The pain of loans

“It’s a multiplicity of factors. We are starting to see the effects of the Covid-19 lockdown measures and the associated global disruptions. We also had some aspects of the Ukraine-Russian war,” Mr Edgar Byamah, the managing director of KCB Uganda, told Saturday Monitor.

Ms Gladys Muchae, Stanbic Bank’s head for credit, said the study provides anecdotal evidence that captures how a slowdown has hamstrung the Uganda economy.

“According to the Uganda Bureau of Statistics (Ubos), inflation is low; but prices of fuel and food have remained high. Also, school fees keep on increasing, so if a parent does not have money, they end up selling their properties to sustain living,” she said.

Ms Muchae further noted that while the central bank gave a host of businesses waivers during a two-year period with various pandemic curbs such as lockdowns, the post-pandemic period has seen lenders frown upon any defaults.

While the deteriorating economy pushed defaults to eye-watering levels, Mr Byamah sees a few green shoots of recovery.

“I also believe even though there is much defaulting, we have seen resilience come through with people now capitalising on upswings in the economy. We have seen some recovery in the education and manufacturing sectors,” he said.

The Finance ministry is also keen to strike an optimistic note. Mr Apollo Kaggwa, its director of economics, reckons that the vast bulk of fire sales only tell half of the story.

Mr Kaggwa also believes the pandemic and its attendant effects on businesses that either climaxed in revenue loss or collapse of businesses dealt the Ugandan economy a bad blow. He further disclosed that while some businesses like private schools that took out loans ended up grappling with foreclosures, other businesses like the manufacturing sector, industries and agriculture have since recovered. This, he reasoned, could be down to the fact that, over the last three months, the government has only increased taxes on imported textiles.

Yet anecdotal evidence points to bloodletting in the past three months that has not spared high-profile entities such as Aya Group and Biyinzika Poultry.

Mr Thadeus Musoke Nagenda, the chairman of the Kampala City Traders Association (Kacita), said borrowers have increasingly found themselves caught between the proverbial rock and hard place.

“By the time one acquires a loan from a commercial bank, he or she might have spent a lot of money, probably Shs25 million, because of bureaucracy involved in acquiring process as you have to bribe bank officials, have a building plan, pay lawyers and bill of quantity papers yet returns are slow,” he said, adding that the government needs to make sure programmes of business sustainability and return to investment are accessed by all Ugandans who are venturing into real estate business.

Despite the central bank putting Uganda’s non-performing loan ratio under six, which experts say is quite high, Mr Byamah says the fact that it has not reached double digits is a strong positive.

“The country is not isolated from the global economic headwinds. We will continue to see it, but I believe we are in a much better financial position than our neighbours. Our macros have been much more stable. The exchange rates, as well as the interest rates, have been stabilised,” the KCB Uganda managing director opined, adding, “Those pains are expected to gradually normalise unless we get another shock. The situation is not good but has improved in a year’s period. Government should continue embarking on the economic recovery out of the pandemic.”

Excerpt from Bank Lending Survey Report fourth quarter—FY 2022/2023

Overall, 21.7 percent of the banks expect the default rate on loans to enterprises to increase on a net basis in the quarter to September 2023. The rate is lower than the 38 percent increase registered in the previous quarter. The net increase in default rate was anticipated for firm size and long-term loans, while the default rate for short-term loans is expected to decrease on a net basis. The expected rise in default rate for firm size and large enterprises was attributed to.

a) Delayed payment of contractors by [the] government.

b) The adverse impact from the Russia/Ukraine conflict which has relatively slowed down economic recovery.

c) Slow recovery from the effects of Covid-19.

On the other hand, the decrease in default rate for SMEs and short-term loans was based on the anticipated improvement in cash flows in and the quarter to September 2023 from government payments which will enhance the loan repayment capacities. On the side of households, 26.2 percent of banks expect the default rate to increase on a net basis in the quarter to September 2023, compared to the 11.6 percent that was recorded in the previous survey results. The anticipated but higher increase in default rate was mainly attributed to the recent parliamentary legislation, which may lead to suspension of funding from international organisations for some NGOs, which might result into loss of jobs.

To understand the direction of interest rates from the lender’s point of view, banks were requested to indicate the direction and magnitude of the change in their expected lending rates in the quarter to September 2023. The results indicate that majority of the banks (93.7 percent) expect their lending rates to remain broadly unchanged, with 6.1 percent anticipating the rates to increase in the quarter to September 2023. The major reason cited for maintaining their current lending rates is strategy by banks to align their lending rates with the direction of the CBR, which is expected to remain unchanged in the next three months. Banks that expect the lending rate to increase in the quarter to September 2023 when compared to that in the quarter to June 2023, registered a weighted growth of 0.07 percentage points. These banks cited the high cost of funds and high risks associated with customers.