The Bank of Uganda’s policy to lower the Central Bank Rate (CBR) of recent has not had a significant impact on commercial bank lending to the private sector, the Uganda Economic Update published this week by the World Bank, states.
The Uganda Economic Update discusses general status of the economy, with the latest, the Ninth Edition majorly focusing on how the government of Uganda can nurture public-private partnerships to address Uganda’s infrastructure deficit estimated at US$1.4 billion.
The Bank of Uganda (BOU), cut the CBR to 10 percent in June 2017, compared to 17 percent recorded in the year earlier. That reduction was meant to push commercial banks to significantly cut their prime lending rates so as to encourage the private sector borrow for production.
However, commercial banks, according to economic analysts at the World Bank, have been reducing their lending rates by only a very limited degree, with average rates declining from 23.5 percent in June 2016 to 23.1 percent in February 2017, before they were reduced to 20.5 percent in April 2017. This means, the report says, commercial bank credit in Uganda remains expensive on the side of most private sector players.
It is only Stanbic Bank, the largest in the country by capitalisation and assets, that has announced it will charge 18 percent interest on its loans starting the coming month, which is just days away. Uganda has over 20 commercial banks, many of them foreign-owned.
“The limited financial depth means that these policy actions have had only a limited impact on economic activity, with the proportion of the private sector having access to commercial loans remaining low,” the Update states in part.
The report recognises that commercial banks have been slow to reduce their lending rates for fear of foreign exchange risks, only providing most loans to transport, communications, business services, personal and household sectors.
Yet the value of credit provided to building, mortgage, construction, real estate and manufacturing sectors have continued to shrink in the financial year 2016/17, compared to the previous year.
“Commercial banks have tightened lending conditions due to the high level of volatility,” continues the report, adding that most borrowers in Uganda take loans in Ugandan currency, with the dollar dominated credit only accounting for 44 percent of the total value by April 2017.
The Update states that the increase in the level of non-performing assets (NPAs) is also responsible for the slower credit and the declining profitability of the banking sector, despite the high level of capitalisation.
The report adds that the proportion of NPAs increased to an average of 4.4 percent in financial year 2015/16 and that by December 2016, the figure had reached 10.5 percent, before decking to 6.3 percent in March 2017. The report gives high cost of credit, exchange rate volatility and government delay to pay suppliers, as some of the factors responsible for the NPAs.
