July 9, 2018—Bank of Uganda (BoU) last week published its latest bank lending survey that shows most of the financial institutions expect a higher number of borrowers knocking at their doors during the next three months.
Part of the reason is the anticipation of new government contracts soon after the National Budget is presented which means requirements for more working capital for successful bidders. Uganda currently has 25 commercial banks licensed by BoU, but borrowing by the private has been subdued coupled with a more cautious attitude of the banks following the burst of non-performing loans on their books two years ago.
Private sector credit (PSC) plummeted in the calendar year 2016 and has only began to recover slightly towards the end of 2017 as BoU’s Central Bank Rate has steadily fallen to the present 9 percent from double digits in 2016. According to pwc Uganda, in the financial year 2015/16, PSC grew by 16.2%. However, in the first 11 months of FY 2016/17 (May), it grew by only 4.2%. In December 2018 it was hovering at 5 percent, but down form 5.9 percent in September.
Prof. Emmanuel Tumusiime Mutebile said in the monetary policy statement for December, “The cost of credit is high and non-performing loans remain relatively high with a possibility that this will constrain credit extension.”
BoU figures show in January 2018, total commercial bank lending was UGX12 billion ($3 million) and slightly up to UGX12.4 billion in May.
‘In the quarter to September 2018, majority of banks (82.3 pc) anticipate an overall increase in demand for credit. The expected increase in demand cuts across all enterprises and loan durations’.
The survey continues that, ‘Some of the major reasons given for the overall expected increase in demand by enterprises above include the expected business opportunities resulting from the start of a new financial year and the expected investments in the oil and gas’.
BoU Statistics Department carried out the survey for supervised deposit-taking financial institutions, for the quarter ended June 2018. There were three objectives in mind.
Improve BOU’s understanding of the lending behaviour and loan financing conditions among deposit-taking financial institutions and secondly capture leading information on credit developments and bank lending on the Ugandan market during the quarter ended June 2018. The banks were also asked for their expectations for the quarter ending September 2018.
Banks were asked to report their expectations on the change in default rates on loans to enterprises and households over the quarter to September 2018. On a net basis, 15.0 pc expect the default rate on loans to enterprises to increase higher than the 3.7 percent anticipated in the previous quarter. On the other hand, 3.5 percent of the banks expect the default rate on loans to households to decline in the coming three months to September 2018 .
The expected increase in default rate on loans to enterprises is mainly attributed to the likely impact of the depreciation of the Uganda shilling against the dollar particularly from enterprises that borrowed in foreign currency.
In an effort to understand the direction of interest rates from the lenders point of view, banks were asked to indicate the direction and magnitude of the change in their lending rate in the coming three months.
The survey results indicate that (12.6 pc) of the banks expect their lending rates to decrease, while 85.7 pc expect the rates to remain unchanged over the next quarter to September 2018. The average percentage decrease in lending rate over the quarter to September 2018 is estimated at 0.13 percentage points while the anticipated decline in lending rates was mainly attributed to competition in response to the reduction in the CBR.
The easing of credit standards to enterprises was attributed to stable lending rates accompanied by stable prices in agricultural output, efforts to maintain the quality of the loan book and improved macro-economic environment.
The survey results indicate that minority of the banks expect their lending rates to decrease over the next quarter to September 2018. Competition in the industry and reduction in the CBR by the central bank are cited as the major reasons driving these expectations.
In the fourth quarter of FY 2017/18, credit standards on loans to enterprises were eased at a slower pace than the previous quarter. In terms of loan duration, banks eased credit standards at a slower pace for short terms loans and increased tightening for long term loans in the quarter ended June 2018.
Across firm size, credit standards were eased at a slower pace compared to the previous quarter for small and medium enterprises (SMEs) and tightened at a higher pace for large enterprises. In the quarter to September 2018, banks expect to further ease overall credit standards on a net basis. The net easing cuts across the loan duration and loans to SMEs. On contrary, banks expect to tighten the credit standards for large enterprises.
Price and non-price terms and conditions for consumer credit are expected to remain largely unchanged over the next three months to September 2018. On a net basis, banks indicated a net easing for average loans, prime borrowers and collateral requirements. On the other hand, conditions were tightened for margin on riskier loans, size of the loan, maturity and non-interest charges.
The major reasons cited for the net easing include; pressure in the market to lower interest rate following the reduction in CBR and the cost of funds to banks expected to reduce, which will lead to reduction in pricing of loans.