Bank of Uganda annual report for the financial year 2017/18 indicates that the shilling denominated commercial bank lending rates declined to an average of 20.3 per cent from 21.1 per cent in the previous year.
The report also indicated that as at June 2018, Shilling denominated lending rates stood at 17.7 per cent, down from 21.1 per cent in 2017.
The report partly attributes the drop in the lending rates to an accommodative monetary policy stance by the BoU since April 2016, where the CBR stood at 16 percent and by June, 2018 it had declined to 9 per cent.
“While the lending rates have declined, they remain elevated reflecting, in part, the structural rigidities which have kept the cost of doing business in the financial sector high. Nonetheless, asset quality has improved,” the report says.
It adds that relative to June 2017, the ratio of Non-performing Loans (NPLs) to total gross loans declined to 4.4 per cent as of June 2018, from 6.2 per cent in the previous year.
Meanwhile, according to the report, time deposit rates averaged 8.7 per cent in the financial year 2017/18, opening and closing the year at 9.3 per cent, which is much lower than 11.4 per cent in financial year 2016/17. Consequently, the report notes, the spread between lending and deposit rates ranged between 8.4 per cent and 13 per cent of the same period.
Overall, the spread increased marginally to 11.5 percent in financial year 2017/18, up from 11.2 percent in financial year 2016/17.
Meanwhile the report gives the average lending rates on foreign currency denominated 7.7 per cent in financial year 2017/18 from 8.9 per cent in the year, and the foreign currency spread averaged 5.0 per cent over the financial year, from respective 5.4 per cent in the previous year.
Credit to private sector
According to the report, although still weak, growth in private sector credit (PSC) showed sign of recovery in financial year 2017/18, relative to financial year 2016/17, as the monetary policy remained accomodative over the period under review. PSC grew on average by 6.5 per cent in financial year 6.5 per cent in financial year 2017/18, which is higher than 4.2 per cent in the previous year. By end of June 2018, PSC had increased by 10.5 per cent compared to 5.6 per cent in the previous period.
However, the report notes, the annual PSC growth, net of valuation changes on account of exchange rate movements, was 5.3 percent in financial year 2017/18, compared to 3.3 per cent in the previous year. The report attributes the improvement of the PSC growth to the easing of the monetary policy, improved economic conditions and reduction in supply-side constraints as NPLs that declined. “The sluggishness in the same growth is part due to the banks’ present risk aversion given the high default rates in the recent past,” says the report.
Sectorwise, growth in PSC was mainly driven by growth of credit to the agriculture, personal and household loans, and trade, which together constitute 50 per cent of the total PSC. PSC to the manufacturing, building, mortgage, construction and real estate sectors, which together account for 33 per cent of the total credit, has notably recovered, having been negative for more than half of the financial year. The report says the trend, if sustained, is likely to boost private investment and consumption, which should in turn boost growth.