The year 2017 is being described as a year of consolidation, especially in regard to decline in the level of non-performing loans and bank lending, which offers hope that Uganda banking industry will do better in 2018.
During the annual Uganda Bankers Association (UBA) dinner held at Pearl of Africa Hotel on November 24, bankers were told that the non-performing loans (NPLs) to total loan ratio have fallen from 10.5 per cent in December 2016 to 7.2 per cent in September 2017. In absolute terms, NPLs fell by 32 per cent, over the same period.
In a healthy and sound financial system, a performing loan will provide the bank with the interest income it needs to make a profit and extend new loans, while a non-performing loan, in both theory and in a practical sense does not!
Banks supervisors generally consider a loan to be non-performing when more than 90 days have passed without the borrower paying the agreed installments.
To be successful in the long run, a bank needs to keep the level of bad loans at a minimum so that it can still earn a profit from giving out loans.Nonetheless, NPLs are a fact of life for banks, as borrowers lose their jobs and fail to pay back. Companies too run into financial trouble anf fail to meet their loan obligations.
This often happens when a borrower faces unexpected financial difficulties, for example when an individual loses their job and, therefore, cannot repay their mortgage as agreed, or when a company experiences financial difficulties.
In the worst case scenario, the borrower is completely unable to repay the loan and the bank needs to correct the value of the loan on its balance sheet - sometimes even to zero. This is often referred to as “writing off” a loan.
Once the value of non-performing loans exceeds a certain level, the bank’s profitability suffers because it earns less money from its credit business.
Banks need to put money aside, that is make a provision, as a safety net in case they need to write down or write off the loan at some point in time.
Both the drop in income and the money set aside for the worst-case scenario result in the bank having less money available to provide new loans, further reducing its profits.
A bank with too much bad debt cannot properly provide companies with the credit they need to invest and create jobs. If this happens to many banks on a large scale, it affects the economy as a whole and therefore individual members of society.
Reduced investment by companies and a lower number of newly created jobs lead to less growth like it was the case in Uganda in the financial year 16/17 which saw economic growth rate drop to 4.0 per cent from 4.7 per cent registered in 2015/16.
Year of consolidation?
In his address to the bankers, the Deputy Governor Bank of Uganda (BoU), Dr Louis Kasekende said over the course of the first nine months of 2017, the financial soundness indicators of the banking system have improved.
“The non- performing loan to total loan ratio has fallen from 10.5 per cent in December 2016 to 7.2 per cent in September 2017; and in absolute terms, NPLs fell by 32 per cent, over the same period, the total capital adequacy ratio of the banking system increased from 19.8 per cent to 23.8 per cent of its risk weighted assets. Strong capital buffers are of particular importance in bolstering the resilience of banks adverse shocks,” he said.
Since the past year was described as a difficult year for banks in Uganda, with banks registering high levels of NPLs, lower profitability, among others.
Mr Kasekende said 2017 is a year of consolidation, especially in regard to lending, with gross loans and advances increasing by a mere 1.8 per cent in the year to September 2017.
“I hope that the downward trend in NPLs and reduction in the policy interest rates will encourage banks to ease their lending policy interest rate acceleration of credit growth in 2018,” he said.
Mr Kasekende advised that the crucial problem that needs to be addressed if banks are to strengthen loan quality is that the valuation of property must be done right.
In a recent survey on real estate lending by BoU, Mr Kasekende said the majority of commercial banks reported concerns about valuation standards and some indicated that they have faced challenges realising the value of collateral because of inflated valuation reports.
“A key gap appears to be the lack of a uniform industry standard,” he said.
Mr Kasekende thinks that it would be useful for the UBA to work with stakeholders to develop common guidelines and standards in this era.
As things are changing for the better, this prompted Mr Kasekende to say the current year is probably best characterized as a period of financial consolidation for the banking industry.
On the other hand, while giving a reflection of the past year, Mr Kasekende said at the end of 2016, one of the largest banks in Uganda - Crane Bank - had been taken into the statutory management of the BoU and the banking industry as a whole was struggling with high levels of non-performing loans and low profitability.
The taking over and subsequent selling of Crane Bank to dfcu Bank left some cross section of the public disgruntled.
However, Mr Kasekende said: “We were able to resolve Crane Bank successfully, without any loss to its depositors, and without any contagion to the rest of the banking system.”
Public confidence in the safety of depositors’ funds has been maintained. I believe that this is a testimony to both the underlying financial strength of the Uganda banking industry and the efficiency of our bank resolution framework,” he added.
Mr Kasekende explained that two aspects this resolution framework are especially worthy of mention, the Financial Institutions Act, 2004 mandates the bank regulator to undertake prompt regulatory interventions to stem the losses of failing banks before depositors’ funds are eroded.
The second one is that BoU has successfully utilised purchase of assets and assumption of liabilities transactions to minimise the disruption to the depositors and other customers of failed banks.
Uganda Bureau of Statistics (UBOS) says the financial sector grew by 1.1 per cent. The growth in the financial services is attributed to a better performance by the commercial banks during the third and fourth quarter of 2016/17.
The director macroeconomic statistics at UBOS, Dr Mukiza explains that there was improved performance in the financial services activities due to higher interest and non-interest income compared to the price change in the activities.
In the macro economic front, Mr Kasekende said the year 2016/17 financial year was undoubtedly difficult, with real Gross Domestic Product (GDP) growth being lower than potential not least because of the severe drought that afflicted Uganda in 2016.
However, as noted by the BoU Governor, Mr Emmaunel Tumusiime Mutebile in October 2017 monetary policy statement, the quarterly GDP data for the first half of 2017 and other high frequency economic indictors point to an acceleration of real economic growth in 2017 and we are now reasonably confident that we can achieve real GDP growth of at least five per cent in the current fiscal year,” Mr Kasekende said.
On inflation, Mr Kasekende said it is firmly under control, with the impact of the drought having abated; headline inflation has fallen by 2.5 percentage points over the last five months to 4.8 per cent in October 2017, while annual core inflation was only 3.5 per cent in October 2017.
He said the improving outlook for inflation allowed BoU to further lower the policy interest rate- the Central Bank Rate to 9.5 per cent in October.
Looking ahead, Mr Kasekende is confident that the banking industry in Uganda can innovate to reduce the cost of financial services, broaden the range of services available to customers and widen access to financial services, in particular through the adoption of digital financial services.
Despite, the advent of digital financial platforms such as mobile money being seen by commentators as competition to the formal financial services sector, to the contrary, these digital platforms have brought in more users into the formal financial system, with the number of accounts in commercial banks increasing from 4.5 million as of June 2015 to 7.4 million as of June this year. And the number of accounts in the financial institutions licensed by the BoU (commercial banks, credit institutions and MDIs) rose by 3.3 million over a two-year period to 9.3 million accounts as of June 2017.
Despite positive developments in the banking industry over the past nine months, Ugandan banks are still faced with many problems.
Mr Kasekende said many of the problems facing the banking industry today can more effectively solved if banks cooperate to pool resources and realise economies of scale and thereby reduce costs.
“A good example of this is the project, spearheaded by the UBA, to build a joint technological platform for agent banking, which can be shared by all banks. As digital financial services become an increasingly prominent feature of the banking market, the sharing of a joint platforms by all banks offers the potential to generate significant costs savings, which can be passed on to the customers,” he said.
Bankers’ view on credit
The chairman of UBA, who is also the managing director of Centenary Bank, Mr Fabian Kasi, recently said the banking sector in 2017 witnessed very modest and slow growth in private sector credit, which remained subdued despite sustained monetary policy easing and high liquidity within the banking industry.
“This is also in spite of banks lowering prime lending rates in response to the downward revisions by the Central Bank consistently during the year. Average prime lending rates have dropped from 25 per cent to 20.8 per cent with most banks’ lending the corporate sector at way below prime lending rates,” he said.
Mr Kasi added: “We do believe this subdued loan demand situation has been precipitated by the overall unfavourable economic slow-down that have helped businesses to generate the typical demand required to drive credit growth.
Banks have therefore been under pressure to find ways of stimulating credit growth and play their intermediation role, which we can only do by joining hands with the various sector players across the economy.”
Mr Kasi said a vibrant economy fueled by credit growth drives business, better fiscal performance and employment among others.
“We have recently proposed a series of interventions to our regulators and we will continue to dialogue with BoU and government on lifting aggregate demand and credit growth,” he said.
“We further believe that with the approvals of agents and agent banking plans now coming through from the Bank of Uganda, and commencement of the actual role out Agent Banking by member banks, the multiplier and trickle down effects therein will ultimately contribute to reviving the economy,” he added.
Although the lending rates are trending downwards, the chairperson of Uganda Manufacturers Association, Mr Barbara Mulwana, says commercial lending rates are still very high for the private sector.
“There is need for further reduction in interest rates by banks so that the business community can borrow more to expand on their enterprises,” she says.