Fear of default forces banks to cut back on lending - BoU 

The fear of default has forced banks to reduce lending to certain sectors of the economy. Photo | file

What you need to know:

  • Even as banks cutback on lending, according to Bank of Uganda Deputy Governor Michael Atingi-Ego, they still have sufficient capital buffers to spur economic recovery. 

Bank of Uganda Deputy Governor Michael Atingi-Ego has said the banking sector has cut back on lending due to fear of default. 
Speaking during the fifth Annual Bankers’ Conference in Kampala, Dr Atingi-Ego said uncertainty about economic growth expectations due to several shocks hitting the economy had made banks shy in advancing credit to the private sector for fear of potential defaults due to poor business prospects. 
This, he said, has created a financing gap that is expected to constrain the rejuvenation and enhancement of local industrial capacity, which government had hoped would cover supply shortages that continue to present challenges to the economy. 
However, Dr Atingi-Ego indicated that banks still have sufficient capital buffers to spur economic recovery given that they remain solid and resilient, having entered the Covid-19 period with sufficient capital and liquidity buffers.
“Banks hold strong liquidity buffers underpinned by growth in liquid assets (mainly government securities) and deposits. The aggregate liquidity coverage ratio was 184.5 percent in June, above the minimum requirement of 100 percent,” he said, noting that all banks had during stress tests in March met capital adequacy requirements, capital conservation buffers and respective systemic risk capital buffer requirements with a potential to withstand any shocks, including credit risk. 
However, according to the Performance of the Economy for April, loan uptake had remained steady during March, defying volatilities in commodity prices experienced since November last year with private sector credit growing by 23.7 percent, representing a value of Shs1.082 trillion. 
The growth, which saw loan approvals increase to 59 percent, was the highest since January.   However, given the rate of mounting inflationary pressures, the banking sector has been reluctant to extend credit to some sections of the economy even as it has previously, under Uganda Bankers Association, committed to finance critical sectors of the economy. 
Dr Atingi-Ego said banks must step in to restore credit growth to pre-Covid-19 levels and above but should remain cautious given that the ratio of non-performing assets has increased to 5.8 percent, exacerbated by a highly volatile operating environment. 
The economy continues to face headwinds resulting from depreciation of the shilling against the dollar and a surge in inflation. 
Therefore, Dr Atingi-Ego noted the Central Bank shall continue to do whatever is within its means to foster price stability, which will in the long-run help to restore inflation to low and stable levels to maintain macroeconomic stability. 
Inflation has already breached the Central Bank 5 percent target, which compromises long-term planning, savings and investment.  
However, Dr Atingi-Ego said Bank of Uganda will continue to implement a tight monetary stance to prevent further price increases, which are now generalized across consumer goods and services, from becoming persistent and spiraling out of control. 
Lending to manufacturing      
Dr Hippolyte Fofack, the African Export-Import Bank chief economist and director of research, said lending to manufacturing remains low at about $6.1m, representing about 12 percent of total bank lending, which does not compare well with other African countries such as Egypt whose lending to manufacturing averages at $118b or 25 percent of total lending as of 2019. 
Lending to manufacturing in other parts such as Asia, he said, are higher and in such countries manufacturing has been the leading driver of growth and trade. 
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