Banking sector remained resilient amid challenges 

According to Bank of Uganda all supervised financial institutions remained resilient against both internal and external shocks in 2022, supported by growth in both income and profitability. Photo / Edgar R Batte 

What you need to know:

  • For the economy to hold in the face of several shocks, it was important that the banking sector remains stable during 2022.
  • Indeed, data shows that the stability in banking formed the pillar on which the economy held onto to post some growth

If there was any sector of the economy that defined resilience in its true sense in 2022, it was banking. 
Talk about standing out at a time when everything else is on its knees. Outside banking, many sectors were just eager to see off a largely difficult year, in which most input costs and output prices rose amid subdued demand.  Yes, it was a tough year even by extension, for the financial markets.      
Well, the banking sector is a critical intermediary in payments and the exchange of goods and services. 
Therefore, its stability and liquidity is of paramount importance. During 2022 financial markets stakeholders and the Central Bank have separately described the banking sector as extremely resilient amid serious shocks. 
During 2022, all banks had adequate core capital above policy requirement and lent out huge sums as well as providing support to customers with stressed loan books. 
Ms Sarah Arapta, the Uganda Bankers’ Association chairperson, told Daily Monitor that in 2022, banks remained sound and conducted conscious lending to support business growth. 
“We have maintained conscious lending and ensured that [our customers] borrow where it is necessary to guard against the rise in the non-performing loans,” she said, noting that during the year, banks maintained a high level of risk management and provided non-banking services such as financial advisory to help businesses remain grounded during a very difficult period.  
However, Ms Arapta indicated the that  high inflationary pressure came with an increase in interest rates as the Central Bank moved to control inflation that had threatened to wipeout economic recovery.     
But beyond the resilience, just like Mr Fabian Kasi, the Centenary Bank managing director, said 2022 has been a challenging year. 
“The rise in inflation, volatile exchange rate and rise in policy rates impacted the banking sector. So, it has not been easy to navigate. It required a lot of planning,” he said. 
During the period ended October, overall lending rates rose with weighted average shilling-denominated loans  increasing to 18.4 percent from 18.2 per cent in September, while foreign currency lending rates rose to an average of 7.71 percent from 7.19 percent. 
Prime lending rates marginally increased in October to 20.3 percent relative to 20.1 percent observed in September as commercial banks transferred their refinancing costs to retail creditors. 

However, the ratio of nonperforming loans fell slightly to 5.2 percent in September from 5.3 percent in June but is likely to rise going forward with higher inflation and slow growth.
Private sector credit declined in the quarter to October to 10.4 percent from 10.8 percent in July.  
However, during the period, shilling-denominated loans increased to 12.2 percent from 9.6 percent while foreign currency loans declined due to appreciation of the shilling.
Dr Michael Atingi-Eg, the Bank of Uganda deputy governor, said as the Central Bank, throughout the year they had conducted risk-based supervision to safeguard the sector from any volatility.  

“A resilient financial sector offers the bedrock for financial innovation as it allows the private sector to take calculated risks backed by sufficient equity so as not to put depositor funds at risk,” he said.
Similarly, while speaking during the Financial Stability Symposium in Kampala early this month, Mr Robert Mbabazize, the Bank Uganda director financial stability, said whereas the banking sector was sound, credit risk remained a concern due to the rising cost of servicing household and corporate debt, whose full impact had emerged after expiry of the Covid-19 credit relief measures.  

However, he said, capital adequacy and profitability remained strong for all supervised financial institutions supported by growth in interest income, which grew by 7.8 percent in the quarter to October compared to 4.9 percent in the July, a reduction in cost-to-income ratio from 72.1 percent to 71 percent, driven by declining loan losses, and enhanced performance of digital financial services. 
During the quarter to October, credit growth remained subdued, due in part to muted economic growth. Loans increased by 3.2 percent or Shs624b to Shs19.9 trillion, but this was lower than the 3.9 percent growth in June due to reduction in credit to manufacturing and real estate. 

Asset quality improved across the sector, largely due continued prudent write-off of bad loans. Nonperforming loans reduced slightly to 5.2 percent from 5.4 percent in Jun-22 but  loan write-offs rose to Shs128.9b from Shs102.8b. 
In September the Central Bank noted that the Covid-19 credit relief measures programme had ended. 
The programme had, just as it had been envisaged, successfully moderated credit risk and provided relief to banks and borrowers. 
Data indicate that 40.1 percent of total loans amounting to Shs7.6 trillion benefitted from the programme and by September, only Shs1.8 trillion remained under credit relief. 
The programme was extended for certain sectors such education and hospitality with a combined outstanding credit of Shs53.5b of September, of which Shs304.6b was due to education services. 

Liquidity and operational risks
Cybersecurity risks 

During 2022, liquidity and operational risks increased partly due to market conditions, rising spreads and tight monetary policy stance but assessment on systemically important payment systems returned a stable environment, save for Airtel Money, which experienced disruptions in October, for which, Bank of Uganda indicates, is the basis on which it engaged payment system operators to address cybersecurity risks such as online fraud, information theft, and malware attacks.
The banking sector concentration remained moderate during the quarter, with 57.5 percent of total assets shared between five domestic systematically important banks. However, the share was a slight reduction from 58.5 percent.