Non-performing loans: Banks reduce lending 

The rate of growth of private sector lending stands at 6.7 percent, which is below the Central Bank’s target of 13 percent. Photo / File 

What you need to know:

  • Private sector credit, Bank of Uganda says has been growing at a lower than projected target compared to 10 years ago

Bank of Uganda (BoU) has said the heightened growth in non-performing loans has made financial institutions to slow down lending to the private sector. 

The slowdown, thus, Bank of Uganda says has seen lending to the private sector remain weak, way below levels seen about 10 years ago. 

Speaking during a presentation of the Fourth Financial Stability report in Kampala, Bank of Uganda executive director supervision Tumubweine Twinemanzi, said growth of private sector lending had weakened compared to 10 years ago. 

In the 2024 first quarter, he said private sector credit had grown at 6.7 percent, which is way below the Central Bank target of 13 percent. 

Private sector credit is key in financing production and consumption, which in turn impacts the wider expansion of the economic. 

In his presentation Dr Tumubweine said there has been a noticeable reduction in private sector credit across all sectors of the economy except households and real estate, highlighting that financial institutions remain cautious, amid growth in non-performing loans, which in the quarter ended March 2024 rose to 5.1 percent from 4.7 percent. 

The increase was mainly due to an increase in the ratio of non-performing loans in trade, which rose to 7.4 percent, while real estate and community services registered a 7 percent and 6.9 percent rise, respectively.  

Dr Tumubweine also noted that there was a possibility of non-performing loans rising further due to spillover effects of Covid-19 that continue to negatively impact the financial sector, and the larger economy. 

“Bank of Uganda continues to engage supervised financial institutions to enforce prudent credit risk management and adequate capital to minimise losses,” he said.

However, Bank of Uganda noted that despite the slowdown in the growth of lending levels, financial institutions continue to register a number of positives, among which include a 3.4 percent rise in deposits, which in the quarter to March, rose to Shs34.8 trillion. 

During the period, however, there was a decline in cash and investment in government securities by banks, while at the same time the share of banking assets held by domestic systemically important banks reduced from 64.4 percent to 61 percent due to an increase in capital requirements to meet the revised regulatory paid-up capital of Shs150b by June 30, 2024.