Hunter becomes the hunted: Banks take on bad debtors

Life was normal for Charles Kibuuka, (Not real names) - One of Kampala’s known commercial property owners. His businesses were doing well. He was looking forward to seeing one of his buildings change the sky-line on Kampala Road.

Saturday July 28 2012

An aerial view of Royal Palm Estates in Kampala.

An aerial view of Royal Palm Estates in Kampala. Economic experts say the construction sector has seen a rise in bank loans partly due to a fall in interest rates. High inflation rate has made it difficult for borrowers to pay back the loans. PHOTO BY ismail kezaala 

By Dorothy Nakaweesi & Solomon Arinaitwe


Life was normal for Charles Kibuuka, (Not real names) - One of Kampala’s known commercial property owners. His businesses were doing well. He was looking forward to seeing one of his buildings change the sky-line on Kampala Road.

About seven years ago, it was difficult to get a bank loan from the 14 commercial banks. But tides have changed. The number of commercial institutions has doubled, compelling a competition for customers.
Because of this, Kibuuka was able to get Shs2 billion loan from one commercial bank to complete his magnificent commercial building.

Initially Kibuuka had invested Shs4 billion, which he used to acquire the prime plot and start the initial stages of the building. Life was good -he could afford to service his loans. Getting a loan at 16-18 per cent interest was affordable and flexible. He could afford to have two or more loans from different banks-generally that is how life has been. But 2011 was a dreadful year because the global financial and economic crisis hit Uganda’s economy. Inflation shot up, prices of commodities went wild, consumption went down and interest rates jumped. This was bad news for Kibuuka and other businessmen.

Kibuuka could not afford to meet his monthly loan repayments to the banks. His businesses were at risk. A few weeks ago, his fears came to pass as the bank took over his dream building along Kampala Road and placed the building in receivership. Kibuuka’s case is one among several receiverships cases happening, as banks attempt to recover their money from non-performing loans.

Reliable information from the business circles in and around Kampala shows that a couple of shopping malls, arcades, homes and businesses have been put under receivership; others have been taken over already. According to information from Bank of Uganda (BoU), non-performing loans have almost doubled.

Dr Adam Mugume, the BOU director research, says: “True, non-performing loans in banks have increased from 2.2 per cent as of December 2011 to about 3.4 per cent in March 2012.” But he adds that by all standards, this is still better than international standards. EAC region average is about 12 per cent.

Default origin
Experts attribute this crisis to the fierce competition among banks. Loans were offered to many people who previously may not have been qualified. BoU records show that, loans have been growing since 2007, especially in mortgage, construction and real estate.

“Loans to building, mortgage, construction and the real estate sector were Shs226.5b in December 2007, Shs586.6b in December 2008; Shs639.3 billion in December 2009 and Shs1065.2 billion in December 2010,” Mr Mugume adds.
This growth continued last year. By last December, a total of Shs1465.3 billion worth of loans had been issued in these sectors. By May 2012, it had grown to Shs1674.4b.

Earlier, BoU report show that bank assets quality had improved. The level of non-performing loans (NPL) in the banking sector reduced by 30.5 per cent between June 2010 and June 2011. As a consequence of the overall improvement in loan quality, banks were able to reduce their loan-loss reserves by Shs24.7 billion to Shs77. 2 billion in the year to June 2011.

Mr Michael Malan, the managing director of Compuscan-the company which operates the Credit Reference Bureau in Uganda said: “We see all forms of debt activity on the CRB, most notably was the early reduction of interest rates with the advent of the Central Bank Rate (CRB), helping banks to make safer lending decisions, which corresponded with an increase in lending.” He adds: “Subsequently, we have seen increases in exposures and borrowers falling into arrears as they battle to service their loans.”

He also says the CRB is assisting banks to make more informed and more reliable lending decisions by linking all exposures together of all loans. Banks need to know the exposure of the loan applicant so that they can offer a fair rate for the perceived risk.

“We agree that it became easy in 2011/2011 to acquire funds, and this was a part of the intended benefits of the CRB. Our specific function is to highlight how people are managing all their loans, to ultimately make access to credit easier and more affordable,” Mr Malan says.

“We also have a parallel focus and that is to protect borrowers from going deeper into debt.It is our opinion that if it were not for the increased interest rates, people may have become even more indebted, getting access to “easy” money. The inevitable market shock fuelled by inflationary pressures could have been even worse were it not for the CRB’s information.” “Lending is a risk game and all risks were vetted, but no-one could forecast what was to transpire with inflation”.

Inflation climbed in less than 12 months from 1 per cent to 30 per cent. Living expenses were notably skyrocketing - people needed cash to continue the same standard of living they had become used to. “But the market never reacted and borrowing continued as interest rates soared at banks,” Mr Malan says.

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