Going by official figures from the Bank of Uganda (BoU), the banking sector has overcome the turbulent times that culminated from the 2011 crisis to register an impressive performance in 2018.
It should be noted that the 2011 election expenditure saw inflation as well as interest rates cross the 30% mark, resulting into increased industry Non-Performing Loans (NPLs) and write-offs.
This has since haunted the sector and the economy at large, owing to the fact that some companies have collapsed while others became financially distressed.
However, looking at the sector’s performance in 2018, banks seem to be past the dark times.
According BoU’s September figures, private sector credit growth increased to 12.2%, while the ratio of NPLs to total industry loans reduced from 5.6% as at the end of 2017 to 4.4% as at the end of September 2018. It could further reduce by the end of December 2018, says the Central Bank.
BoU considers NPLs to be worrying when the ratio is above 5%.
This recovery is a result of the continued economic recovery.
BoU’s Composite Index Economic Activity (CIEA) indicates stronger economic performance in the first 10 months of 2018, with an annualized growth rate of 7-8 percent.
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“This is an indication that economic growth in FY 2018/19 could be higher than the previous projection of 6 percent,” Prof. Emmanuel Tumusiime-Mutebile, the BoU Governor said earlier December.
He added that the strong growth is in part supported by the accommodative monetary stance and the associated rebound in private sector credit extension, ensuing strong domestic demand conditions, multiplier effects of public infrastructure investments and improved agricultural productivity.
“The positive growth is expected to be sustained over the coming years, partly driven by public infrastructure investment,” he added.
Key banking figures
According to Dr. Tumubweine Twinemanzi, the Executive Director, Supervision at BoU, total industry assets grew to Shs28.8 trillion in the first eight months of 2018 and this could go higher by end of December. Total industry assets stood at Shs26.5 trillion at the end of December 2017.
“Banks are more prudent, so we expect a reduction in NPLs and more lending from banks to private sector players,” Twinemanzi said in an interview.
He added that the sector has shown ‘significant resilience’ in 2018.
“Stress tests indicate that there are no liquidity issues in the sector; all banks remain well capitalized,” he added.
Patricia Amito, the Head Communications & Corporate Affairs at Uganda Bankers Association (UBA) also paints a picture of a generally good year for the sector.
UBA is the umbrella body for Uganda’s operating 24 banks.
“The banking sector has in 2018 registered positive growth of credit across all sectors supported by a steady decline in the percentage ratio of non-performing loans averaging 4.4% and a relatively stable average lending rate of 19.1% p.a,” Amito said in an exclusive interview with Business Focus.
She added: “Average monthly end deposit balances have risen to Shs20 trillion from Shs14.7 trillion in 2015 and the number of accounts in commercial banks increased from 4.5 million in 2015 to now 10.9 million.”
According to UBA, the sector continues to register an increase in physical service points of presence with over 6,399 Agent Banking outlets in addition to the various alternative electronic banking platforms available.
“These numbers will be increasing year on year,” she said.
During the year, several banks were issued with Banc -assurance licenses and to date 15 out of 24 banks provide these services, an important step that the association believes will contribute to growth of the formal insurance sector.
Dr. Fred Muhumuza, an analyst and economics lecturer at Makerere University also speaks positively about Uganda’s banking sector in 2018.
“The sector has withered the storms of Crane bank closure and also seems to have lowered the NPAs possibly through cautious lending and provisioning by use of capital buffers,” Muhumuza exclusively told this site.
He added: “Banks are required to use capital to cover potential losses due to bad assets. It might be a tricky ride for some small banks. Otherwise the levels of confidence in the sector are still high.”
It should be noted that the International Financial Reporting Standards 9 (IFRS 9) took effect on January1, 2018.
Unlike before, the new rules require all commercial banks to put aside money to cater for expected losses from the loans that they give out. This means that commercial banks require more money at hand if they are to give out loans or expected credit loss (ECL) provisioning.
This will definitely impact on profitability and capital adequacy; banks may have to bring in more capital to meet the standards.
However, Twinemanzi says “IFRS9 will have no big impact on banks’ capital because they are all well capitalized.”
It is worth noting that in 2017, six banks made losses out of the 24, but the trend is expected to change in 2018. The banks in question made a net loss of Shs16.053bn.
The other 18 banks made a net profit of Shs768.66bn in 2017, up from Shs676.56bn in 2016. This represents an increase/growth of 92.1%.
Interestingly, over 60% of the banking industry market share is controlled by about six banks.
Whereas the sector has registered great achievements over the years, just like any other sector, the banking industry faces some key challenges.
According to UBA, these include low banking penetration & financial literacy which still remains low especially in the semi urban & rural areas, high operating costs – with industry cost income ratio at 67%, a large chunk (nearly 20%) of the banking liquidity remains idle, 79% of the banks (19 out of 24) derive more than 60% of their income from Net Interest (Loan) revenues as opposed to Non-Interest revenues and inaccurate asset valuations – adherence to valuation standards remains a challenge.
There are also several unfavorable policy constraints affecting banking growth & expansion which in turn hinders & limits the ability of banks to aggressively support national development targets.
‘BoU Probe didn’t affect sector’
Dr. Muhumuza says the probing of BoU officials by Parliament over the controversial closure of seven defunct hasn’t affected the banking sector.
“The BoU is still respected in the banking sector and continues to exercise its supervisory role with vigour. The noise in Parliament is largely seen as administrative weaknesses, but not supervisory failures or threats,” Muhumuza said.
Similarly, UBA’s Amito says “We believe this is being resolved well and will not necessary have any impact on the banking sector.”
We’ll keep you posted on the 2019 banking outlook.