Bank of Uganda, in its financial review for June 2020, has revealed that while banks’ liquidity risk reduced, there were bank-specific funding shortages among some three supervised financial institutions.
However, the Central Bank does not reveal which banks sought for support in the period to June.
“In June 2020, one commercial bank accessed Shs20b from the Covid-19 Exceptional Liquidity Assistance Facility that was established by BoU to support banking institutions during the pandemic,” the review reads in part.
In addition, the Central Bank also reported that in July 2020, one credit institution applied for Shs2b but withdrew its application while another commercial bank borrowed Shs40b from the Lombard Window.
The Lombard Window is defined by Bank of Uganda as the lender of last resort and through it, the Central Bank lends money to commercial banks at an interest rate.
The review indicates that during the first half of 2020, the Central Bank at least released Shs60b to support commercial banks that had experienced liquidity challenges.
Bank of Uganda in April enforced measures such as providing permission to supervised financial institutions to provide credit relief through restructuring individual and corporate loans as a measure to mitigate the impact of covid-19 on the businesses.
The measure was meant to maintain liquidity in businesses during the period in which a number of businesses were operating at half capacity or fully closed down.
In addition, the Central bank set up a liquidity assistance programme for all supervised financial institutions including microfinance deposit accepting institutions and credit institutions, which previously had no direct access to BoU’s liquidity.
BoU also instructed supervised financial institutions to defer payment of dividends to enable them shore up liquidity reserves and capital.
According to the review, despite the slowdown in economic activities and impact of the Covid-19 induced lockdown, systemic liquidity risk in the banking sector diminished, as liquidity buffers in all institutions improved.
Liquid assets ratio-to-deposit ratio, which indicates the ease with which an institution can access money, increased for commercial banks, credit institutions and micro-deposit-taking institutions in June 2020 compared to the two years prior.
The rise in liquidity buffers, BoU said was accounted for by increased investment in government securities and cash balances, amid reduced credit growth.
Even then, certain banks needed financial assistance to weather the Covid-19 shocks.
As a result, the Central Bank said that in order to further address normal bank-specific funding stress, it embarked on setting up a Standing Lending Facility in July 2020, which is in the process of operationalisation.
In an email to Daily Monitor, Dr Adam Mugume, the Bank of Uganda executive director, research confirmed that the standing lending facility was being set up with the view of financing banks that are not necessarily under distress.
“Yes, the bank is due to operationalize a standing lending facility which is different from lender of last resort. This is to ease monetary operations in normal times when a bank that is not under distress is in need of short term liquidity,” he explained.
Dr Mugume went on to explain that the proposal under this arrangement is for a bank to access a standing facility at the upper band of the central bank rate, meaning slightly above 7 per cent.
This is expected to be lower than the interest charged when banks borrow from the Lombard window.
With non-performing loans expected to increase on account of potential failure to service loans by a weakened private sector, banks will need to fasten their seat belts.