Private sector credit grows despite rise in interest rate

Uganda’s Ministry of Finance, Planning and Economic Development (MoFPED) has there was a 0.4 per cent growth in the stock of outstanding private sector credit despite the rise in lending rates from November 2022.  

The growth in the stock of private sector credit means that the high lending rate has not discouraged the general public from borrowing funds for different activities from financial institutions.

Official government figures indicate that commercial banks’ shilling denominated rates edged to a weighted average of 18.98 per cent in November 2022, up from 18.42 per cent in October 2022.

This, government says, was partly on account of the tight monetary stance that has seen BOU raise the Commercial Borrowing Rate (CBR) from 6.5 per cent in the earlier months of 2022- to 10 per cent that still prevails up to date.

According to a MoFPED report released January 23 focusing on the macroeconomic policy for December 2022, the stock of outstanding private sector credit stood at Shs19.886 trillion in November 2022 compared to the Shs19.827 trillion recorded in October 2022.

“Of this, Shs13.947 trillion was shillings denominated credit while Shs5.938 trillion was foreign currency denominated credit during the month,” MoFPED revealed.

However, the MoFPED noted that the private sector credit growth in 2022 was generally lower than historical trends. This was attributed to “subdued economic activity occasioned by the spill-over effects of the Russia-Ukraine war as well as the tight monetary stance by the central bank.”

Credit Extensions

Uganda’s finance ministry emphasized that the value of credit approved for disbursement in November 2022 amounted to Shs1.139 trillion, representing a 50.4 per cent approval rate against the Shs2.259 trillion that was applied for during the month. This was lower than the 64.2% approval rate registered in October 2022.

Government records suggest that this was partly due to heightened risk aversion from lenders and the tightening liquidity in the financial sector following the rise of the Cash Reserve Ratio by the Central Bank.

“Lending institutions are starting to realign their portfolios from illiquid sectors such as building, mortgage, construction and real estate that demand a lot of money but have long repayment periods to sectors like business, community and social services; and personal and household loans which have shorter repayment periods,” MoFPED observed.

It further explained that as was the case in October 2022, personal and household loans took the largest share of approved credit at 29.2 per cent (Shs 333.2 billion) in November 2022, followed by Trade at 18.4 per cent (Shs 209.4 billion).

Further, the two sectors accounted for almost half of the funds approved for disbursement during the month. Other notable sectors were manufacturing (14.8 per cent), agriculture (13.1 per cent) and building, mortgage, construction and real estate that accounted for 11.7 per cent.