The value of both loan applications and approvals fell in the quarter to February, reflecting a decline in demand and supply of credit.
According to the monetary policy report by Bank of Uganda, during the period, loan applications fell significantly to Shs3.8 trillion from Shs4.5 trillion, which could be a signal of the drop in demand for credit.
However, out of the Shs3.8 trillion application, only Shs2.5 trillion worth of loans were approved from, falling from Shs2.6 trillion, mainly due to an increase in risk aversion.
Personal and household loans, during the period, took the largest share of both applications and approvals followed by trade, building, construction and real estate.
However, all categories registered levels that are way below the value of loan applications and approvals of Shs7.6 trillion and 4.8 trillion, recorded before Covid-19, particularly in the quarter to December 2019.
However, the contraction comes at a time when Bank of Uganda indicators have noted an improvement in the business environment in the quarter ended March.
For instance, the Bank of Uganda Business Confidence Index and the Markit Purchasing Managers’ Index (PMI), according to the monetary policy report, indicated a steady improvement in the business environment in the last two quarter.
The PMI increased to above the 50 mark in March to 53.2 from 51.2 in February, signaling growth in new orders and output.
This was the second month PMI was increasing, building confidence among business owners and operators that the economy will continuously improve over the next 12 months.
The stock of private sector credit by supervised financial institutions grew by 9.4 per cent in the quarter to February from 8 per cent in the quarter to November 2020, reflecting the gradual recovery in domestic economic activity.
During the period, the Central Bank noted growth in the stock of Uganda Development Bank (UDB) loans, which rose to Shs547b as of February from Shs469b in November.
UDB has been at the centre of lifting up the economy by lending to key sectors of the economy such as agro processing, manufacturing and primary agriculture sub-sectors.
As of February, the stock of restructured loans stood at Shs8.2 trillion, of which Shs4.6 trillion remained outstanding, implying that 46.9 per cent of loans in the banking sector have benefitted from credit relief measures since April 2020.
Bank of Uganda said credit relief measures have been important in moderating risk aversion and consequently supported lending in the short-term.
Credit extension to personal and household loans, agriculture and manufacturing rose by 8.2 per cent, 6.6 per cent and 13.6 per cent, up from 7.5 per cent, 5.6 per cent and 3.1 per cent, respectively in November 2020.
However, credit extended to trade, business services, and building, mortgage, construction and real estate sub-sectors declined by an average of -4.0 per cent, 5.6 per cent and 9.1 per cent, respectively from -0.1 per cent, 8.8 per cent and 10.4 per cent in November.
Bank of Uganda also noted that in the short-run, growth of private sector credit is likely to depend on the pace of economic recovery and the quality of bank assets, particularly the growing stock of non-performing loans.
Rise in interest rates
The Central Bank also noted that after a sharp decline in lending rates in December and January on account of significant loan extensions to prime customers in the telecom sub-sector, interest rates have since February been rising in agriculture, services, and building, mortgages, construction and real estate sub-sectors, which have recorded the highest rates of 22.9 per cent, 22.5 per cent and 20.8 per cent, respectively.