‘Financial Sector Stability: Managing risk in a growing and fast-changing environment’ was the theme at this year’s annual conference of the Uganda Bankers’ Association (UBA) held in mid-July.
Considering only last year, the conference’s theme was ‘the future of banking’, the current cautious drift is a significant shift. This is not to suggest that there is that much to worry about. After all, as recently as about mid-July, in an interview with Bloomberg, Bank of Uganda (BoU) deputy governor Louis Kasekende assessed that “most banks [in Uganda] are meeting their capital requirements and non-performing loans as a percentage of total credit have improved to about 5%.” And “chances are that [the BoU] might have to revise [its] stance on monetary policy,” Kasekende adds.
Inflation rose, most recently, to 2.2% in June from 1.7% a month earlier. Relative to a May 2017 high of more than 7%, this is still quite low. So the BoU would be justified in easing monetary policy further; after keeping its benchmark rate steady at 9% in June 2018; albeit it cut interest rates by 50 basis points to 9% in February.
Stronger supervision required
Fears about bank failures and the central bank’s seeming preferred approach of liquidation remain rife. In this regard, BoU governor Emmanuel Tumusiime-Mutebile remarked at the UBA conference thus: “Most of the banks, which have failed in Uganda during the past 20 years, either had very little franchise value or were too heavily insolvent to be sold on a going concern basis or merged with another bank”. Memories are still fresh about the defunct Crane Bank, which was taken over by the BoU in October 2016. Hitherto, it was Uganda’s third-largest local bank, and according to the IMF, accounted for about 10% of private sector lending and total banking system assets in the country. Had there been stronger supervision by the BoU, the IMF believes the bank’s liquidation, and those of four others since 2010, could have been prevented.
Credit extension to improve
According to the World Bank, domestic credit growth was about 3.5% in the first eight months of the 2017/18 fiscal year; a deceleration from 8.5% during the same period the year before. The World Bank estimates FY 2017/18 credit growth should be about 13.4%, however. If the forecast materialises, it would be a significant improvement from 2.6% in 2016/17. Even so, it would be far below potential.
As recently as 2014/15, domestic credit growth was 32%. For credit to the private sector, growth was about 5.5% in the first eight months of 2017/18; little changed from the 5.7% recorded for the full year in 2016/17. The World Bank estimates, however, that private sector credit growth in FY 2017/18 should more than double the previous year’s at 12.5%. That said, commercial loans remain quite expensive to acquire. That is even as the average lending rate decreased to 21% from closer to 25% over the past two years; no doubt incentivised in part by monetary policy easing by the BoU.
With deposit rates also declining to about 3% in February from about 5% two years ago, net interest margins remain high. Overhead costs account for a great deal of the margins, says the World Bank; they are perhaps the second highest in East Africa (ex-Rwanda). This is one of the key reasons why interest rates remain sticky at currently still high levels. Due diligence costs a great deal as well. Thankfully, there have been fewer problematic loans lately. Non-performing loans to gross loans stood at 5.6% in December 2017. Only six months earlier, they were adjudged to be about 6.2%. And just a year before, NPLs were 8.3% of gross loans. The level could be better still. In 2015, NPLs were just 4% of total loans.
As headwinds weighing on sectors like agriculture, construction, trade and commerce, where the IMF found NPLs to be concentrated a year ago, are beginning to abate, the outlook suggests there should be fewer problem loans over the next year, at least. Relative peace is returning to South Sudan, a key trading partner. An ambitious infrastructure programme should also boost construction. Justifiably, the BoU assesses Ugandan banks to be safe and sound; all of them having met the minimum core capital requirement of 8% of risk weighted assets (end-June 2017).
There are concerns about government interference at the BoU, however. Stakeholders have also called for a cultural shift in the industry, where instead of focusing on how to ensure the business of the borrower succeeds, bankers’ primary interest is the collateral. Perhaps a wider adoption of agency banking and the use of alternative data in the assessment of creditworthiness would reduce how much it costs banks to service customers, some suggest. With cost-to-income ratios of over 70%, Ugandan banks could use all the creative ideas they can get. One idea mooted by the World Bank to improve and reduce the cost of credit extension is for the authorities to enhance “the coverage of the credit reporting system through credit bureaus”, which only cover 6% of the population currently; a far cry from 30% in Kenya and 20% in Rwanda.
In any case, progress is being made in the adoption of alternative financial services like Islamic banking and cheaper and more inclusive channels like mobile money. In regard of the former, regulations were approved by the government in February. Thus, Ugandan banks will be able to provide Islamic banking services soon; and for the latter; 51% of Uganda’s adult population now own a mobile money account, up from 35% in 2014 – a win for financial inclusion. But the introduction of a tax of 0.5% on mobile money transactions in early July, albeit reduced from 1% when it was first announced, could erode further progress in this regard.