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Tough Times As Banks Hike Lending Rates Further, Reduce Personal Loans Approvals

Customers in a banking hall/Courtesy photo 

Commercial banks have increased their prime lending rates by one percentage point on average following the increase in the Central Bank Rate (CBR), a benchmark lending rate for commercial banks to the current 10%.

According to Bank of Uganda’s recently released State of the Economy December 2022 report, overall, the shilling lending rate rose to 18.4 percent in the October 2022 from  18.2 percent in September 2022.

“The increase in rates is a sign that the effect of tight monetary policy is permeating from the money market through the securities market to the credit market. Notable increases of shilling rates were observed across all major sectors of Agriculture, Manufacturing, Trade and Personal and Household loans,” the report obtained by Business Focus says.

It adds that Private sector credit Private Sector Credit (PSC) growth remains weak and below historical trends.

“Total PSC growth fell to 10.5 percent year-on-year in the quarter to October 2022, down from 10.8 percent in the quarter to July 2022. Excluding the exchange rate depreciation and capitalized interest, PSC grew at 8.2 percent in the quarter to October 2022 from 8.6 percent in the quarter to July 2022. Over the same period, growth in Shilling loans increased to 12.2 percent from 9.6 percent, while growth in forex loans declined to 6.3 percent down from 13.8 percent,” the report says.

It adds: “Overall, net extensions were largely driven by shilling denominated loans which outweighed the contraction in foreign currency denominated loans. The loan approval rate increased in the quarter to October 2022 to 59.8 percent from 50.4 percent observed in the quarter to July 2022. The approval rates were higher in Agriculture (66.5 percent) and Building, Mortgage, Construction & Real Estate sectors (62.2 percent) and lowest in personal & household loans (6.6 percent). The low approval rate in personal loans was on account of the high risks attached to the sector as majority of the applications are micro consumption loans with limited collateral.”

BoU says credit demand and supply appear to have picked up in the quarter amid tight financial conditions. This is assessed to be temporary and a reflection of seasonal dynamics for which investors are taking advantage of business opportunities offered by the festive season.

“Credit growth remains constrained in most sectors notably, Agriculture, Building, Mortgage, Construction and Real Estate sectors, and Business Services except for mild increases in Trade, Manufacturing and Personal & Household Loans,” the report adds.

Notably, the report says, quarterly credit growth entered negative territory for the Electricity and Water sector averaging minus 12.0 percent, and Mining and Quarrying sector at minus 15.2 percent, signaling a contraction in investment in capital intensive sectors

Asset quality

Meanwhile, commercial banks asset quality slightly improved as the ratio of non-performing loans to gross loans fell to 5.2  percent in September 2022 from 5.3 percent in June 2022. Declines of NPLs were observed in the sectors of transport, building, construction & real estate, community, and social and personal & household loans sectors.

“Going forward, improvements in NPL could reverse following expiry of the credit relief measures and due to the disruption of economic recovery,” the report says.


Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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