalizing their branch networks as boutique service centres, not as places customers go to line up and transact.
Figure 1: Deposit sensitivitiesLenient lending, drive deposits tremendously
Deposits are greatly influenced by the lending ability of banks in Uganda’s financial sector. An increase in private sector credit by a basis point increases appetite to save with the bank for consumers generating deposits from lows of Ugx. 956 billion to highs of Ugx. 1.6 trillion. Ugandans are greatly inclined to saving with a bank that has lenient lending policies compared to those that have a sophisticated appraisal model. There have been huge shifts in consumer awareness of inclusive banking in 2020. Banks that are aware of this consumer shift have eased lending complications while those that have remained resilient with old policies face increased churn.
Savings have also been strongly correlated with an increase in demand deposits. The higher the demand deposits the higher the saving appetite. This is particularly inclined to salary earners.
Key to note is the increasing demand for convenience by the consumers. Many banks, if not all, have prioritized reducing branch physical locations in favour of digital and agency banking delivery channels (commonly referred to as alternate banking channels) that are both cost-efficient but also have high penetration. A huge physical asset base continues to lose value as technologies bring convenience closer to the customer.
Figure 2: Mobile money impact on depositsMobile money has positively impacted deposits – both time and demand deposits as well as private sector credit (Figure 2). No wonder COVID-19 positively increased deposits with an isolated impact of Ugx. 384 billion as consumers moved to embrace convenience banking. Mobile phone penetration has reached a high of 60% in 2020 with most business being conducted digitally following closure and rising operating expenses of physical business.
Figure 3: Impact of COVID-19 on 364-day TBYHowever, the increasing T-Bill rate as the Bank of Uganda looked to mobilise funds to finance the economic stimulus package and recovery that rose from about 8.3% in the past 12 months reduced saving appetite withholding approximately Ugx. 47.9 billion went directly into fixed-income investments rather than boosting bank financing. While this increased capital gains on trading, it held out the opportunity to increase long-term time deposits that would increase investment reserves for banks thus limiting available deposits for private-sector lending since most hold characteristics of overnight money market instruments (demand deposits) and thus could not be reinvested immediately.
Mobile Money has had a significant positive impact on deposits boosting collections. For every percentage increase in the value transacted on mobile money platforms, deposits are likely to grow up by Ugx. 800 billion. A client using mobile money is likely to save their money with one of the banks, the more they transact using mobile money. This way, mobile money has helped fast track financial inclusion.
Figure 4: MTVpC vs Private DepositsBanking is no longer complete without mobile money as well as the “mobile” ecosystem. It will never be. Over 79 per cent of Uganda’s financial institutions have partnered with telecoms (mobile network operators – MNOs) to leverage from this likely growth of deposits engineered by mobile money uptake. This underscores the significance mobile money has brought into convenience banking. We foresee many more solutions developed by banks to leverage these partnerships to increase not only deposits but also payments. More than Ugx. 27 trillion was transacted on mobile money platforms in 2020 with Ugx. 1.5 trillion deposited on mobile money accounts by December 2020. There are currently at least 60.9 million registered accounts on mobile money as banks look to tap into this growing number of users. The question is how can banks tap into this space? Which kind of products or services to offer? With the passing of the National Payments Systems Act, (NPS) 2020, MNOs now can operate as financial institutions which allows them to grow and scale without any regulatory constraints. For the time being, telecoms continue to hold their accounts (mobile money Nostro accounts) with banks, which means the latter is still strategically critical in the mobile money ecosystem. One wonders how the game will turn out for the banks when the telecoms stop working with banks strategically for mobile money Nostro account operations.
