The banks’ weighted average lending rate has maintained a downward trajectory since February 2021 in line with the reduction in Central Bank Rate (CBR), Bank of Uganda (BoU) has revealed in its State of the Economy Report dated September 2021.
“The average lending rate on shillings loans stands at 16.3 percent in July 2021 from 17.0 percent in June 2021,” the report obtained by Business Focus,reads in part.
It adds: “Lending rates reduced to a quarterly average of 17.6 percent in July 2021 from 18.9 percent in April 2021. However, lending rates on foreign currency denominated loans increased to 6.1 percent from 5.9 percent.”
According to the report, all the sectors, except agriculture, transport and communication and services witnessed declines in lending rates in July 2021 relative to June 2021.
On a quarterly basis, however, there are notable divergences across sectors, it says.
Banks’ lending to households and businesses is an important channel through which monetary policy affects the real economy.
Private sector credit
Despite the reduction in the lending rates, the report says growth in banks’ credit to the private sector moderated, reflecting subdued demand for and supply of credit, largely attributed to the slow economic recovery, heightened uncertainty related to the Covid-19 pandemic, and government’s high domestic financing needs.
“On a quarterly basis, annual growth in banks credit to the private sector fell to 7.9 percent in the quarter to July 2021, down from 8.9 percent growth in the quarter to April 2021. May 2021 registered the lowest growth rate of 5.4 percent,” the report says.
Including loans disbursed by the Uganda Development Bank (UDB), the report says, credit to the private sector grew by 9.2 percent in the quarter to July 2021 from 11.8 percent in the quarter to April.
“Growth in credit to the private sector is expected to moderate in the near-term largely due to heightened uncertainty related to Covid-19 pandemic and the slow pace of economic recovery,” the report reveals, adding that in the medium- to long-term, however, credit growth is expected to be stronger largely due to improved health metrics on account of the government’s plan to increase vaccination rate, which should pave way for the full reopening of the economy.
It adds that the growth in banks credit in the quarter to July 2021 was dominated by household (which takes up to 18.4 percent of total banks’ loans), real estates (which takes up to 20.5 percent) and manufacturing (which takes up 12.0 percent).
“However, growth in banks credit in the trade sub-sector and business services remained subdued, declining to minus 0.6 percent and minus 3.2 percent, respectively in the quarter to July 2021 relative to minus 3.5 percent and minus 3.6 percent in the previous quarter,” the report says.
According to the report, loan applications fell by 1.8 percent, from a total of Shs.3,775 billion in the previous quarter, while approvals fell by 2.9 percent, from a total of Shs.2,247 billion.
“The fall in the value of loan applications and loan approvals in the quarter to July 2021, were however lower than declines of 19.7 percent and 4.0 percent respectively, for the quarter to June 2021,” the report says.