BoU’s lending to banks increases by Shs21.5 trillion

Commercial banks’ emergency borrowing from the Central Bank surged significantly in the three months to November, rising by at least 681 percent, according to the Bank of Uganda's December State of the Economy report.

The report, which highlights economic outlook, associated risks, and policy actions, notes that commercial banks borrowed at least Shs21.5 trillion in the three months from the Standing Lending Facility due to increased demand for short-term liquidity.

Details further indicate that borrowing from the emergency window rose from Shs3.7 trillion in August to Shs25.2 trillion in November, signaling a substantial surge in liquidity needs by banks for overnight operations.

“Utilisation of the Standing Lending Facility surged significantly to Shs25.2 trillion from Shs3.7 trillion in the three months to August, highlighting increased demand for short-term liquidity by banks,” the report reads in part.

The Standing Lending Facility, an emergency lending window, was created by Bank of Uganda in 2020 to mitigate Covid-19-related challenges. However, it has been maintained to help banks deal with liquidity shortages. 

The report does not explain the substantial surge in overnight borrowing.

Earlier, Bank of Uganda had reported a decline in utilisation of the facility due to recovery of the banking sector from Covid-19-related shocks, with short-term lending dropping to Shs3.7 trillion from Shs21.52 trillion in June. However, it showed signs of rising again in September, surging to Shs9.97 trillion in the month. 

The sharp resurgence in short-term borrowing, therefore, signals a liquidity squeeze in the banking sector that continues to bet on long-term government debt, in which a lot of capital has been tied, fuelled by an increase in government’s appetite for domestic borrowing. 

The Covid-19 squeeze saw commercial banks largely resort to the Standing Lending Facility to insulate themselves against liquidity challenges, with the facility registering a drop in draw-downs towards 2023 due to increased recovery and stability of the sector.

Bank of Uganda further indicated that the increased demand for cash, therefore exerted pressure on overnight interbank lending rates, which during the three months rose to an average of 11.2 percent from 9.9 percent, thereby impacting yields on government debt that rose across the board despite cuts in the policy rate.

In its October Monetary Policy report, Bank of Uganda lowered the Central Bank Rate to 9.75 percent, citing improved inflation outlook, which is projected to stay below the 5 percent target this year. 

The increase in domestic borrowing has, however, impacted growth in credit to the private sector, which slowed between September and November to 8.2 percent from 9.1 percent with both shilling and foreign currency-denominated loans declining to 10.4 percent from 11 percent and to 2.4 percent from 4.1 percent, respectively. 

Interest rates have also remained volatile, with prime lending rates for shilling-denominated loans remaining unchanged at 20.7 percent, while weighted average shilling lending rates edged higher to 19.1 percent from 18.1 percent, suggesting that banks maintained a cautious approach in their pricing strategies amid evolving credit dynamics.

The report also noted that private sector credit growth had softened, reflecting the impact of increased government borrowing, which constrained private sector access to credit, thereby declining to Shs800b from Shs1.2 trillion in July 2024.

Demand for credit, however, rose to Shs7.4 trillion from Shs6 trillion, signaling sustained economic activity and growing financing needs across various sectors, but banks were only able to supply credit of up to Shs4.6 trillion, even as this was an improvement from Shs4.1 trillion.

Bank of Uganda also reported a decline in credit apprval to 62.6 percent from 68.4 percent as banks adopted a more cautious lending approach in response to heightened risks and increased competition for funds.

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