In the financial year (FY) 2018/19, the shilling denominated lending rates declined to an average of 20 per cent, relative to 20.3 per cent in FY 2017/18 and 22.6 per cent in FY 2016/17, according to the Bank of Uganda (BoU).
However BoU in its 2019 Annual Report notes that as at June 2019, shilling denominated lending rates were higher at 19 per cent relative to 17.7 per cent as at end-June 2018. The rise in lending rates is partly attributed to the increase in the CBR to 10 per cent in October 2018, from 9 per cent.
BoU attributes the drop in lending rates partly to the accommodative monetary policy stance it has established since April 2016, where the CBR stood at 16 percent and by June 2018, it had declined to 9 percent.
Declining NPLs
According to the report, the ratio of Non-Performing Loans (NPLs) to total gross loans declined to 3.8 per cent as of March 2019, from 5.3 per cent in December 2018 and 4.4 per cent in June 2018. “Lending rates are expected to decline further as banks leverage on technology to increase operating efficiency,” the report says.
It says some of the measures undertaken by Government to reduce structural rigidities such as the passing by Parliament of the Immovable Property Bill will give borrowers alternate collateral to land and property, in the end also contributing to the decline in lending rates.
Time deposit rate
The time deposit rates gradually increased during FY 2018/19 opening at 9.2 per cent and closing the year at 10 per cent, an average of 10.1 per cent, which is much higher than 8.9 per cent in FY 2017/18.
However, the report says the spread between lending and time deposit rates narrowed, to the range of 9-11 per cent in FY 2018/19 compared to 8-13 per cent in FY 2017/18. Overall, the spread fell to 9.8 per cent in FY 2018/19, down from 11.5 percent in FY 2017/18. “The narrower spreads augurs well with financial sector efficiency and if sustained would enhance the financial sector’s contribution to economic growth through higher savings and investment,” it says.
Average lending rate on foreign currency declines
The weighted average lending rate on foreign currency denominated loans averaged 7.5 percent in FY 2018/19, from 7.7 per cent the previous year, and the foreign currency spread averaged 4.3 per cent, from 5.0 per cent in the previous year, says the report.
Agriculture attracts higher interest rates
In terms of sectoral interest rates, Agriculture, Building, Mortgages, Construction and Real Estate, Personal and Household Loans attracted the larger average market lending rates.
Private Sector Credit strengthens by 12.7 per cent as banks give loans of Shs1, 890.8 billion
Growth in Private Sector Credit (PSC) continued to strengthen in FY 2018/19, consolidating gains realized in the previous year supported by an accommodative monetary policy, improvement in asset quality and continued improvement in economic activity, the report says.
“PSC grew on average by 12.7 percent in FY 2018/19, which is higher than 11.5 percent in the previous year. In May 2019, PSC reached an unprecedented rate of 15.3 percent since October 2016 when PSC started recovering at 1.9 percent. Similarly, the annual PSC growth, net of valuation changes on account of exchange rate movements, averaged 12.5 percent in FY 2018/19, compared to 10.8 percent in FY 2017/18,” says the report.
Credit went to all sectors
Sector-wise, the report says robust credit growth was observed in all the sectors . “Credit to agriculture sector, though robust, was slower, at an average of 15 percent during FY2018/19 relative to 23 percent in FY2017/18,” it says.
The report adds that lending to the services sector (with a share of 1 percent of total lending) has recovered. Annual credit growth for the services sector, having been negative from July 2016, has recovered since March 2019. This reflects improved risk aversion towards this sector, which if sustained, could boost business activity of Small and Medium Enterprises (SMEs), lending support to private investment and consumption and in turn boost growth.
Credit extension
On a net basis (new loans disbursement less recoveries) loans by commercial banks improved over the financial year. Net extensions in FY 2018/19 increased to UGX 1,890.8 billion, from Shs1,106.3 billion in FY 2017/18, and from Shs714.6 billion in FY 2016/17.
The continued recovery in credit extension was in partly due to less risk aversion by banks towards some sectors as asset quality improved, continued recovery in economic activity that stimulated demand and an accommodative monetary policy that kept the cost of lending relatively stable, the report says.
Treasury bill and bond holdings
The report shows a total of Shs10,385.47 billion was issued of which Shs6,959.41 billion was in Treasury bills and Shs3, 426.06 billion was in Treasury bonds during the year. Government securities redemption in the period amounted to Shs7, 985.02 billion, out of which Shs6,675.54 billion was Treasury Bills and Shs1, 309.48 billion was Treasury Bonds. As at end-June 2019, the total stock at face value of Treasury bills and Treasury bonds was Shs 4,144.6 billion and Shs11,881.8 billion representing an increase of 7.4 percent and 22.6 percent respectively.
As at June 30, 2019, commercial banks held the largest portfolio of government securities at 41.32 per cent of the total stock, while pension and provident funds held 40.98 per cent and offshore investors held 5.59 per cent. Other financial institutions held 5.60 per cent and insurance companies and retail investors held 2.20 per cent and 1.70 per cent, respectively.
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