Prime
Bank of Uganda projects increase in rate of loan default
Bank of Uganda indicates that banks fear that funding cuts resulting from the Anti-Homosexuality Act might increase the rate of non-performing loans . Photo / File
What you need to know:
- Bank of Uganda says that banks have expressed fear that the recently enacted Anti-Homosexuality Act might result into job losses, which could increase the number of non-performing loans
A report by Bank of Uganda (BoU) has indicated that default rates, especially on household loans, are projected to increase due to the anticipated negative impact of the Anti-Homosexuality Act on funding for non-governmental organizations (NGOs).
In details contained in the Bank Lending Survey Report 2022/23 Fourth Quarter, Bank of Uganda said outlook on the default rate on loans is biased towards an increase due to job losses that might result from tightening of funding to NGOs by international funders.
“The default rate … is expected to increase … attributed to the recent Parliamentary legislation, which may lead to suspension of funding from international organisations for some NGOs in turn increasing the level of non-performing loans due to job losses,” the Bank of Uganda survey report reads in part.
The report, which sought to enhance the Central Bank’s understanding of the lending behaviour and loan financing conditions among deposit-taking financial institutions, noted that apart from job losses due to suspension of funding to NGOs, delayed payment of contractors by government, the adverse impact from the Russia-Ukraine conflict, which has relatively slowed down economic recovery and slow recovery from the effects of Covid-19, have also presented challenges that continue to threaten an increase in non-performing loans.
Whereas the report does not explicitly state which Parliamentary legislation it refers to, the recently enacted Anti-Homosexuality Act has attracted tough responses from international funders and lenders with the World Bank suspending new lending to Uganda recently.
Others have threatened similar action, which the Bank of Uganda report said might result into job losses, thus increasing loan defaults, especially on household credit.
In May, President Museveni signed the Anti-Homosexuality Bill into law, inviting international criticism, in which government was accused of narrowing human rights space and criminalising human rights. However, government has insisted that the law only criminalises promotion and recruitment of young people into homosexuality.
The Bank of Uganda report noted that banks had reported that default on household loans could increase to 26.2 percent on a net basis, compared to the 11.6 percent recorded in the previous survey results with overall default rates for both enterprises and households standing at 21.7 percent, with net increase in default anticipated for firm size and long-term loans, while the default rate for short-term loans is expected to decrease on a net basis.
The report also noted that banks had reported that they would tighten terms and conditions for lending to riskier customers but relax terms for prime borrowers.
“Banks expect to tighten their price terms and conditions for average and riskier loans, while easing for prime borrowers,” the Bank of Uganda survey indicates, noting that the expected net tightening for average and risky loans was due to the high cost of funding, high interest rates to compensate for the risk and delayed payments from contractors, while the easing for prime borrowers was hinged on the need to maintain customers and match with competitors in the market.
Loan pricing
The Bank of Uganda report indicates that majority of banks expect to maintain non-price terms and conditions, with a bias towards tightening, except for the size of the loan and maturity, which are anticipated to ease on a net basis because of the mismatch in funding due to liquidity challenges, diversion of contract proceeds and performance failures, which will lead to tightening through collateral requirements.
