Private sector credit up, borrowing still costly

The cost of money is the interest that could be earned if the amount invested in a business or security was instead invested in government bonds or in other time deposits.

The rate of interest is usually expressed as an annual percentage of the principle, and is influenced by the money supply, fiscal policy, amount being borrowed, creditworthiness of the borrower, and rate of inflation.

Despite the prevailing high cost of money in the credit market, during May 2020, the stock of private sector credit grew by 0.5 per cent to Shs16.3 trillion from Shs16.23 trillion in April 2020.

There was growth in both shilling and foreign currency-denominated lending, which rose by 0.4 and 0.8 per cent, respectively during May 2020. The growth in the stock of private sector credit was partly due to new credit extensions during the month, which was 20.1 per cent higher than for the previous month.

The Ministry of Finance said in the July economy performance report that new credit approved and extended in May 2020 totalled Shs589.49 billion, which was higher than the Shs490.80 billion that was extended in the previous month.

The Ministry of Finance said: “Of the total credit extended during May 2020, 30.1 per cent was to the manufacturing sector which accounted for the largest share in that month, just like the month before. There was an increase in the share of total credit extended to the real estate sector during May 2020 to 22.2 per cent from 8.6 per cent in April.

With the uncertainties still surrounding the health of the people and the economic activities, it is not yet clear whether the cost of money being loaned to the private sector/general public will come down in the country.

To support the post-Covid-19 economic recovery, the Bank of Uganda (BoU) further eased monetary conditions. The Central Bank reduced its policy rate (CBR) by 100 basis points to 7.0 per cent in June 2020.

The latest data for May 2020 indicates that weighted average shilling denominated lending rates rose to 18.84 per cent from 17.73 per cent recorded in April 2020.

The increase in average lending rates, amidst eased monetary conditions in part, reflects increased worries about credit losses within the banking sector.

On the other hand, the weighted average foreign currency lending rates declined during the month to 4.24 per cent, from 6.2 per cent in April 2020, which was partly attributed to the stability in the exchange rate.
BoU governor Emmanuel Tumusiime Mutebile in his July 7, 2020, letter to all chief executives of the commercial banks and the Uganda Bankers Association executive director asked banks to revise their lending interest rate downwards.
In response, the Uganda Bankers Association agreed on July 10, to review the lending interest rate downwards within the next 30 days to stem effects of Covid-19.