What you need to know:
- Overall, Uganda’s financial system is characterised by small and concentrated private bank-dominated financial systems, a large informal financial sector, shallow capital markets, high borrowing costs and underdeveloped long term savings, development banks and other financial institutions.
Global debt for households, firms and governments is glaringly in excess of 300 per cent of world GDP. This implies that debt is an imperative factor in leveraging economic activity across the globe particularly where economic return is foreseeable. However, in the global debt composition, there are a few bad oranges in the basket.
Turning back to Uganda, government is the largest borrower from the domestic market, with an outstanding stock of Shs 12.7 trillion in February compared to total private sector credit of Shs12.1 trillion.
Over the last four years, commercial banks have increased their investment in government securities at an annual rate of 19 per cent compared to growth in commercial bank credit of 13 per cent (and slowing. As of June 2016, commercial banks held 43 per cent of the total government securities. The rest were held by NSSF (33 per cent), offshore investors (10 per cent) and others (14 per cent).
This trend suggests shrinking space for private sector borrowing due to heightened government borrowing, yet government employment accounts for about six per cent labour force.
Private sector credit for Uganda as a share to GDP, a measure of financial depth at 15 per cent, is low comparable with low-income countries - far below the Sub Saharan Africa average of 24 per cent and more than 40 per cent for other regions (North Africa, East Asia, Middle East and Latin America and the Caribbean). The limited credit penetration reflects the quality and size of the private sector. That is why the banks that account for more than 75 per cent of the financial sector still hold substantial excess reserves (beyond the required levels by Bank of Uganda).
The other telling sign is in the notable weakness in the banking sector. The loss-making banks in 2015 were five, including Crane Bank (defunct) now taken over by Dfcu. The level of non-performing loans (NPLs) reached 10 per cent of gross loans in December 2016, twice the ratio in December 2015. Uganda has the second highest NPL ratio in East Africa after Burundi.
The leading NPLs are in building and construction sector, the agriculture sector and trade services. While the agriculture sector accounts for 10 per cent of the outstanding private sector credit, together with building and construction, they continue to account for largest composition of NPLs.
This performance coincides with the tight economic conditions and slowing economic growth, particularly in the agricultural sector. The agricultural output growth has averaged less than three per cent per annum since 2010, lower than population growth rate. On a quarterly basis, the sector output exhibited recessionary trend in 2015/16 - that is two consecutive negative quarterly growth. Also a slowdown in investment growth impacts negatively on building and construction, since 70 per cent of the total investments in Uganda go to buildings and structures. With such composition of investments, capital productivity is likely to slow further in the long run.
On the supply side, financial sector assets as share of GDP also remain low at less than 50 per cent of GDP, which is half the share in the aforementioned regions. Another important source of capital for the private sector is through equity markets either through listing or issuance of corporate bonds.
Uganda’s equity market remains small, illiquid and shallow with only 16 companies registered on the equity segment and five corporate bonds listed on debt segment of the Uganda Securities Exchange (USE). There hasn’t been any activity on the primary market (initial public offers) since 2012, when Umeme was converted into a public company. The secondary market activity on USE remains subdued and registering annual total turnover less than three per cent of GDP.
The Ugandan private sector is arguably small and prefers to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 per cent of businesses had less than four employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than one per cent of GDP.
Overall, Uganda’s financial system is characterised by small and concentrated private bank-dominated financial systems, a large informal financial sector, shallow capital markets, high borrowing costs and underdeveloped long term savings, development banks and other financial institutions. Without pragmatically improving the general business environment and growing a substantial middle income class, the level of financial leverage for private sector will remain low. No more pussyfooting on structural and long term reforms.
Mr Nyorekwa Twinoburyo is a PhD Fellow at University of South Africa