Uganda Central Bank Blames Gov’t on Rising Non-Performing Loans

Uganda’s Central Bank, the Bank of Uganda (BoU) has said delayed payments by government to its suppliers have greatly contributed to the increasing Non-Performing Loans (NPLs) in the banking industry.

This is contained in the Financial Stability Report (FSR) for the year to June 2016 released on January 02, 2017. The Report shows that the Ugandan banking system faced a difficult year in 2015/16, mainly because of a rise in NPLs from 4% of total loans in June 2015 to 8.3% in June 2016. As of June 2016, bad loans stood at Shs906.2bn.

“A survey by Bank of Uganda in March 2016 indicated that the majority of bad loans were due to delayed government payments, insufficient cash flows and diversion of funds which accounted for 24 percent, 22.7 percent, and 14.9 percent respectively, of total non-performing loans,” the report, signed off by BoU Governor, Prof. Emmanuel Tumusiime-Mutebile, reads in part. Other factors for the high NPLs according to the report include reduction in economic output and to a smaller extent, exchange rate depreciation.

“All sectors registered a rise in Non-Performing Loans. However, the largest rise was recorded in the building and construction sector by Shs203.7bn, the agriculture sector by Shs124.3bn and to the trade & commerce sector by Shs101.8bn,” the report further reveals,  adding: “The decline in asset quality in the banking sector in the year to June 2016 poses a risk to the performance of banks.”

The report indicates that watch loans grew by 56% from Shs796.0bn to Shs1.24trn in the year to June 2016.

“Further deterioration of these watch loans will result in a rise in non-performing loans. Any further rise in NPLs will have a negative impact on bank lending and bank profitability moving forward,” says the report.

It adds that bank loan quality will remain a concern for banking sector stability in the short term at least, due to several factors.

“First, it is likely to take time to fully address the impact of the factors highlighted above. Secondly, indicators show that watch loans, the category of loans that are a step from NPLs, are still increasing,” reveals the report, adding that NPLs also affected the performance of Domestic Systemically Important Banks (DSIB’s).

The three DSIBs include; Stanbic, Standard Chartered Bank and Crane bank that was taken over by BoU on October 20, 2016. Two of the three DSIBs had NPL ratios above the industry average of 8.3% in June 2016, leading to a drop in their profitability.

“Banks’ aggregate net after tax earnings were Shs485.6bn, down from Shs556.3bn in the previous year to June 2015. The banking system’s return on assets and return on equity dropped from 2.8 percent and 17.7 percent respectively in June 2015 to 2.2 percent and 13.8 percent respectively in the year to June 2016,” says the report.

The weakening in profitability over the past year was driven by several factors including; higher provisions for non-performing loans and higher operating costs. The report adds that total bank expenses increased by Shs347.7bn while provisions for bad debts increased by more than 100% from Shs153.7bn in 2014/2015 to Shs364.1bn in 2015/2016.

However, the number of loss making banks reduced from seven banks in the year to June 2015 to five banks in the year to June 2016.

“… Earnings and profitability might reduce further due to reduction in returns from banks’ holdings of government securities coupled with the need for banks to set aside high provisions for bad debts. At the end of June 2016 for example, interest rates on 91-day treasury bills were 15.2%, compared to 20.5% in January 2016,” says the report.

Positively, the report says overall, the banking sector remained well capitalised as at the end of June 2016 and all commercial banks, except one bank (Crane bank), met all the regulatory minimum capital adequacy requirements.

“The banking system remained strongly capitalized, with a core capital adequacy ratio of 19 percent as of June 2016; far higher than the statutory minimum of 8 percent,” the report says, adding that the robust capital levels offer a high degree of resilience against systemic distress.