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Demand for loans hits Shs4.9 trillion
Customers in a banking hall. The value of loan approvals from financial institutions rose to Shs2.8 trillion in the quarter to October 2021. PHOTO | FILE
What you need to know:
- Bank of Uganda is optimistic that the outlook for credit growth is positive in the short-term based on eased liquidity conditions and gradual improvement in economic activity.
Demand for credit from financial institutions has been on an upward trajectory since the last quarter of 2021.
Latest data from Bank of Uganda shows that the value of loan applications rose to Shs4.9 trillion in the third quarter of 2021, up from Shs3.7 trillion in the quarter to July last year.
Similarly, the value of loan approvals from financial institutions, which is a proxy for credit supply, rose to Shs2.8 trillion in the quarter to October 2021, from Shs2.2 trillion in the quarter to July 2021.
The details contained in the State of Economy report show that both the number of loan applications and loan approvals picked up in October 2021, having declined for a couple of months previously.
The growth in demand and supply of credit is reflective of improved economic activity following the easing of the lockdown.
Credit growth
The report shows credit growth was largely dominated by lending to the manufacturing sector, with an average share of 12.5 percent of total outstanding credit, which registered an annual growth rate of 16.9 percent, up from 8.5 percent, in the quarter to July.
Lending to the trade sector which had an average share of 17.4 percent of total outstanding credit in the quarter to October 2021, remains subdued, growing by an average of 1.2 percent annually, up from minus 0.6 percent.
The annual rate of growth of lending to the personal and household sector, with an average share of 18.5 percent of total outstanding credit, reduced to 18.4 percent from 19.5 percent.
Commercial banks, also being the biggest lenders, have maintained high interest rates with data showing an increase in the quarter to October of 2021 relative to July 2021.
The weighted average lending rate on the shilling-denominated loans averaged 19.0 percent, higher than the average of 17.6 percent for the quarter to July 2021.
The spike in interest rates partly reflects risk aversion due to uncertainty associated with the adverse impact of pandemic related restrictive measures.
This can also be explained with the expiry of credit relief measures, as well as deterioration in asset quality as the share of Non- Performing loans (NPLs) have continued to rise for all sectors, except manufacturing, mining and quarrying.
However, there are downside risks to the short-term outlook largely from continued uncertainty due to the lingering effects of Covid-19 on economic activity, the expiry of Bank of Uganda’s credit relief measures and deterioration in asset quality.
Beyond the short-term outlook, credit growth is likely to improve in line with projected economic recovery as the pandemic is contained and the economy fully reopens.
