LETSHEGO CHAIRMAN’S REPORT
Last year I reported on a fundamental review of Letshego’s business strategy. Our new Group Managing Director, Mr. Christopher Low, brings with him an outstanding corporate track record in the financial services and banking arena spanning sub-Saharan Africa, Asia, and the United Kingdom. He faced the immediate challenge of implementing a major transformation of the business, as envisaged in the business strategy.
Transformation Strategy and Performance
In brief, Letshego’s new strategy involves entering new micro-finance markets adjacent to our core payroll deduction offering. To do so in a low-risk and responsible manner requires a major internal transformation of how the Group and its subsidiaries operate. It requires major investment into our information technology (IT) and into building up the capacity of the Letshego workforce, as well as significant training and realignment of our employees to understand and rise to the demands of the new business operating model.
Letshego’s transformation is in response to the need to evolve beyond payroll deductions for its long-term sustainability, as well as to leverage opportunities provided by the new financial platforms that are transforming Africa’s economy. Letshego’s transaction systems are being re-designed to meet the technological challenges. This is a key driver of the business strategy.
While leading this transformation, the management team is also working to deliver the financial returns anticipated by shareholders and investors. On behalf of the Board, I am pleased to report that the team has met all objectives set for the financial period. Letshego’s internal transformation and diversification into new financial markets over a five-year horizon is well underway, and we can report on an excellent start indeed.
In an 11-month financial period (due to the change of financial year end to 31 December), Letshego’s profits before tax increased by 24%* to P970 million (2014 January: P850 million) and the net advances book grew by 28% to P5.7 billion. Despite our investments into transformation, the cost-to-income ratio improved to 29% (2014 January: 33%), while impairment charges on the net portfolio were kept down to 2.0%.
These exemplary results, when read together with our non-financial highlights, demonstrate that Letshego’s long-term sustainability is being increasingly assured. I anticipate that our results will continue improving in the years ahead as Letshego continues building out and leveraging its new business operating model.
The Socio-Economic Reality and Opportunity
In sub-Saharan Africa, the economies of the so-called “African Lion” countries are growing consistently at over 6% per annum, outstripping many other regions in the world. Although rising off a low base, these economies are benefiting from a wealth of natural resources, rapid infrastructure development, and rising consumer demand. At current growth rates, these African economies will more than double in size over the next decade.
While economies grow and ordinary African citizens start earning more cash than before, nearly 80% of this population of close to 1 billion people remains unbanked. Due to their cost and organisational structures, most traditional banks are not equipped to engage this lower income yet highly entrepreneurial class of people. At the same time, many, if not most, in this income band lack the assets and conventional financial literacy to approach these banks.
This has given rise to a wide disconnect between a population looking for financial access and banks that are simply not structured to meet this need. Ever resourceful, Africans are turning to mobile and other technologies to transfer cash between them. The rate and costs of technology advancement must act as enablers for the growth of those moving up the pyramid in a safe and regulated manner.
Based on our established and core payroll deduction business, Letshego is transforming itself to provide simple, accessible, and responsible financial solutions to the unbanked millions. We intend helping them up the next step in the ladder to join the growing middle class that will transform Africa itself.
Managing Market Risks
Letshego offers consumer and business development loans to middle and lower income segments. To minimise risk, these loans require more comprehensive background checking than payroll deduction loans. The Group’s recently implemented integrated banking platform enables more comprehensive data management, and the Group is lobbying for central credit registers in those countries still lacking in this regard. Strict policies for taking on new customers and extending further credit to existing customers apply. Each credit application is aligned to an individual financial plan, incorporating affordability assessments.
Many unregistered lenders are operating in African markets in an irresponsible manner. The lack of financial literacy in the lower income bands is a root cause of over-borrowing. In Botswana, Letshego is running a financial literacy programme to meet this need in close cooperation with the government. Should this three-year programme make significant inroads into reducing financial illiteracy, we will certainly consider rolling it out to our other markets.
Given that a high percentage of Letshego’s customers are government employees, we carefully assess the concentration risks in our customer base. Certain governments are tightening their budgets. Affordability for civil servants remains an area of focus. This is a major reason why diversification is being implemented as a key aspect of our forward strategy.
Regulatory Compliance and Corporate Governance
The Board ensures that we comply with regulatory requirements in each country where we operate. Bureaucracy can be a challenge at times, but the Group has built up the local experience to manage this. Letshego also has a policy of identifying suitable local equity partners, managers, and employees in each country, which helps ensure that we engage each market appropriately. Our multi-national workforce is a Letshego strength, as this diversity encourages the cross-pollination of ideas and learnings between the respective country teams. While listed in Botswana, we view Letshego as an authentic and growing pan-African group.
Over the past two years, Letshego has taken steps to introduce best practices in corporate governance policy and structures. We consider rigorous corporate governance to be a cornerstone of risk management and the responsible and ethical lending we are contributing to African economies.
