Standard Chartered Bank headquarters in Kampala

The latest Bank of Uganda (BOU) findings from the survey for the period April – June 2018, as well as expectations for July – September 2018, show that most banks anticipate an increase in the demand for credit, largely influenced by more business opportunities and expected investments in the oil and gas sector.

According to the Bank Lending Survey Report Fourth Quarter – FY 2017/18, the banks also expect the default rate on loans to businesses to increase mainly because of the likely impact of the depreciation of the Uganda shilling against the dollar, particularly from businesses that borrowed in foreign currency.

Following the reduction in Central Bank Rate for June 2018, the cost of funds to banks is expected to reduce, which will lead to reduction in pricing of loans, says BOU. The survey shows that a few banks expect their lending rates to decrease.

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The survey shows that banks reported eased credit standards on net basis at 5.9 per cent in the quarter ended June 2018 compared to 17.2 per cent recorded in March 2018. The overall net easing was much lower compared to the net easing of 21.7 per cent that banks had anticipated in the previous survey.

Across firm size, credit standards were eased at a slower pace compared to the previous quarter for SMEs (from 35.5 per cent to 0.2 per cent) and tightened at a higher pace for large enterprises (from 10.6 per cent to 15.4 per cent).

In terms of loan duration, banks eased credit standards at a slower pace for short terms loans and increased tightening for long term loans in the quarter ended June 2018. Key reasons cited for the overall easing include: stable lending rates accompanied by stable prices in agricultural output, efforts to grow the loan
Credit Standards by Economic Sector.

In terms of credit standards to the different economic sectors; the report shows that manufacturing, agriculture, electricity and water, business services and trade registered a net easing while the rest of the sectors registered net tightening in the quarter ended June 2018.

Reasons given for net easing for manufacturing sector were increased demand for credit and continued reduction of Central bank rate. Other reasons cited were increased competition from other financial institutions and favorable weather conditions.

The building, mortgage, construction and real estate sector registered the highest net tightening (18.6 per cent) on account of low uptake in the sector arising from difficulties already being experienced in loan service in this sector. This was followed by personal and household (4.6 per cent) and Transport (1.2 per cent). Respondents indicated that the tightening was due to the high default rates observed in these sectors.

With regards to the observed decline in the central bank rate (CBR), banks were further requested to provide their opinions on the slow decline in the lending rates on new loans to borrowers. They said the major reason for the slow pace in reducing interest rates was the high cost of funds.

Bank of Uganda surveys 24 commercial banks and 9 non-bank institutions on a quarterly basis to better understand how they are lending and what the credit market in Uganda looks like.

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