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NRM@33: Growth In The Finance And Banking Sector; The Case For Digitization

By Mr Laban Musinguzi,

Uganda’s prevailing situation in the Finance and Banking sector is going through a lot of criticism, experts, academicians, policy makers and politicians are providing several explanations to pinpoint the underlying reasons. From these explanations, there are possible recommendations emerging for the rejuvenation of the economy. However, they are making headlines for wrong reasons.

The performance of Uganda’s banking sector grew over the years to June 2018, notably in asset growth which was driven by increased lending activity, and higher profitability due to reduced loan losses. Banks started to ease lending standards in 2018 but remained mindful not to compromise credit quality. There are also concerns about the effect of the International Financial Reporting Standard (IFRS) 9 accounting standard on provisioning and profitability in the medium term. Through this article I would like to sight out the achievements that have surpassed in this sector,

Looking at the financial performance of Banks in the East African Community (EAC) region, Bank lending in all East African countries grew in 2017-18, with Uganda registering the highest annual growth of 11 percent, this was largely as a result of eased supply side constraints, especially in Tanzania and Uganda where asset quality improved. The region’s annual average growth rate of credit to the private sector increased to 7.0 percent up from 5.7 percent in the previous year, and this is expected to boost economic activity in the region.

Uganda’s banking sector comprises of 24 commercial banks, which as I mentioned above registered increased growth in the years to June 2018. Total bank assets grew by 10.2 percent, up from 9.0 percent in the previous year. The growth in assets was driven mainly by a pickup in lending, investment in government securities and placements with non-resident financial institutions. Notably, bank lending strengthened, with annual loan growth rising from 0.9 percent in June 2017 to 11.0 percent in June 2018. Uganda’s banking sector has remained well capitalized up to the year 2019. Most commercial banks meet the minimum core and total capital adequacy ratios of 10.0 percent and 12.0 percent respectively.

Profitability of the banking industry has greatly improved in the past 33 years of the NRM government compared to before 1986. Banks’ aggregate net after-tax earnings increased by 82.6 percent from USh.404.5 billion in the year to June 2017 to USh.738.7 Billion in the year to June 2018. The primary reason for the improved profitability of banks was a large fall in expenses on provisions for bad debt. The total income increased by USh.46.6 Billion in this period, mainly on account of gains of USh.54.1 Billion from foreign currency operations, as a result of the depreciation of the local currency in the quarter to June 2018.

There has been a massive development in Uganda’s financial infrastructure and financial corporations that is to say payment systems are crucial for intermediation in the financial system, promoting financial stability and economic growth. At the end of June 2018, Uganda’s payment systems infrastructure included: the Uganda National Interbank Settlement System (UNISS) – Uganda’s Real Time Gross Settlement System; the Electronic Clearing System (ECS) – for cheques, direct debit and credit transfers; and an electronic central securities depository for government securities. Private sector players also provide a number of payment systems and instruments including mobile money, cross-border money remittance and internet banking services.

In the next years, the main focus for Bank of Uganda (BOU) as the central bank will be on implementing the EAC regional harmonized oversight and risk analysis policies for payment systems. There will be taking steps to fully comply with the Principles for Financial Market Infrastructures which were issued by the Bank for International Settlements (BIS) in 2012, aimed at helping central banks in ensuring and promoting safe and efficient payment systems and other financial market infrastructures.

In a nutshell, amidst all this tremendous growth in Uganda’s Banking sector, all players starting with BOU must be ready to accept transformation for the sector to allow full digitalization. This is transformation I can only relate to President Museveni’s 1987 currency reforms. If his able leadership had not taken that strong stand in that direction, it is highly possible that our economy would have degenerated, crashed and collapsed by now to the standards of Zimbabwe or even worse off.

It is therefore imperative that banks in Uganda accept digitalization if they are to remain in business. Digitization in this case would mean converting data into a digital format through adopting technology. Digitalization is indeed very important for Uganda’s banking sector and if embraced our banks shall be in position to provide enhanced customer services which will in turn provide convenience to customers, help them to save time and result into greater profit margins for the sector in general.

Mr Laban Musinguzi, works as a Communications Officer at the Government Citizens Interaction Centre (GCIC), Ministry of ICT and National Guidance.

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