Lessons to learn from Crane Bank takeover

A Crane Bank branch in Gulu. The bank is now under the control of BoU. file photo

What you need to know:

  • Structural factors, such as the high cost of doing business and heightened risk aversion by commercial banks could also have kept lending rates elevated.
  • The Shilling-denominated loans grew by 6.2 per cent year-on-year, while foreign exchange loans declined by 1.8 per cent on average in three months to August 2016 compared to respective values of 5.7 per cent and 0.7 per cent in three months to May 2016.

The rise in the levels of non-performing loans, weak private credit growth and the subsequent takeover of Crane Bank management by the Bank of Uganda shows that Uganda’s banking industry has been hit hard over the last one year despite the macroeconomic stability.
Even when Bank of Uganda eased monetary policy, interest rates in financial institutions have stayed high, which in part has contributed to high levels of non-performing loans alongside delayed payment by government to suppliers.

The lesson we learn here is that banks refusal to follow the suits of the Central Bank monetary policy easing trend which has exacerbated the levels of non- performing loans points to the need for banks to rethink their way of doing business to flourish in a rather challenging economic environment characterised by slower economic growth rate.
Latest developments in Uganda’s economy show that the Consumer Price Index data for September indicates that domestic cost pressures remain largely subdued, driven mainly by relative exchange rate stability over past seven months.
All components of inflation declined in September, save for food crops and energy Fuel and Utility (EFU).
Annual Headline inflation declined to 4.2 per cent from 4.8 per cent in August while the Annual Core inflation declined to 4.1 per cent from 5.0 per cent.

Other goods and services inflation declined to 4.4 per cent and 3.6 per cent from 5.3 per cent and 4.5 per cent, while food and non-food inflation declined to 4.8 per cent and 4.0 per cent from 5.4 per cent and 4.6 per cent, respectively.
Annual EFU increased to 4.3 per cent from 3.1 per cent, largely driven by increase in pump prices. In the same period the annual food crops inflation rose only marginally to 5.1 per cent from 4.8 per cent in August 2016.
The Bank of Uganda monetary policy report for October shows that growth in private sector credit remains subdued. In August 2016, private sector credit grew by 0.8 per cent year on year basis compared to 24.7 per cent in August 2015. In the 12-months to August 2016, annual Private Sector Credit growth averaged 11.3 per cent compared to 17.1 per cent in the year to August 2015.

The Shilling-denominated loans grew by 6.2 per cent year-on-year, while foreign exchange loans declined by 1.8 per cent on average in three months to August 2016 compared to respective values of 5.7 per cent and 0.7 per cent in three months to May 2016.
The Bank of Uganda explains that after accounting for valuation changes, credit growth averaged 4.9 per cent compared to 9.6 per cent over the same period.
Overall, financial sector remains sound but there remain pockets of risks, which includes declining credit quality in some business sectors.” The level of non-performing loans in banks as of June 30, 2016 stood at Shs907 billion which translates to eight per cent.

Lending rates on shilling-denominated loans remain relatively elevated notwithstanding the relatively eased monetary policy stance.
The weighted average lending rate averaged 24.1 per cent in the five months to August 2016 compared to 24.5 per cent in the five months to April 2016, a marginal decline of only 0.4 percentage point compared to the reduction of the CBR by 3 percentage points.
Structural factors, such as the high cost of doing business and heightened risk aversion by commercial banks could also have kept lending rates elevated.

Rates on foreign exchange denominated loans remained relatively stable at 9.4 per cent in August 2016.
As Ugandans and beneficiaries of the banking sector in Uganda, through savings , loans, investments and financial literacy, it is of fundamental interest that all registered banks in Uganda have best practices of good governance, be transparent and act with keenness when conducting investments using depository monies.
Banks should not take long to lower their lending rates in response to the Bank of Monetary policy stance such that they do not get the problem of high level of non-performing loans.
Ms Birungi Mugisha Journalist, [email protected]