Agriculture is the backbone of Uganda’s economy but the sector continues to get highest interest rates
Agriculture sector tops the sectors with highest lending rates in Uganda, Bank of Uganda’s Annual Report for 2023/2024, has revealed.
The report says in 2023/2024, interest rates varied among sectors primarily due to differences in risk profiles.
“Over the year, the sectors with the highest lending rates, above the industry average, were Agriculture (21.5 percent), Building, mortgages, construction, real estate (20.1 percent), personal and household loans (18.6 percent) and trade (17.3 percent),” the report obtained by Business Focus reveals.
It adds: “Conversely, the Transport and Communications sector enjoyed the lowest interest rates at 13.2 percent, attributable to the predominance of prime borrowers within this sector. The manufacturing sector’s average lending rate was 16.9 percent over the year.”
According to the report, commercial bank weighted average lending rates for shilling-denominated loans marginally declined in FY2023/24, averaging 17.89 percent, down from 18.56 percent in the previous year.
This was mainly on the back of a monetary policy loosening cycle that started at the beginning of the financial year.
“Lending rates on shilling-denominated loans rose in the second half of the financial year partly because of the tightening of monetary policy that started in March 2024,” the report reads in part, adding that the time deposit rates gradually increased during FY 2023/24, to an average of 10.78 percent, higher than the 10.64 percent registered in the previous financial year.
Consequently, the report says, the spread between lending and time deposit rates narrowed to 7.11 percent in FY2023/24 compared to 7.92 percent in FY2022/23.
“The marginal decline notwithstanding, the interest rate spread remains wide and signals prevalent inefficiencies in the intermediation process leading to low savings and investment,” the report says.
In the fiscal year 2023/24, it adds, the average lending rate for loans in foreign currency was 8.94 percent, up from 7.71 percent in the previous year.
Private Sector Credit
The report indicates that private sector credit extended by commercial banks, credit institutions, and microfinance deposit-taking institutions slowed over the year mainly due to lackluster demand for credit among borrowers and a cautious approach to lending by the financial institutions. The average growth in credit to the private sector was 7.7 percent in FY 2023/24 down from 9.9 percent in FY 2022/23.
“This slowdown was primarily due to a decrease in shilling-denominated lending, which grew by 9.6 percent, down from 12.1 percent in the previous fiscal year,” the report says, adding: “Similarly, the average annual growth in foreign currency-denominated loans declined to 3.2 percent from 4.7 percent in the previous year. Nonetheless, government initiatives such as the Parish Development Model (PDM), Emyooga, Agricultural Credit Facility (ACF), Small Business Recovery Fund (SBRF), and others, as well as other sources of financing provided by FinTechs have augmented the lending provided by the financial institutions.”
BoU says the expansion of private sector credit varied significantly among the major economic sectors.
Notably, the report adds, the agriculture, mining & quarrying, and construction sectors experienced an increase in credit growth.
In contrast, the report says, a deceleration in credit allocation to manufacturing, trade, business services, and household sectors was registered during the financial year.
“Credit to sectors perceived as high-risk witnessed a downturn mirroring the cautious approach of lenders. In as much as the proportion of non-performing loans to total loans decreased to 4.9 percent in June 2024, down from 5.7 percent in the preceding year, some sectors continued to record above-average NPL ratios. Notable among these are the business services and trade sectors, which registered the highest ratios of non-performing loans, standing at 7.3 percent and 6.8 percent, respectively, in June 2024.”
