‘Payback period for loans in banks is too short’

One of the commercial bank’s core function is to provide loans that allow companies to invest in expanding their enterprises while creating jobs. Money not only helps businesses to grow but also allows consumers to purchase goods and services.
Bank loans allow individuals to buy, for example, a house, a car, or new machinery for capital investment, the bank then earns money from the interest it receives on these loans.

Commercial banks provide liquidity through loans, access to money on deposit and the availability of revolving debt by using credit cards or by participating in government debt (purchase of treasury bills and treasury bonds in both primary and secondary markets in the domestic money market).

All the 24 commercial banks in the country lent out Shs14.8 billion, the highest level in recent years. By the end of September 2018, the total stock of private sector credit was Shs13.892 billion compared to the same month in 2017. This number has improved, registering a 12.5 per cent growth from Shs12.3 billion in September 2017, meaning more people are borrowing from banks despite high interest rates.

In an interview with Prosper Magazine, Bank of Uganda’s director communications, Ms Charity Mugumya said: “The stock of private sector credit as at January 2019 was Shs14.8 billion; reflecting an annual growth rate of 17.6 per cent.”
Banks or financial institutions give loans to different sectors based on demand. Presently, almost all sectors in the economy are increasingly accessing loans from banks and there is liquidity in the market.

Ms Mugumya attributed this trend to the shares for leading sectors such as: Trade comprising 20.4 per cent; building, mortgage, construction and real estate 20.2 per cent; personal loans 18 per cent; agriculture 13 per cent and manufacturing 12.6 per cent.

“The loan extension per sector is a combination of several factors; including riskiness of the sector; the return to investment of the sector; collateral and loan maturity and pay back,” she said.
Banks are in the business of giving out loans. So, when you take a loan, the bank takes a risk that you might not repay it within the agreed time-span.

Non-performing loans
According to the regulatory guidelines, if the borrower stops paying back the loan or the interest, after a specific period of time, the bank must classify the loan as a “bad debt” or “non-performing loans.”
A performing loan will provide the bank or banks with the interest income it needs to make a profit and extend new loans, while a non-performing loan does not.

Cost of finance
The cost of finance or credit is still high for most enterprises despite various policy actions by Bank of Uganda.
The level of non-performing loans or assets has been reducing in the recent past. Ms Mugumya said the weighted average lending interest rate was 21.4 per cent in January 2019, while the non-performing loans to total loans stood at 3.4 per cent in December 2018.

Private Sector Credit (PSC), a leading indicator of the financial sector’s contribution to economic activity, has continued recovering from a rapid contraction in the year to September 2016 when it reached lows of minus 1.0 per cent.
The PSC grew by 6.9 per cent year-on-year (y-o-y) in February 2017, up from 5.4 per cent in the year ended January2017 and minus 1 per cent in the year ended September 2016.

Trends in Private Sector Credit growth in Uganda show that average annual growth in PSC expanded by 6.1 per cent in the quarter to February 2017, up from 2.6 per cent in the quarter to November 2016. After adjusting for the exchange rate changes, on year-on-year (y-o-y) basis growth in PSC averaged 3.9 per cent in the quarter to February 2017, compared to 3.5 per cent in the quarter to November 2016.

Bank of Uganda says economic growth is expected to remain robust, strengthening to above 6 per cent in 2018/19 and 6.5-7 per cent over the medium term.

In an interview, Mr Samuel Fredrick Mwogeza, the chief finance officer of Stanbic bank, said Uganda’s interest environment in the last one year has been low which allowed people to access loans from low credit.

Mr Mwogeza said there was a slow period in the first half of last year but activities picked up in the second quarter of the year.

He further explained that the aggregate demand, which is key in an economy has improved in Uganda, adding that improved economic fundamentals of the various sector shows that the economy is growing.
“We are very optimistic that this year and the next two years will be good, if the FDI in the oil and gas gets in quarter three of this year,” he said.

With total share of loans to manufacturing sector standing at 12.6 per cent, in an interview the executive director of Uganda Manufactures Association (UMA) Association of 1,200 membership, Mr Daniel Birungi, said the growth in loans for manufacturers has gone up which is a good thing.

But the cost of credit remains high plus the tenure period for the manufacturers to pay back the loans.
“The average pay back period for the manufacturers should be in the range of seven to 15 years. However, the average payback return period for commercial banks is between three and five years which short for the manufacturers and it remains a challenge,” he said.

“As manufacturers, we have always campaigned for is recapitalisation of Uganda Development Bank and increasing the tenure of these loans to longer term which could provide low cost of credit,” he added.

Money supply
Growth in bank lending is an important driver of both interest rates and inflation. For instance, when inflation rises due to excess money supply, the central bank may raise the Central Bank Rate to control both the interest and inflation rates.
“The Central Bank Rate was at lowest rate at 9 per cent last year before it was raised to 10 per cent. As a result, we have seen uptake in loans increasing in the manufacturing, building and construction and personal loans,” Mr Samuel Fredrick Mwogeza said.