6% growth: Are banks picking up fresh appetite to lend?

Monday February 03 2020

A customer in a banking hall. Commercial bank loans extended to the private sector has positively influenced economic activity in Uganda. PHOTO BY ERONIE KAMUKAMA

Uganda’s economy is projected to grow at 6 per cent this year, something economists say is good enough because it will encourage banks to lend to the private sector.
Reliable financial services from banks are the lifeline in the economic structure so is the capital they provide. The availability of credit, therefore, is important in every country because firms (businesses) and households need finances to expand their enterprises.

In the last two years, Private Sector Credit growth in Uganda has recovered following the accommodative monetary policy in place by the Bank of Uganda, which has influenced lending rates to remain fairly low.

In a discussion with Prosper journalist on January 29, after presentation East African Economic Outlook by the Standard Chartered bank chief economist for Africa and Middle East, Ms Razia Khan who said Uganda’s economy is expected to grow by 6 per cent this year, the chief executive officer of Standard Chartered Bank Uganda, Albert Salton said the overall impact of 6 per cent growth in Uganda’s banking sector will be increase in domestic private sector growth because the general public will access finances for their economic activities.

Domestic credit to the private sector refers to financial resources provided to households and businesses by financial corporations in the form of loans, purchases of non-equity securities, trade credits, and other accounts receivable. In some countries, credit to the private sector may sometimes include credit to state-owned or partially state-owned enterprises.

Mr Salton said private sector (bank credit) extended to the private sector has positively influenced economic activity in Uganda.

“Private Sector Credit (PSC) has been growing in Uganda, with 6 per cent economic growth we expect it to continue growing for financing various economic activities of the private sector,” he said.


Mr Salton said bank credit will be needed for financing agriculture, trade activities, transport, manufacturing, and construction among other activities.

The low policy rate (Central Bank Rate) of 9 per cent by Bank of Uganda has supported the growth of private sector credit, while the inflation rate is low. All these according to Mr Salton encourage private sector investment in the economy.

The Bank of Uganda said in the highlight of the monetary policy report of December 2019 that money market rates declined in October and November 2019, in line with the reduction in the Central Bank Rate (CBR). During the period Treasury bill yields also continued to trend in line with CBR. Yields on treasury bonds with the exception of the 10-year paper rose in the Quarter to November 2019 compared to Quarter August 2019.

“Average commercial bank lending interest rates on shilling loans remained unchanged at 20.0 per cent in the Quarter to October 2019 similar to the Quarter to July 2019. Average lending rates on US dollar denominated loans declined marginally to 6.8 per cent in the Quarter to October 2019 from 7.0 per cent in the Quarter July 2019.

Time deposit rates on local currency deposits declined to 9.9 per cent in the Quarter to October 2019 from 10.3 per cent in the Quarter July 2019.While foreign currency deposits rates remained relatively stable at 8.2 per cent in the same time period.

“Growth in PSC remains robust although it slackened slightly in the Quarter to October 2019.Average (Year-on-Year) growth was 12.6 per cent in the Quarter to October 2019 relative to 14.3% in the Quarter to July 2019,” said the Bank of Uganda.

However, the Bank of Uganda said the lower growth in PSC in the Quarter to October 2019 could partly be due to the slackening in economic activity and an increase in Non-Performing Loans (NPLs) in September 2019.

Trend of lending
A sectoral decomposition shows that lending has generally declined across sectors except Agriculture.

Average annual credit growth to the personal and household loans sector was 7.9 per cent in the Quarter to October 2019 lower than 8.7 per cent in the Quarter to July 2019.

In manufacturing, it declined to 14.4 per cent from 21.2 per cent; trade 11.9 per cent from 14.8 per cent; Building, mortgage, construction and real estate 12.8 per cent from 12.9 per cent.

“The share of NPLs in total loans extended by commercial banks rose to 4.4 per cent as at September 2019 compared to 3.8 per cent as at June 2019;Poor performance of loans to the building and construction, trade and services sectors, coupled with high NPLs in the agriculture sector,” said Bank of Uganda.

While presenting the East African regional Economic outlook, Ms Khan said conditions in the global financial market show that the US Dollar will remain strong through 2020 while there are low interest rates in bonds charged in advanced markets (advanced economies). This implies that the investors are getting low returns on their investments in advanced economies.

“The dollar remains strong globally; we are likely to see it benefits in the Sub Saharan Africa in local domestic market in the debt market,” she said.

Ms Khan said due to high returns on investments in emerging markets economies and developing economies international investors will prefer to invest in domestic debt markets in African countries.

Ms Khan said Kenya has been attracting investors’ interest unlike the equity market which has attracted high appetite from investors.

Uganda government issues treasury bills and treasury bonds in the debt market, which attract international investors in the local debt market.

Ms Khan said: “Uganda has the most open debt market in the region which offers offshore investors to participate in the debt,” she said.
Uganda’s financial sector though still very shallow, attracts offshore investors.

The head of financial markets Standard Chartered bank, Charles Katongole told Prosper magazine that the dollar will remain strong in Uganda. However, Mr Katongle said the strong dollar has not discouraged offshore investors in Uganda’s debt market because of the high returns on their investment in the local domestic market.

Uganda’s fixed income (treasury bonds) is in the range of 8 per cent to 10 per cent of the total government security in the market.

State of liquidity
Asked about the current liquidity conditions in Uganda’s banking industry Ms Katongole said currently, there is Shs1.2-3 trillion that the banks are siting on in the interbank market.

“There is still room for banks to lend to the private sector,” he said.

The Ministry of Finance in its performance of economy report for December 2019 says the stock of outstanding private sector credit grew by 0.9 per cent from the Shs15.498 trillion that was recorded in October 2019 to Shs15.639 trillion in November 2019 and 10.9 per cent when compared to November 2018.

“This growth was partly due to an accommodative monetary policy,” said the ministry of Finance said.

The primary market was characterised by an increase in yields across all tenors, largely attributed to reduced demand for these instruments.

It explained that the annual yields to maturity for December were 9.43 per cent, 11.33 per cent and 12.48 per cent for the 91, 182- and 364-day tenors, respectively. This compares with 8.56 per cent, 10.59 per cent, 11.55 per cent for the 91, 182 and 364-day tenors in November 2019.

There were two Treasury bill auctions during the month, the 91-day tenor was undersubscribed on both auctions, whereas the 364-day tenor was undersubscribed on one auction. The 182 day tenor was oversubscribed on both.

Ms Khan said most central banks in the advanced developing economies have cut interest rates due to accommodative monetary policy stance) which has encouraged low interest rates and this could continue for some time.

Global perspective
In the World Economic Outlook it published on January 20 during the World Economic Forum in Davos, the International Monetary Fund said Global financial conditions continue to be accommodative by historical standards.

Overall conditions are little changed since the October 2019 Global Financial Stability Report.

“Over the past three months, markets have again been driven by two main factors: monetary policy and investor perceptions about trade tensions. Monetary policy has remained supportive. For example, the US Federal Reserve cut its policy rate by 25 basis points; the European Central Bank restarted net asset purchases at a pace of 20 billion euros per month,” said the IMF.