Business

High interest rates lead to rise in non-performing loans

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Bank of Uganda governor Emmanuel Tumusiime Mutebile 

By MARTIN LUTHER OKETCH

Posted  Wednesday, March 9  2016 at  02:00

In Summary

Not bad. Bank of Uganda says the level is within limits

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Kampala.

High interest rates, leading to low repayments of loans by borrowers, have increased the number of non-performing loans (NPLs), both business and personal, in Ugandan banks by 1.2 per cent in 2015.

However, Bank of Uganda (BoU) says the percentage is still within limits because it is far below the international standard which classifies NPLs as bad when they stand at 10 per cent.

In an interview with Daily Monitor recently, the BoU director financial stability, Dr Charles Abuka, said: “The level of non-performing loans in the banking system remained relatively stable throughout 2015. For the period ended December 2015, the NPL ratio increased slightly to 5.3 per cent from the level of 4.1 per cent recorded in December 2014. While there has been a slight increase, this is still a good level of asset quality by international standards.”

Regarding bank asset capital adequacy, Dr Abuka said it stood at 18.6 per cent as of December 2015 comparedwith December 2014 when it was 19.7 per cent. “While it has somewhat decreased, the sector is still recording a capital adequacy level that is well above the minimum acceptable ratio of 8 per cent,” he said.

Despite the business challenges in the country, banks in Uganda continue to make relatively stable profits. Average return to total equity in December 2014 was 16.1 per cent and was 16.0 per cent in December 2015. Dr Abuka said the banking system held adequate liquidity buffers at the end of December 2015. The ratio of liquid assets to total deposits was 46.4 per cent, well above the minimum requirement of 20 per cent.

“Ugandan banks continued to be profitable throughout 2015. Overall, Uganda’s financial sector is resilient to shocks and is adequately capitalised,” he said, adding that: “In absolute terms the sector was more profitable in 2015 compared with 2014.”

Talking to Daily Monitor recently, Mr Martin Bamukunde, the senior manager PricewaterhouseCoopers, said: “Credit risk is expected to rise in an environment experiencing rising interest rates. NPLs are a reflection of the challenges experienced by borrowers in meeting their financial obligations as and when they fall due.”

Banking facts
As at December 2015, Uganda had 25 licensed commercial banks with a total of 581 branches and 850 ATMs.
Imperial Bank which has been under the care of BoU has been taken on by Exim Bank of Tanzania.
Equity Bank and Stanbic Bank have merged some branches and reduced on customer service points while there is talk about Barclays Bank parent company pulling out of Africa.

moketch@ug.nationmedia.com