Rapid increase in non-performing loans forced BoU to ask banks to abolish charges on early loan repayment
Bank have been charging individuals who might want to clear their loans before maturity. Photo / File
What you need to know:
- Details indicates that Bank of Uganda asked banks to abolish charges on early loan repayment due to a rapid increase in the stock of non-performing loans
Bank of Uganda (BoU) asked commercial banks and other supervised financial institutions to abolish charges for early credit repayment on the back of growing non-performing loans and an increasingly volatile lending environment.
The directive is referenced in a Monday Uganda Bankers’ Association (UBA) letter to the Bank of Uganda executive director supervision by UBA Executive Director Wilbrod Owor, in which he indicated that “a decision was reached [in an October 13 meeting] to abolish the practice ... across our membership”.
The letter came after a series of meetings and correspondences between commercial bank chief executives, central bank executives and other members of the banking sector umbrella association (UBA).
However, the letter does not indicate why and who initiated the proposal to drop a practice that had been a norm for decades in the banking sector.
Asked how UBA members had had arrived at the decision, Ms Patricia Amito, the UBA corporate affairs manager, said the issue, which had been originated by Bank of Uganda, had been discussed with members before it was agreed on.
“The issue was raised by [Bank of Uganda] to UBA. We discussed it extensively and agreed to drop the practice,” she said without giving more details.
However, people familiar with the matter told Monitor that the Central Bank had proposed the issue to mitigate the growing rate of non-performing loans that had started to eat into commercial bank profitability in terms of large sums of money put aside to cater for loan provisioning.
“The stock of non-performing loans has been increasing rapidly. It was prudent that BoU does something. Otherwise, many banks have seen substantial sums of capital tied in loan provisioning,” as source that asked to stay anonymous because he is not authorised to speak about the matter, said.
In its annual report for the period ended June 30 released on Monday, Bank of Uganda conceded that the increase in non-performing loans had become “anemic”, indicating that the stock of non-performing loans had in the period “increased by 12.7 percent compared to 4.7 percent for gross loans”, in the year ended June 2022.
“Supervised financial institutions continue to take measures to address credit risks, including prudent provisioning for expected credit loss and write-off of impaired loans,” Bank of Uganda said in the report, highlighting the seriousness of the matter.
It was not immediately clear whether the rapid increase in the stock of non-performing loans was the reason behind Bank of Uganda’s directive.
The Bank of Uganda director for communications Kenneth Egesa, did not directly address our inquiries to understand why the Central Bank had directed banks to explore the possibility of dropping charges on early loan repayment.
However, he said: “The step UBA has taken is a welcome development, which is appreciated by Bank of Uganda. This will help to lower the cost of borrowing for borrowers who make early repayments.”
Notice requirement
In a statement yesterday, UBA indicated that regulated financial institutions, had during an October 13 monthly chief executive officers’ meeting agreed to drop the practice with effect from December 1.
“The Executive Director UBA … notified Bank of Uganda of this decision … the changes will take effect on December 1 in conformity with the minimum 30-day notice requirement for notification of customers,” the statement quotes Mr Owor, noting the decision would facilitate loan market flexibility and alternatives in constraining economic circumstances and by extension contributing to the growth of private sector credit.
