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How Uganda’s appetite for home loans starved commercial lenders of money

Bank of Uganda headquarters in Kampala.

A government decision to mobilise funds from the domestic debt market to clear outstanding loans issued by Bank of Uganda (BoU) in the past has triggered larger debt auction sizes, created liquidity challenges among commercial banks and stimulated higher funding costs for lenders, The EastAfrican has learnt.

Uganda’s Finance Ministry owes the central bank an estimated Ush10 trillion ($2.7 billion) in outstanding loans acquired in the past for financing various state projects, sources indicated.

“Government is trying to pay money owed to BoU and this has led to larger debt auction sizes. Government has so far paid Ush7 trillion ($1.89 billion) but the total amount owed to us is bigger than that,” noted Dr. Kenneth Egesa, BoU’s Communications Director.

Repayment of those loans is a key performance target highlighted in recent International Monetary Fund (IMF) country economic reviews.

Faced with larger debt auctions and rising interest rates earned on Treasury bills and bonds, several banks have reportedly increased their investments in government securities in the last few months, representing a double-edged sword for local lenders.

“Larger debt auctions, increased tax payments and reduced government spending have affected liquidity levels in the banking industry in recent weeks,” said Benoni Okwenje, General Manager for Financial Market Operations at Centenary Bank Uganda Ltd.

The government’s domestic borrowing target was raised from Ush6.3 trillion ($1.7 billion) in financial year 2023/24 to Ush8.9 trillion ($2.4 billion) in financial year 2024/25, official data shows.

As a result, the average debt auction size has risen from Ush0.525 trillion ($142 million) in 2023/24 to Ush0.7 trillion ($189 million) in 2024/25 based on a 12-month working period.

Interest rates earned from the one-year Treasury bill rose to 15 per cent last week while interest rates earned from the two-year Treasury bond are estimated at 15.75 per cent.

Interest rates earned on the five-year Treasury bond rose to 16 per cent at the beginning of this month while interest rates earned from the 10-year Treasury bond increased to 16.5 per cent, according to the latest financial market data.

While bigger investments in government securities promise higher interest incomes for commercial banks, wider exposure to these assets has apparently diminished short-term liquidity levels in the banking sector, industry sources claim.

A close look at BoU data shows total borrowing transactions recorded on the Standing Lending Facility (SLF) – an emergency lending window dedicated to commercial banks, surged from Ush3.7 trillion ($1 billion) between June and August 2024 to Ush25.2 trillion ($6.8 billion) between September and November 2024.

“We are seeing [Repurchase Agreements] REPOs worth the same amount in the interbank market these days. The SLF is priced at Central Bank Rate-plus two percent and offers overnight funding for commercial banks. But whether the SLF works for me or not is a subject of another debate,” Mr Okwenje explains.

Total transactions on the SLF stood at Ush1.1 trillion ($297.6 million) at some point, Okwenje adds.

In comparison, short term lending rates quoted in the interbank market similarly rose during the same period. While overnight interbank rates rose from 9.9 percent to 11.2 percent, seven day interbank interest rates increased from 10.6 percent to 11.4 percent during the period under review.

“Government’s domestic borrowing activities have been ramped up in this financial year. This has led to bigger auction sizes in Treasury bill and bond offerings and banks have equally increased their participation in debt auctions,” said a bank executive who requested anonymity, citing confidentiality obligations.

This, he said, directly affects commercial banks’ liquidity positions as deposits have grown by around three percent this year, which is not enough to take care of all of banks’ liquidity needs, while the SLF offers smooth access to short term credit in the form of collateral derived from government securities and a fixed interest CBR-plus two percent – or 11.75 percent today.

Changes in banks’ short term funding costs often affect borrowing charges incurred on temporary credit lines such as overdraft facilities sought by businesses and individuals that suffer from serious cash flow gaps, financial experts say.