World Bank/FSDT-Workshop on SME Financing

Leasing: The DFCU Experience

Moses K. Kibirige

Executive Director, DFCU Ltd.-Uganda

Delivered by Juma Kisaame - July 27th. Dar es Salaam-Tanzania

History of DFCU DFCU Founded in 1964

Survived the turmoil of the 70s and 80s

Uganda Leasing Co. established in 1994 (by DFCU,IFC,DEG,CDC and Nile Bank)

July 1999 – acquired Uganda Leasing, became DFCU Group

Sept 1999 – acquired 63% of Rwenzori Properties Ltd.

May 2000 – acquired 100% of Gold Trust Bank, renamed DFCU Bank

Listed on Uganda Stock Market in October 2004

Who we areEstablished 1964

Shareholders Include:

CDC (60%) - Britain

Norfund (10%) - Norway

NSSF (11%) – Uganda’s Pension Fund

4,000 other Private & Institutional Shareholders (19%)

Listed on the Uganda Securities Exchange, October 14th, 2004.

Sound, reputable shareholders, good brand, sound track record and respected

Share price at listing shs.230/= October 2004

Share price currently shs.400/= June 2007

4th. Largest bank group in Uganda

dfcu Group

Development Finance dfcu Bank

Leasing MortgagesTerm

FinanceCommercial

Banking

DFCU GROUP -FINANCIAL ENTITIES

DFCU LtdHolding Co.

Mortgage Financing

Long/ Medium term loans

Leasing

DFCU Bank100% subsidiary

Loans/ Overdrafts

Deposit taking

Financial Advisory

ATMs

International transfers

Treasury services

STRENGHTHS OF DFCU GROUP

Support from strong shareholdersGood Corporate GovernanceStrong Management TeamDiversified Product RangeRapid GrowthInnovative FundingHuman Resource DevelopmentListed on the Uganda Securities ExchangeDiversified Financial Institution-Bank and non Bank

operations

IMPORTANCE OF IMPORTANCE OF SMESSMES

Private sector is key engine of development

Majority of businesses are SMEs > 90%

SMEs provide jobs through which people can acquire skills and raise income (50%)

SMEs contribute 2/3 of national income

Strong developmental impact - bottom up

Powerful force for poverty reduction

Foundation for a middle class

CHALLENGES OF FINANCING SMESCHALLENGES OF FINANCING SMES

Start ups with limited or no credit history

Lack of suitable collateral – LEASING is appropriate

Under capitalized

Corporate Governance

High costs of monitoring

Red tape and regulation of business

Fragile sector – informal, no strong voice, lack of sustainability/survival

OVERVIEW OF LEASING IN UGANDA

Under developed – less than 1% market penetration

Accounts for 4.8% of total private sector credit

Currently with three players;

East African Development Bank (Mkt Share 20%)

DFCU Leasing (Mkt Share 45%)

Stanbic Bank (Mkt share 30%)

Uganda Microfinance Ltd. (MFI New entrant 5 %)

Simple finance leases – ( 2- 5 yrs)

Focus on SMEs - $5,000 - $500,000

ATTRIBUTES OF A LEASE

Agreement between the lessor and the lessee. 

Lessor transfers the use (but not the ownership) of the asset to the lessee. 

Lessee compensates the lessor for the use of the asset, usually in the form of rent. 

After the pre-determined period of use (the lease term), which should not exceed the asset's economic life, the lessee returns the asset to the lessor or, depending on the arrangements, may have an option to purchase it or lease it for a secondary period at a lower rental.

Benefits of Leasing

For LesseesAccessibility; especially to SME’sMinimal collateral - leased equipmentDuration - medium termAlternative source of finance Minimum capital outlay Easy budgeting.Rentals tailored to lessee cash flow (structured)Flexibility and process timeFunds usage - effective credit delivery

BENEFITS OF LEASING (cont’d)

For the Economy

Deepening of domestic capital markets

Supports development of SMEs –GDP, Widens Tax Base

Technology transfer- Increase productivity

Creates employment opportunities, skills development, growth of service industries (mechanics, artisans).

Increased access and usage of banking systems

Challenges of Leasing in Uganda/Africa

1. Enabling environment – Tax, Regulation and Legislation

2.Court system improvement.

3.Market awareness for leasing.

4.Building capacity and local expertise in leasing.

5.Suitable and appropriate funding-local currency with a long tenor

6.SMEs – Quality, Size, Trustworthy and Management

DFCU LEASE FINANCESME Finance

Most DFCU Leases tend to be US $ 5,000 to US$ 500,000. The target sectors are

Mainstream economic sectors; Transport, Manufacturing, Construction, Agro-processing and value added exports.

Education, Health and MFIs (wholesale lending & Support)

Consumer Leases – individuals

Finance and Operating Lease

Innovative Schemes

STRUCTURE OF A DFCU LEASE FACILITY

Size of facility: between Ush 10 million and Ush 500 million. Transactions outside this range are considered on a case by case basis

Lease currency: UGX and/or US$.

Repayment period: Normally between 2 - 5 years

Cash collateral: deposit between 10-20% of amount financed.

STRUCTURE OF A DFCU LEASE FACILITY

No grace period after commencement of the lease.

Pre-delivery interest: Finance charges accruing between disbursement and delivery may be paid at the time of delivery or added to the cost price.

Nature of equipment: durable and identifiable.

Lessee identifies the asset(s)

STRUCTURE OF A DFCU LEASE FACILITY

Title of ownership of the asset can pass to the lessee at the end of the lease period.

Value Added Tax is not part of the amount financed.

Maintenance is by the lessee at all times during the lease period. 

Assets is insured by the lessee at all times during the lease period.

Funding Lease Operations

Funding sources;

1. Lines of Credit-EIB, IFC, FMO, KfW etc.

2.Borrowing from local financial institutions

3. Cash guarantees from clients cash deposits.

4.Donor grants – DFID, USAID, Shell Foundation

Others;

Bonds, IPOs, and securitisation

Funding Challenges

High cost of funds - Libor

Inappropriate tenor

Currency Restrictions

Sector Restriction

Borrowers – SMEs

BDS providers

Economy - status

Environmental Risk

Operational Efficiency

Innovations introduced;

1. Flexibility of Deals

2. Upcountry branches

3.Financing second hand Assets

4.Leasing software – IT and MIS

5.Cash deposit by clients

6.Risk Management

SUCCESS OF THE DFCU MODEL

Responsive to Small and Medium Enterprises (SME)

Innovative products (harness supply chain)

Leverage Donor Funds

Operate profitably to attract Funding

Economies of scale – optimum size

Build local skills/expertise

Investment in IT

DFCU LEASING: TOTAL ASSETS AND LIABILITIES

05

10152025

303540

UGX'

bill

ions

1999 2000 2001 2002 2003

Total Assets Total Liabilities

DFCU LEASING:TOTAL INCOME AND EXPENSES

0

2

4

6

8

10

UGX'

bill

ions

1999 2000 2001 2002 2003

Income Expenses

Group 2006 - Financial Performance

5 Year trend

Total income (shs billions)

19.1

29.7 32.0

43.4 42.0

2002 2003 2004 2005 2006

PAT after MI (Shs billions)

7.2 7.79.3

7.5

13.2

2002 2003 2004 2005 2006

Lending Assets (shs billions)

75.4103.3

175.3

245.2 246.7

2002 2003 2004 2005 2006

Shareholders' Funds (shs billions)

32.538.3

41.4

50.4 51.7

2002 2003 2004 2005 2006

Group 2006 - Financial Performance 5 Year trend