Commercial bank shilling-denominated lending rates maintained a downward trajectory in July, decreasing to a weighted average of 16.28 per cent from 17 per cent in June.
According to the Ministry of Finance Performance of the Economy report for the period ended July, the movement is partly due to a decline in the ratio of non-performing loans to total gross loans from 5.4 per cent in March to 4.8 per cent in June 2021.
The noted that decline in the ratio of non-performing loans reflects a decrease in the risk of default thus a reduction in the risk premium, which, feeds into commercial bank interest rate.
Similarly, during the period, according to the report, foreign currency denominated lending rates decreased from a weighted average of 6.03 per cent to 5.44 per cent over the same period.
The general decrease, the report noted, was also due to Bank of Uganda’s accommodative monetary policy stance, which seeks to support economic growth recovery as well as spur access to private sector credit.
Banking of Uganda has since April reduced the Central Bank Rate, which currently stands at 6.5 per cent.
However, private sector response has remained sluggish as some commercial banks continue to react with caution.
For instance, during the period, the stock of outstanding private sector credit increased slightly by 1.3 per cent to Shs18.415 trillion in July from Shs18.187 trillion in June.
However, the report noted that whereas the growth was lower than the 2.2 per cent recorded in June, it was much higher than the average growth of -0.1 per cent realised from January to May.
In terms of credit extensions, the report noted the value of loans approved in July had declined to Shs661.39b compared to Shs773.79b in June.
The bulk of advances, the report noted, went to personal and households loans, which took 28.7 per cent, followed by trade (19.3 per cent), manufacturing (13.8 per cent) and agriculture (13.5 per cent).
Credit to construction declined by more than over 50 per cent, which is consistent with reduction in growth of the construction sector.
highlighted by the Purchaser Managers Index.
However, the report noted that despite the reduction in lending rates and non-performing loans, credit extension remains subdued due to default risk.