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Uganda banks upbeat on credit growth mid-year

Thursday May 25 2017
textiles

Sharon sells textiles she imports from Uganda in her Kisumu shop. There is renewed optimism about the business outlook in Uganda. PHOTO | FILE

Private sector credit growth in Uganda is headed for a rebound after a downturn, amid intense loan promotions by banks eager to beat half-year lending targets.

There has also been increased borrower appetite attributed to falling interest rates.

The sluggish credit growth last year was blamed on election-related fears that affected banks’ lending appetite, and a steep increase in non-performing loans. Faced with a hostile business environment, many banks opted to invest in Treasury bills and bonds to grow their revenues.

Annual private sector credit flows grew by 4.6 per cent in February 2017, compared with a target of 14.5 per cent, Bank of Uganda data shows.

Shilling-denominated loans grew by 8.6 per cent during the same period while forex-denominated loans dropped by one per cent.

Forex-denominated loans fell by two per cent in January 2017. They had declined by 2.2 per cent in December 2016. This is attributed to diminished uptake of foreign currency credit lines in the real estate, energy and telecommunications sectors, which traditionally favour dollar loans for import orders.

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Quarterly credit growth slumped to 1.1 per cent between December 2016 and February 2017, compared with a six per cent growth rate recorded between September and November 2016, a trend driven by considerable credit recoveries and huge non-performing loans posted in the former period.

Rapid growth witnessed in such loans saw overall default rates surge to a record high of 10.8 per cent in August 2016, but these dropped to 7.7 per cent in September 2016.

Soft policy actions

The industry bad loans ratio, however, rose again to 10.5 per cent in December 2016 – a consequence of the former Crane Bank’s mounting default problems, with growing numbers of individuals and businesses unable to repay loans.

In spite of the gloomy indicators, the banking industry sounds upbeat about a recovery in credit growth, citing improved lending appetite in the coming months and notable discounts in lending rates.

The Central Bank projects credit growth to gross eight per cent next month as the impact of soft policy actions takes its toll on mainstream interest rates.

“Yes, credit growth has been subdued for some time and recorded a negative two per cent growth rate in September 2016. But we believe projected declines in NPLs will help steer credit growth to around eight per cent at the end of June 2017. We saw credit grow by 4.6 per cent in February 2017 and I think this momentum looks sustainable in the current environment,” said Dr Adam Mugume, Bank of Uganda’s executive director for research.

Quality stumps quantity

The Central Bank Rate, for instance, fell by 0.5 per cent to 11 per cent in April while yields recorded on Treasury bills and bonds too dropped in recent debt auctions, financial market reports show.

“We are optimistic about achieving credit book growth of around 8-9 per cent this year through introduction of new products like student loans and used car loans, plus tapping into stable, efficiently managed small to medium enterprises.

Our lending focus has changed to quality above quantity of borrowing clients and as a result, we prefer to engage clients on the nature of the financing needs they face instead of rushing to approve any and all credit applications,” said Patrick Mweheire, managing director of Stanbic Bank Uganda.

According to BoU data, the building, mortgage, construction and real estate registered sectoral credit growth of 20.56 per cent between July 2014 and February 2015 compared to a decline of 0.01 per cent recorded during the period July 2015-February 2016.

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