BoU registers slowdown in short-term credit utilisation by commercial banks
Banks borrow from the Standing Lending Facility to meet short-term liquidity needs. Photo / File
What you need to know:
- The Standing Lending Facility was created by Bank of Uganda in 2020 to mitigate Covid-19-related challenges
The Bank of Uganda Standing Lending Facility registered a decline in credit disbursements, signaling a reduction in the uptake of short-term loans by commercial banks to meet liquidity needs.
In details contained in the October Monetary Policy Report, Bank of Uganda noted that utilisation of the Standing Lending Facility declined to Shs9.97 trillion, which was equivalent to 160 transactions during the three months to September 2024.
The decline was a sharp drop of Shs11.55 trillion from Shs21.52 trillion – equivalent to 266 transactions – drawn out in three months to June. The facility was created by Bank of Uganda in 2020 to mitigate Covid-19-related challenges.
However, it has a few years, recorded a drop in draw-down even as it continues to be a source of credit for some banks.
As of June, borrowing from the facility stood at a cumulative of Shs69. 5 trillion, a decline from Shs71.3 trillion or 1,006 transactions registered in the year ended 2023.
The report also shows that domestic financial money market rates declined, with overnight interest rates falling to 10.3 percent from 11.2 percent in June.
Similarly, the seven-day interbank weighted average rate fell to 10.9 percent from 11.7 percent, while weighted average shillings and foreign currency lending rates remained relatively stable, reflecting eased liquidity conditions.
Lending rates for shilling-denominated loans averaged 18.2 percent in the three months, compared to 18 percent, while foreign currency-denominated loans averaged 9.2 percent from 9.1 percent in June.
In terms of sector distribution, lending rates notably increased in the transport sector due to the risk profiles of the long-maturity loans extended to investment in water and air transport projects.
Bank of Uganda also noted that lending rates are expected to remain stable in the near term, with the quarterly Bank Lending Survey indicating that 91.3 percent of commercial banks expect rates to remain stable due to favorable macroeconomic conditions and the anticipated stability of the central bank rate.
However, the market remains exposed to risks presented by an increase in government borrowing and shifts in global financial conditions.
The Central Bank also noted that private sector credit extension rose to Shs1.4 trillion from Shs402.7b in May on the back of increased borrowing by companies seeking to build inventory for sale and end-of-year festivities.
The report further indicates that demand for credit rose to Shs6.5 trillion, but the rate of credit approval, however, fell to 65.2 percent from 70 percent in May, with a large share of credit going to manufacturing, which benefited from increased financing for construction materials, chemicals, pharmaceuticals, plastics and rubber products.
Other beneficiaries included wholesale and retail trade, driven by higher financing towards retail and export credit and transport, and communications due to higher financing on new projects for water and air transport.
