Lending rates and Non-Performing Loans (NPLs) in Uganda’s banking industry are gradually declining, a new report has revealed.
The PwC report titled ‘Uganda Economic Outlook – 2019’, Average lending rates charged for shilling denominated loans have been gradually declining. As at June 2018, the shilling denominated loans average interest rates stood at 17.7%.
“This gradual fall in lending rates was partly due to the decline in BoU’s CBR from a high of 16.0% back in April 2016 to a low of 9.0% as at October 2018,” the report reads in part.
It adds: “The gradual decline in interest rates resulted in a reduction in the ratio of NPLs to total gross loans across the banking sector. As of June 2018, the total NPLs to gross loans had declined to 4.4% from 6.2% as of June 2017.”
This low rate of NPLs together with BoU’s monetary policy framework of maintaining price stability should feed into greater credit provision and boost demand for credit in the private sector, the report says.
The Uganda banking industry is currently made up of 24 commercial banks, which together have 544 branches and 821 ATMs across the country.
According to the financial statements of all the 24 commercial banks for the year ended 31 December 2017, the total assets of the banking sector increased by 12.0% between 2016 and 2017. The five top banks by market share hold 62% of all total banking assets, with the balance of the 38% of the assets held by the rest of the other nineteen banks.
Credit to the private sector and households is very important to the economy as it contributes to consumption which in turn stimulates the economy.
According to the PwC report, the stock of total outstanding Private Sector Credit (PSC) continued to expand in the first quarter of FY19, supported by a pickup in economic recovery and improvements in the NPL ratios.
The average annual growth in PSC for the quarter ended October 2018was 11.3% compared to lows of 5% observed in the quarter ended December 2017.
“The quarter-on-quarter shilling-denominated loans on average grew by 18.5% in October 2018 relative to 16.3% in July 2018. As at the end of September 2018, the total stock of private sector credit was UShs13.89 trillion,” says the report.
Compared to the same month in 2017, private sector credit had tremendously improved, registering a growth of 12.5% from UShs12.35 trillion in September 2017.
“This improvement was supported by increases in both economic activity and availability of cheaper credit in September 2018 compared to September 2017,” reads the report.
By sector, the largest holders of private sector credit stock were: building, mortgage, construction & real estate and trade; each of which accounted for 20% share of outstanding private sector credit.
The other sectors with big shares are personal and household loans (18%), agriculture and manufacturing each with 13% shares.
However, says the report, the recent increase in the CBR has resulted in a slight increase in lending rates.
Following the increase in the CBR by BoU in October 2018, from 9.0% to 10.0%, the commercial banks’ shilling denominated lending rates edged upwards from a weighted average lending rate of 19.56% in September 2018 to 20.37% in October 2018.
“The increase in the lending rates was partly due to the risk aversion tendency of commercial banks especially following an increase in the NPL ratio to the total gross loans which went up from 4.44% for the quarter ending June 2018, to 4.71% for the quarter ending September 2018,” says the report.