In their 160 pages report, which was published recently and was meant to advise and guide government on how Uganda Development Bank (UDB) can serve its purpose better, NPA researchers make strong recommendations against the Bank’s practice to impose 1% of the total loan value as loan appraisal fees.
The NPA report indicates that this can be a lot of money, leaving any potential or actual borrower more liquidity-constrained. At 1%, a borrower who takes out Shs3bn ends up parting with Shs30m and the one seeking a loan of Shs10bn ends up parting with Shs100m.
Officially, UDB justifies the money, which a borrower has to pay upfront at the beginning of the loan application evaluation process, as facilitation to assess financial viability of the project the borrower is seeking to invest the borrowed money in. It’s the money the Bank uses to evaluate the loan application plus the conducting of due diligence on the proposed project. Costs involved in assessing financial viability of some complex projects can be substantial as matters relating to technical feasibility, social and environmental compliance of the proposed project can’t be easy to ascertain.
The NPA report indicates that in most cases, by the time any business comes up with a loan application it means they are already liquidity-constrained and are coming to UDB to seek relief yet being required to pay upfront a non-refundable loan appraisal fee equalling 1% of the total loan they are seeking, can only make such stressed business entities’ liquidity-related constraints even more complicated. That, because of that prohibitive fee, many SMEs or even investors seeking to go into high-impact sectors like agro-industrialisation, tourism and manufacturing can end up being discouraged from coming to take up UDB loans. Even when the interest is just 12%, imposition of such loan appraisal fees only makes UDB loans more expensive.
The report calls on UDB to become innovative through benchmarking on what happens at other Development Finance Mechanisms and quickly do away with the mandatory 1% loan appraisal fee because “such [heightened] costs can deter liquidity-constrained enterprises and reduce inclusivity.” That some of the loan applicants have to turn to private money lenders to be able to raise the required 1% loan appraisal fee, which only exposes them to vulnerability and exploitation which UDB was improvised to shield them against.
For benchmarking purposes, the NPA report reflects on what happens elsewhere and wonders why the UDB management can’t borrow a leaf. At the Bou-based Agricultural Credit Facility (ACF), the loan application appraisal fee is 0.5% (though like at UDB, it’s applicable to all applicants and full amount has to be paid upfront). The one at UDB is twice higher, which is why the NPA report calls for reflection and adjustment of the same downwards.
At Uganda Development Corporation (UDC), due diligence costs are only charged on successful loan applicants and it’s added onto the overall loan amount, as opposed to the borrower being required to pay it upfront. At Kenya Development Corporation, only a fraction of the due diligence fee is required at the commencement of the application (paid upfront) and the borrower will only pay the balance if his or her loan application is successful.
As a way forward, and reflecting on all these above-referenced models, the NPA report calls on UDB to adopt a balanced approach to charging the inevitable appraisal fee. The options include totally waiving the loan appraisal fee for straightforward loan applications which don’t require complicated due diligence plus credit and business analysis. This will encourage, as opposed to discouraging, new loan applications coming to UDB. It should only be maintained on borrowers seeking to implement complex projects that require feasibility studies, environmental impact assessment and value chain analysis etc.
The other alternative that NPA is advising UDB to consider is that of having in place “a blended appraisal fees structure” permitting imposition of fixed appraisal fees only on high value loans, while operating a rate-based appraisal fees structure for lower value loans. Giving the example of a borrower taking out Shs10bn having to part with Shs100m in appraisal fees, the report says there is urgent need to “reduce the burden on large scale loans.”
The report adds, in defense of high value loans takers, that: “In such cases, a flat fee that is large enough to cover the cost of the due diligence and feasibility studies would be more appropriate.” Emulating ACF and cutting the loan appraisal fee to just 0.5% of the total loan amount being sought, is also an option the NPA report proposes UDB can ponder.
UDB is also called upon to consider accepting a fraction at the commencement of the loan application, only becoming entitled to the balance once one’s loan application has succeeded.
“This approach, as practiced by institutions such as the Kenya Development Corporation, ensures that unsuccessful applicants are not burdened with the full appraisal cost while easing liquidity pressures on loan applicants particularly SMEs and enterprises in high-impact sectors. Nationally, UDC has implemented similar approaches where the loan processing fees are deducted from the loan principal instead of paying upfront,” the NPA report concludes on this issue. Give us feedback on this story through our email: kamwokyatimes@gmail.com.
