We have worked with DFCU since its founding to support long-term growth and the development of Uganda's wider financial system.
CDC made its first investment in DFCU Bank in Uganda in 1964 as a founding investor alongside the national government. CDC has played an integral role in the bank’s long-term growth over the last six decades through multiple equity and debt funding rounds. Being a founding member of the bank in the 1960s, shortly after Uganda gained its independence, CDC has also contributed to the development of Uganda’s wider financial system through its active engagement with the bank over the decades.
As a founding member, CDC’s original investment in DFCU took place at a significant point in CDC’s history. To continue to participate in economic development, particularly as various Commonwealth countries declared their independence in the 1960s, CDC took on a strategic approach to partner with newly independent governments. DFCU, or the ‘Development Finance Company of Uganda’, was created under this framework followed by similar institutions in Kenya, Tanzania and Nigeria. This created goodwill with African governments and helped give CDC the continued ‘license to operate’ and contribute to the development of these countries post-independence.
CDC has supported DFCU through multiple milestones, contributing to its transformation into one of the top three commercial banks in Uganda today. This includes the beginning of commercial banking operations and lending to Small and Medium Enterprises (SME) in 2000, the listing of the bank on the Uganda Stock Exchange in 2004—after an IPO in 2004 in which CDC acted as anchor—and the introduction of a “Women in Business” programme in 2007. CDC’s support is in line with our overarching goal to improve a financial system’s ability to manage risk and allocate capital, and also fits in our sector impact framework for financial institutions by supporting the development of financial sectors through investing.[Refer to Insights Study on the Impact for of Investing Financial Systems for more detail].
CDC’s development impact focussed on enabling the bank to increase its SME loan book, increasing access to finance for an underserved sector in Uganda. By supporting the commercialisation of the bank, CDC has sustainably enhanced its ability to serve underserved segments such as the agricultural sector or female entrepreneurs.
After a period of six decades as a shareholder, it has also been our objective to identify a like-minded investor for our remaining stake who could support DFCU. We have found that partner in the Investment Fund for Developing Countries (IFU), the Danish development finance institution.
Thesis
Increasing access to finance, particularly longer-term financing for SMEs in Uganda, will result in enhanced economic opportunities. Access to longer-term finance will enable SMEs to grow, by allowing them to invest in their businesses, hire more employees or improve their processes, contributing to an increase in business income and employment.
Who will benefit from increased access to finance?
Employers and employees of small and medium sized enterprises will benefit from increased access to finance, allowing these businesses to better manage risk and liquidity, and in turn, enable them to grow. SMEs contribute to approximately 20% to GDP and 90% of employment within the private sector in Uganda. Yet, SMEs struggle to find the longer-term financing needed to grow. Today, formal finance for micro businesses and SMEs continues to be a challenge, only addressing 10% of the addressable market in Uganda.
Most banks are hesitant in lending to SMEs, only offering short-term financing, if at all. SMEs are often viewed too risky or are perceived as an expensive segment of the market because of the additional costs associated with assessing credit risk for an SME, when compared to offering credit to a larger and more established business. Female entrepreneurs have struggled to access finance, not only because of systemic and deeply entrenched gender biases, but because, historically, property was passed between male heirs, making it difficult for female business owners to offer collateral to lenders.
Since launching banking operations following CDC’s investment, DFCU has built a loan portfolio of over $370 million. Approximately 90% of DFCU loans are for lending to SMEs across several sectors including education, agri-business, construction, and manufacturing. Almost 50% of DFCU’s portfolio has a loan tenor of 5 years or more, providing SMEs and other businesses with the longer-term financing that they require to grow. CDC has supported DFCU as it commercialised and diversified its products, serving over 600,000 clients.
Since the establishment of DFCU’s Women in Business (WiB) programme in 2007, which was initiated by CDC, the programme has provided business training, financial advice, networking opportunities, banking products at preferential terms and mentorship programmes to almost 19,000 women. More than 3,000 women have benefited from WiB loans. This was in-line with a concerted national effort to increase representation of women in the workforce, and today, 35% of all business owners in Uganda are women. Uganda has one of the highest rates of female entrepreneurship, ahead of Botswana, Austria, Bangladesh, and the United States.
Our investment in the bank has also helped the bank across other value-add areas such as E&S and business integrity, demonstrated through the strengthening of corporate governance by appointing additional independent directors on the board, assistance in integrating environmental and social considerations into its credit approval processes, and integration of anti-money laundering training for all staff into the bank’s operations.