CHAPTER FOUR

Products & Services, Competition and Commercialization of Bank and

Microfinance Institutions

Banks and microfinance industry has become multilayered and fairly complex
industry in structure. The industry setting is growing at diverse scope as hundreds of
millions of clients, with multi product and service mix. This has also registered an
increased capitalization and financial assets mix with billions of shillings being
transacted in both savings and credit extension and increasing services. The many
industry players continue to experiment with what works across all facets of the
sector

Ugandan Bank and microfinance sector consists of a large number of competing

institutions of varying formality, commercial orientation, and professionalism.
These range from multipurpose NGOs, cooperatives (SACCOs) and informal
organizations; more formal commercially oriented bank and microfinance
Institutions; and, increasingly, a number of commercial banks, which have identified
a new market in urban microfinance.

Products & Services

Bank and Microfinance products and services include several financial tools such
as; credit, leasing, savings, insurance and cash transfers.

Leasing by banks refers to a financing arrangement where a bank buys an asset (like
machinery, vehicles, or equipment) and then allows a customer (the lessee) to use it
for a specified period in exchange for regular payments, called lease rentals.

The bank retains ownership of the asset, while the customer uses it for business
or personal purposes. At the end of the lease term, the customer may have the
option to purchase the asset, renew the lease, or return it to the bank, depending
on the type of lease.

These services are provided by a variety of institutions, which can be broadly divided
into banks, NGOs, credit and savings cooperatives and associations, and non-
financial and informal sources. Notably the two financial institutions, have a both
related and non-related forms of services and products as stipulated by the regulating
agencies. Under the bank setting and its banking systems, the products and services
mix is made up of;

Loans or credit; these fall in different categories such as business loans, house
loans, automobile by the lender and have to repay the loan in fixed installments over
a set period, and interest will be charged on the money you borrow.

Credit cards; a type of credit services and product provided by banks. This allows
customers to borrow funds within a pre-approved credit limit and it enables
customers to make financial transactions on goods and services.

Mortgage loans; A mortgage is financial agreement between the borrower and a

lender that gives the lender the right to take your property if you fail to repay the
money you've borrowed plus interest. Mortgage loans are used to buy a home or to
borrow money against the value of a home you already own.

Certificates of deposit; a financial certificate issued by the bank to the customer or

person or non-individual depositing money for a specified length of time at a specific
rate of interest.

Deposit products; are a savings product that customers can use to hold an amount
of money at a bank for a specified length of time. In return, the financial institution
will pay the customer the relevant amount of interest, based on how much they
choose to deposit and for how long.

Checking Accounts that is; an account at a financial institution that allows for
withdrawals and deposits.

Consultancy and advisory services; under this a team of qualified personnel with
in the bank offers or addresses financial services on how funds are managed,
management of receivables and payables, issues of equity holdings and other
acquisitions in relation to the business plans and objectives

Competition and Commercialization of Banks and microfinance

Commercialization of banks and microfinance institutions refers to the process of

transforming these financial institutions from being primarily socially driven or
donor-funded entities into profit-oriented, self-sustaining businesses that operate in
a competitive market.

Banks and microfinance commercialization refers to the application of

environmental market- principles driven by the process of bringing an idea, product
or service to the meet market demands and making monetary benefits from it. This
process follows a chain of steps such as Idea generation, research and development,
licensing, marketing, monitoring and evaluation.

Banks and microfinance under take two forms of commercialization which involves,
promoting the product to distributors and retailers to get a wide service distribution
and developing a strong advertising and sales campaigns to generate and maintain
in the product among distributor and consumers

This process of commercialization of banking and microfinance products is

conducted based on the three main activities of operating, investing and financing.
Advantages of Commercialization

• Increased Access to Capital: Commercialized banks and MFIs can attract

more investors and funding, which allows them to expand their lending
capacity and offer more services to a larger client base.
• Improved Efficiency and Innovation: With commercialization, there is
often increased competition and a focus on profitability, which pushes
institutions to adopt modern technologies, streamline operations, and develop
innovative financial products.
• Financial Sustainability: Commercialized institutions aim to be self-
sustaining by generating profits, which reduces their dependency on donor
funding or government support, ensuring long-term viability.
• Wider Outreach: The profit motive drives commercialized banks and MFIs
to reach more customers, including those in rural or underserved areas, as they
seek to grow their market share.
• Professional Management and Governance: Commercialization usually
brings in professional management practices, better governance structures,
and accountability, leading to more effective and transparent operations.
• Job Creation and Economic Growth: As commercialized institutions grow,
they create jobs both directly (within the institution) and indirectly (through
increased lending to businesses), contributing to broader economic
development.
• Generation of Revenue: It equally helps to boost the generation of revenue
for the banks and microfinance
• It promotes efficiency in production and operations of
banks and microfinance institutions
 • Better Choice by Customers: The policy enables the customers to have a
wide range of choices when there are abundant products.
• Commercialization leads to competition and market saturation which creates
regulation practices for the banks and microfinance institutions

Since Adam Smith, economists have nearly always favored policies that foster
competition, as competition typically results in lower equilibrium prices for
consumers. It would be reasonable to expect therefore that an increase in competition
between banks and microfinance institutions would unequivocally result in more
favorable credit contracts for the entrepreneurial poor in developing countries.

Competition amongst banks and microfinance institutions has the following

advantages:

• Improves on the service and products provisions of the sector. This in turn
improves on the payment behavior and induces clients to pay on time.
• On the other hand, competition increases the supply of loan which in turn
creates a loan burden and then leads to defeat
• Greater competitiveness creates more productivity and better-quality
products and services
• Competition enables banks and microfinance institutions satisfy consumer

preferences and consequently attain a better position in the market. With stiff
competition in the financial market, enables the market grow steadily and consumers
benefit from lower prices and more comprehensive range of services and products
at their disposal.

• Competition in the banking system is desirable for efficiency and

maximization of social welfare.
Challenges of Competition in Bank and Microfinance Industry

• As banks become more competitive, they choose to lend more and choose a
more risky balance sheet while the more risky behavior results in larger bank
failures
• Competition in banking and microfinance industry can take away your
customers, divide your attention, and drain your resources.
• Competition may result in borrower over-indebtedness, lower
repayment performance and increased default rates.
• Lower levels of repayments and increased default rates add to the costs MFIs'
lending activities.
• Pressure on Interest rates and Profit Margins: Increased competition
forces banks and MFIs to lower their interest rates and service fees to attract
clients, which can reduce their profit margins and financial sustainability.
• High Marketing and operational Costs: To attract and retain clients in a
competitive market, banks and MFIs often invest heavily in marketing, branch
expansion, and technology, increasing their operational costs.
• Loss of Client Loyalty: With many options available, customers may
frequently switch between providers for better rates or services, making it
difficult for institutions to maintain a loyal customer base.
• Compromise on Credit Standards: In a bid to grow their customer base
quickly, some institutions may relax their credit assessment procedures,
increasing the risk of lending to unqualified borrowers and facing higher
default rates.

All in all, when there is competition and commercialization of bank and

microfinance products and services, the industry improves on its performance, core
competence, increased sales, business efficiency, product value, effective cost,
product customization, customer service and satisfaction, usability, sales
management activities, market-oriented product management activities, sales
performance and efficiency.