Letshego: Where can growth come from?
Analysts point to Botswana’s widespread financial exclusion as an attractive growth opportunity for Letshego.
Even though the rate of financial inclusion in Africa has progressed rapidly in recent years, there is potential for growth across Letshego Group’s markets as financial exclusion remains widespread, a report compiled by analysts at Imara Capital says.
In the 12 months ended 31 December 2020, Letshego’s customers grew by 39 percent year-on-year. Kaone Kebonang and Mogorosi Badisang, analysts at Imara Capital, argue that the prevailing gap in financial inclusion in its markets presents a vast opportunity to drive portfolio growth for Letshego.
“Due to rising unemployment rates in Botswana, currently at 24.5 percent, Batswana may have to be entrepreneurs out of necessity rather than choice,” the two wrote, adding that the MSE sector in Botswana remains thoroughly untapped and underserved by the conventional banking system on the basis of its high-risk profile. “This presents growth opportunity for Letshego, as the microfinance sector has become a major conduit for the provision of financial services to micro enterprises.”
Letshego’s MSE business portfolio covers agriculture, education and housing financial solutions, in addition to general small businesses and traders. MSE loans focuses on financing incremental improvements to address housing and business needs, as well as support human development through education. The MSE book registered a 4.60 percent y-o-y increase to P 933 million (FY 19: P 892 million), accounting for 8.69 percent of the company’s loan book.
Expected credit loss provisions to gross loans improved by 882 basis points (bps) to 13.83 percent (FY 19: 22.65 percent) as the company improved its credit decision-making during the period and benefitted from increased collections and recovery efforts to lower impairments from the portfolio of loans. Collections improved to 81 percent from 75 percent reported at FY 19. Letshego says it will focus strategic support for small to medium subsidiaries and seize local growth opportunities, increasing collective contribution to group profits over the medium to long-term.
Kebonang and Badisang have observed that technology has revolutionised how microfinance markets operate, allowing micro finance institutes (MFI) to access micro-entrepreneurs in hard-to-reach areas, enabling implementation of more robust ICT and risk assessment tools. Thus technology represents a huge opportunity for microfinance institutions. “From a market development perspective, technological advancements such as mobile money and branchless banking enable the microfinance industry to leap over phases that it would have otherwise had to go through,” they wrote, adding that they allow MFIs to adapt their products to the unique environments and business cycles of their clients. “Letshego’s digital transformation strategy, which will see it enter the fin-tech space, is a commendable effort as it could increase access for customers and provide new revenue and value-producing opportunities,” they say. “Letshego’s ‘LetsGo’ application has high potential to catalyse future growth for the company, given the generally high penetration levels of mobile money offerings in the sub-Saharan region, suggesting there is a readily available market for the product.”
Letshego’s ‘LetsGo’ is in the piloting stage in Botswana and Nigeria. The group-wide launch of Letshego’s digital platform and digitalisation of Deduction-at-Source (DAS) planned for 2021 is expected to broaden ease of access and grow this core product offering. Kebonang and Badisang argue that Letshego’s technological progress is one of the key factors that will anchor growth driven by cost control efficiencies, business continuity and greater customer reach. Management is targeting one million enterprise active customers by 2023.
Analysts say in order for the counter’s performance to be sustainable, diversification is a requisite. Whilst the company has hinted of potentially exiting some of its markets, it has since turned on the decision and committed to its jurisdictions. Letshego says it is introducing non-credit based products to caution against potential high unemployment as the SOE ends and government embarks on a mission to rightsize.
The company has not given up on acquiring a deposit taking licence. The Chief Executive Officer said during a briefing on the results presentation that they will be looking to acquire a partner in this journey. Across 11 of its markets, Letshego’s six are regulated deposit taking institutions – Mozambique, Namibia, Nigeria, Rwanda, Tanzania and Ghana. Letshego’s funding is from its borrowings, development finance institutions and pension funds. The group wants to increase development institution funding going forward.
The company recorded strong deposit growth with a 56 percent y-o-y increase in deposits to P 664m (FY 19: P 427m) and a 54 percent y-o-y growth in deposit customers to 619,481 (FY 19: 402,298), driven by mass micro saving (MMS) customers in Tanzania and Mozambique. Imara says savings deposits represent an important complement to microloans and are an attractive source of financing. “Letshego’s mobilisation of savings as a source of funding will on average lead to a decline in its cost of funding.”