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Bank of Uganda warns banks amidst growth in lending
Non-performing loans. Customers in a banking hall inquire about taking loans. The banking sector faced a difficult year in 2015/16 because of a rise in non-performing loans. PHOT0 BY ERONIE KAMUKAMA
What you need to know:
Loans. The number of loans advanced to the market increased by 8.6 per cent as of September 2018 compared to the 1.5 per cent achieved over the whole of 2017.
Kampala. The Bank of Uganda (BoU) has advised commercial banks to be cautious in light of the growth in lending.
The number of loans advanced to the market increased by 8.6 per cent as of September 2018 compared to the 1.5 per cent achieved over the whole of 2017. This is alongside an average lending rate of 19.1 per cent.
Credit management
BoU’s executive director-supervision Tumubweine Twinemanzi said, “This upsurge, however, in credit extension and uptake demands that supervised financial institutions put in place adequate credit management, monitoring and risk management frameworks and controls so that we do not have this surge in credit extension translate into problems in 2019. This is because there tends to be a lag between a growth in credit and then a growth in non-performing loans (NPLs).”
The BoU director drew parallels with 2016’s stock of bad loans. He was speaking at the Annual Bankers’ Dinner in Kampala on Friday.
The Ugandan banking system faced a difficult year in 2015/16, mainly because of a rise in NPLs from 4 per cent of total loans in June 2015 to 8.3 per cent in June 2016.
Amongst the different sectors of the economy, the construction section sector was the largest single contributor to the rise in NPLs during 2015/16.
Rising NPLs
Ensuring NPLs are dealt with remains key to the sector as many of Uganda’s banks still derive a massive amount of their total income from lending. Actually, 79 per cent of the banks (19 out of 24) derive more than 60 per cent of their income from loans.
The non-performing loans ratio has reduced from 5.6 per cent as of December 2017 to about 4.6 per cent this September.
Mr Twinemanzi said this is in contrast with what transpired in 2016 when the banking industry struggled with significant NPLs which is why for the financial year 2017, a number of banks reported losses.
“Five out of 24 is too large a percentage of banks reporting losses,” Mr Twinemanzi said. He further said these achievements mirror the impact of BOU’s shift to cooperation with and regulation of banks.
Uganda Bankers Association (UBA) has now made progress towards protecting the banking sector. It has managed to get the Asset Reconstruction Company (ARC) up and running and has commenced discussions with the International Finance Corporation (IFC) and World Bank to attract institutional and technical funding partners.
“The ARC will enable us to buy non-performing loans and put them in a separate subsidiary and work them through. Hopefully this will put pressure on banks to write off and sometimes to immaturely kill businesses,” UBA chairman Patrick Mweheire said.
Mr Mweheire said the sector is doing a lot of training around NPL resolution, collateral valuation and packaging NPLs for sale to investors.
“This will free a lot of capital that we can then re-lend into the market,” he said.
