BoU asks banks to limit lending on mortgages

KAMPALA- Bank of Uganda has advised financial institutions to put a limit on the loan-to-value ratio for residential mortgages and loans for land purchase because the impact of Covid-19 is likely to affect the quality of their assets.
The ratio is a lending risk assessment that the financial institutions and other lenders examine before approving a mortgage to their clients.

“As a risk mitigation measure, BoU hereby sets a maximum limit of 85 per cent on the Loan -to -Value Ratio for residential mortgages and loans for land purchase, wherein ‘value’ means the appraised market valuation. This will take effect from June 1, 2020 and stay in force until further notice,” Dr Tumubweine Twinemanzi, the executive director of supervision, said in a June 1 statement.

Dr Tumubweine added that the ratio would in the near term potentially lead to a double-digit decline in real estate valuations.

He said this increases the risks of downward pressure on banking asset quality, reduces collateral valuations, increases expected credit losses, and breaches of Loan to Valuation Ratio limits.
Loan share
In a new credit extension approved in February, building, mortgage, construction and real estate constituted 24.1 per cent of the total loans disbursed by the Supervised Financial Institutions .

On April 6, the central bank during its monetary policy committee meeting decided to reduce the Central Bank Rate by 1 percentage point to 8 per cent, saying the Covid-19 pandemic had led to a severe contraction in economic activity due to a combination of global supply chain disruptions, travel restrictions, measures to limit contact between persons, and sudden decline in demand.

The BoU said consumer-facing sectors have been severely affected by social distancing measures and heightened uncertainty, while the manufacturing sector has declined on account of disruptions to the inflow of raw materials.
It said the economic activity in the trade sector had also been weighed down by the decline in external demand and supply chain disruptions, while service sectors such as finance, insurance, and information and communications are affected by the general stall in business activity and investment.

Mr Mathias Katamba, the Uganda Bankers Association chairman, recently said: “We are fully cognizant that these are unprecedented times created by the Covid-19 pandemic and businesses across most sectors have and are bound to continue going through a period of stress.”