Govt banks are just followers of private ones, says Finance Ministry report

The Ministry of Finance has said government-owned financial institutions cannot influence market movements because they are just followers of private banks that prioritise profits over economic transformation. 

In details contained in the Public Investment Financing Strategy, the Ministry of Finance indicated that out of the Shs38.3 trillion total assets held by the banking sector, at least 61 percent are held by five largely foreign private banks, around which an oligopolistic structure has been formed to bias interest rates movements upwards. 

“Public banks are undercapitalised and unable to influence the market. They are instead followers of the private commercial banks,” the report reads in part, noting that Uganda has invested the least in public banks compared to other East African member states where public banks influence market movements due to their large market share. 

For instance, the report indicates, in Kenya government-owned banks have a market share of 22 percent, while in Tanzania they hold 27 percent, compared to Uganda’s 7 percent. 

This, the report notes, limits the ability of the government to influence domestic lending in terms of financing strategic sectors of the economy and trends in interest rates. 

The report further notes that commercial banks, because they are largely driven by profits, have de-risked their lending, limiting it to safer sectors such as government securities and trade. 

“Five commercial banks, largely foreign owned, [hold] 61 percent of the assets in the [banking] industry. The behaviour of these banks makes interest rates sticky downwards. Most foreign banks minimise local lending and prioritise ... their lending to trade and government securities,” the report reads, adding that the action of such banks influence other banks in regards to credit policies and operations. 

Government fully owns three commercial banks including Uganda Development Bank, Post Bank and Pride Microfinance and holds a large stake in Housing Finance Bank.  

However, none of the above is listed among the domestic systematically important banks, which include Stanbic, Standard Chartered, Centenary, dfcu and Absa, whose actions influence market movements.        

The report also notes that compared to other members states in East Africa, Uganda’s lending rates, which average at 22 percent, remain the highest compared to 14 or 16 percent for other EAC states. 

This, the report notes, is largely due to the informality of the private sector, which makes it difficult for banks to assess risk and price it appropriately. 

“As a result, the borrower is required to provide additional security or collateral, and prudential rules require banks to provision higher amounts, thus tying up capital and limiting lending,” the report says, noting that this translates into high cost of capital. 

Lending to the private sector is further constrained by low levels of collateral possession, yet it is a default requirement for commercial bank lending. 

The report also notes that only 20 percent of Ugandans have collateral in form of land, building, other immovable and movable assets, among others. 

The lack of a framework in which none-performing loans can be handled, yet they tie up capital in the form of loan provisioning for nonperforming loans, is also a key constraint to private sector lending. 

Banks are also constrained by the high cost of regulatory requirements, infrastructure, inefficient public services, limited technology and skills.  
 
Validating customer data 

Lending is also constrained by the high operational costs, which are predominantly due to continued use of manual processes as well as the high costs incurred by the banks to trace and validate information about customers, and how long it takes for dispute resolution in the commercial courts. 

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