The Bank of Uganda (BoU) Governor, Prof. Emmanuel Tumusiime-Mutebile (pictured) has provided an assessment of the banking sector in the recent past, the present, and where it is going.
He gave the status of the banking sector during the 2019 Annual Dinner for the Uganda Bankers’ Association (UBA) held on Friday, November 22, 2019 in Kampala.
Mutebile noted that the level of customer complaints arising from transactional relations and interactions with banks has surged upwards in 2019.
“This trend must be reversed at the earliest. Consumer protection in earnest must begin to feature in discussions at a senior level within financial institutions, and be a central part of your strategic planning,” Mutebile said.
He added: “It should be noted that the practices associated with the culture and conduct of financial institutions in their intermediation role, are significant in the maintenance of sound and stable financial system. I will draw your attention to the words of James Cash Penney, a business man and entrepreneur who said that ‘courteous treatment will make a customer a walking advertisement’.”
Mutebile said the Ugandan economy has remained strong, and with growth projected at 6.3 percent in the Financial Year (FY) 2019/20, this has not deviated significantly from the rate achieved as at June 2019.
The Governor added that BoU has maintained an accommodative monetary policy stance that was further reinforced with the recent 100 basis point reduction of the Central Bank Rate (CBR) to 9%, a level last attained in September 2018.
“This development, together with the multiplier effect from continued public infrastructure investment, and expansionary private sector credit that grew at 12.6% in the past year, has kept, and will keep GDP on a positive growth trajectory,” Mutebile said.
He added: “Inflation has remained within the target level of 5% over the last year, and BOU’s commitment to maintaining this target remains unwavering in the coming year. These developments and achievements, together with the active participation and critical role played by the supervised financial institutions in banking sector, have created a conducive environment for investment and business growth.”
Banking sector stable
In the year ending 30th September 2019, Mutebile said, the financial soundness indicators of the banking system have remained stable.
The banking sector has registered increases of 13.6 percent, 9.2 percent and 8.8 percent in total assets, total deposits and net profits after tax, respectively.
“This clearly demonstrates the continued confidence of the public in the stability of the banking sector and is an attestation that initiatives being implemented by some sector players are yielding the desired results. And it is these kinds of successes that we should build upon in the coming year,” he said.
Asset quality over the same period, he said, reflected in the Non-performing Loans (NPL) ratio has improved by 300 basis points to 4.7 percent.
“The industry average indicators of capital stock and adequacy at 19.6 percent and 21.57 percent for Core and Total Capital to Risk Weighted Assets, respectively, reflect well capitalized financial institutions. Liquidity reflected by the ratio of Liquid Assets to total Deposits, for the year ending September 2019 stands at 50.3 percent, an almost 700 basis point improvement,” he said.
Mutebile noted that agency banking uptake is on the increase, with almost 3,000 agents being added to the network between March and September 2019.
“The positive impact of these developments on financial inclusion, and financial sector deepening cannot be underestimated,” he said.
He said the Central Bank is pleased with the seamless implementation of IFRS 9 (International Financial Reporting Standards 9), with minimal impact to SFI capital buffers.
“Now we look forward to a seamless implementation of IFRS 16 with an expected negligible impact on the banking sector this coming year. That said, Uganda’s banking sector has maintained its attractiveness, and two new licensees have this year joined the ranks of Tier 1 Banks, increasing the number to 26,” he said.
He noted that the digitization of service delivery channels within the sector has enhanced financial sector deepening and inclusiveness.
“I look forward to seeing these digital initiatives adopt responsible and inclusive financial services as a central pillar of their implementation,” he said.
Challenges faced by the Banking Sector
The fragile international economic environment, reflected in regional and global economic tensions are triggers for exogenous shocks that pose significant risks to our economy and the region at large, Mutebile said.
He said medium to long-term prospects for the global economy remain uncertain, with growth of the global economy projected at 3.2 percent; the lowest level since the last financial crisis in 2008.
“In response, BOU expects domestic financial institutions to strengthen their existing risk management frameworks and associated mitigation measures,” the Governor said.
He noted that Cybersecurity related risks heighten the likelihood of fraud. “The pervasive use and reliance on social media as a source of information heightens liquidity and solvency risk within the banking sector. The disruption of existing business models, through the innovation inherent to technology, is a source of existential risk to the traditional banking model,” he said.
He added: “So while in academia, the rallying cry is “publish or perish”, for the banking sector, it is “adapt or die”. As someone once said, “only those that anticipate change, succeed”, this adage will hold true for the banking sector, as it is does for most aspects of human endeavour that increasingly rely on technology for continuity and sustenance.”
Looking into the future, Mutebile said, increased competitive pressures within the banking sector will lead to improved efficiency and service delivery to the customers.
“Bank of Uganda will continue to take the lead in reforming and strengthening the existing regulatory framework in a manner that enables continued growth and stability of the banking sector. This will mean working with the sector to manage the downside risks associated with increased competition,” he said.