Uganda’s state development bank has recorded lower default rates, but it is yet to reach the required levels.

The Uganda Development Bank’s non-performing loan (NPL) ratio fell from 50 per cent in 2011 to 36 per cent in 2013, and to 25 per cent last year, according its annual 2014 report.

The figure is, however, below the 15 per cent mark required by the Prudential Standards, Guidelines and Rating System (PSGRS), a challenge attributed to prolonged legal battles waged against the bank by defaulting clients scared of losing collateral, and a limited skills base.

PSGRS is a compliance standards provided by the umbrella body of development finance institutions operating in Africa — the African Association of Development Finance Institutions (AADFI). It has 74 members.

Peer reviews which are conducted every year to measure compliance, show that none of the members has fully complied with AADFI’s guidelines.

Results from this year’s peer review exercise for example, shows that UDBL scored A.

AA is the highest rating followed by A+.

Strong PSGRS ratings offer members more opportunities for syndicated loans initiated by international lenders and also translate with lower risk perceptions among investors.

The lack of supervision by the central bank and private ownership have affected UDBL’s ability to achieve full compliance.

PSGRS guidelines require that development banks be supervised by the central bank or a financial advisory board in their countries of origin. UDBL, however, is supervised by the Ministry of Finance, Planning and Economic Development.

Patricia Ojangole, UDBL’s chief executive said that while the law prohibits Bank of Uganda from regulating development banks, discussions with UDBL top management to come up with legal solutions to this dilemma have not borne fruit.

Benedict Sekabira, BoU’s deputy head of bank supervision said that proposed amendments in the law would address default risk problems for players like UDBL that it does not regulate.

“It is hard to regulate institutions that you do not license. However, current amendments proposed in the Financial Institutions Act of 2004 provide for access to borrower information for non-BoU regulated players such as UDBL, the Microfinance Support Centre, telecommunications firms and utility companies,” he said. “This will eventually help reduce UDBL’s default risk problems.

Years of mismanagement

UBDL suffered years of mismanagement that saw politically favoured individuals and businesses obtain huge loans leading to high default rates that eroded its balance sheet.

The institution’s restructuring programme, which included a major shakeup of top management that saw a number of them exit the company, helped to boost the NPL ratio.

The bank’s total assets grew by 16 per cent to Ush169.973 billion ($49 million) last year, while its loan portfolio increased by 13 per cent to Ush119.425 billion ($34.5 million). The bank’s profits rose from Ush515 million ($148,960) in 2013 to Ush4.8 billion ($1.4 million).

On the issue of private investors, while the PSGRS framework requires development banks to accommodate them in their shareholders’ book, the latter remain reluctant citing significant government control in the boardroom.

“It is difficult getting suitable investors to own equity in local DFIs because of less profitable business models and considerable government control. The Central banks’ credit management rules are also less flexible for DFIs,” said Julius Mukoji, head of risk and compliance at TIB Development Bank of Tanzania.