Letshego sharpens competitive edge

MBONGENI MGUNI
Staff Writer | Wednesday October 27, 2010 00:00

 

By lowering Letshego's costs of borrowing, the low interest rates have enabled the micro-lender to solve a long-running operational dilemma - that part of its funding is sourced from banks whom it also competes with in the market.

The dilemma has over the years put a squeeze on Letshego's margins, resulting in the group seeking to diversify its revenue base away from a reliance on interest income.

However, for the six months ended July 31, Letshego reported pre-tax profits of P296.7 million, 40 percent up from the corresponding period, powered by stronger lending and lower borrowing costs. Letshego's loan book across its seven subsidiaries rose by 22 percent to P1.8 billion while levels of borrowings declined by 24 percent to P348.8 million.

According to the financials, Letshego's interest expense-to-interest income expressed as a percentage for the half year to July 31 was 5.2 percent, compared to 9.1 percent for the corresponding period last year.Overall cost-to-income ratio between the two reporting periods has declined to 19.9 percent, compared to the 25.9 percent reported last year.

In an interview, Letshego Chief Financial Officer, Colm Patterson, said the micro-lender was pleased with its performance for the half year, particularly with the growth and quality of the loan book in Botswana and across its African subsidiaries.

'The prevailing interest rates, these have reduced our cost of borrowing, which has helped us in terms of our overall interest expense and we always look to make sure our offering to customers remains attractive,' he said in Gaborone yesterday.

'In terms of competition, it has been the case over the last 12 years that we have lines of credit from some of our competitors. One can look at them as competitors or as arrangements that benefit both parties.

'That competitive environment continues to evolve and develop. We want to continue our relationship with the banks while also broadening our lending base, and there are various initiatives being pursued in that perspective.'

Patterson noted that the global financial crisis had constrained Letshego's ability to diversify its lending base. 'One of the issues we have had is that from an overall perspective, the global financial crisis has made it more difficult to access new lines of credit,' he said. 'Hopefully, the worst is over and we continue to look to negotiating new lines of funding to grow the business.'

In February, Letshego was able to secure a P240-million convertible Pula loan from a private equity organisation at 10 percent interest over six years. In April, the micro-lender also completed the sale of its subsidiary, Letshego Guard, to Botswana Insurance Holdings Limited, raising another P57 million towards its funding.

Patterson said Letshego's impairment expense up to July 31 was 1.8 percent, comparing well with last year's 1.4 percent despite the negative impact of the recession. While commercial banks and other lending institutions have struggled with high levels of impairment, Letshego has largely been insulated due to its operating model. The bulk of Letshego's loan book is secured through government deduction codes, enabling the micro-lender to garnish its customers. However, the pan-African group is also exploring 'strategic alliances and acquisitions'.