By Julius Businge
BoU cut its central bank rate from 13% in October to 12% in December to stimulate economic activities
As 2017 business starts commercial banks are optimistic that the sector will register a surge in profitability on the back of improving economy and a reduction in Non-Performing Loans.
Speaking to The Independent in exclusive interviews, top bank managers made it clear that this New Year will be generally better for business enabling banks to post better returns.
Patrick Mweheire, the chief executive officer at Stanbic Bank, Uganda’s largest bank, for instance, said the financial industry is now gearing up for a more robust phase of the economy. The economy is projected to record a 5% growth this financial year compared with 4.6% a year before, according to latest data from Bank of Uganda.
“With the election behind us and a looser monetary policy in place, we will see increased economic activity in 2017,” Mweheire said.
His comments came barely a fortnight when BoU announced a cut in the Central Bank Rate from 13% to 12% in December to lure banks to reduce interest rates to stimulate private sector borrowing and economic growth.
Samuel Odeke, the CEO at Commercial Bank of Africa said of prospects in 2017: “I am very optimistic that the banking industry will grow.”
Industry executives said they are encouraged by governments undertaking of several infrastructural projects arguing that the developments would in the medium to long term create multiplier effects that would help the other sectors of the economy to grow.
They cited the $20billion that will be invested in the country’s nascent oil and gas sector in the next three years saying the investments will have a much more trickle-down effect into the local corporate and small and medium enterprises and hence spurring economic activity.
Last year’s bank performance
Last year was generally a bad year for the banking industry as it chocked on bad loans leading to the reduction in profitability.
The worst scenario happened when one of the country’s leading banks, Crane Bank, was the worst hit hard; with its core capital wiped out by more than half, prompting BoU to take-over its management.
According to BoU, the NPLs to gross loans jumped from 3.8% in September 2015 to 8.3% in June 2016, but marginally declined to 7.7% in September 2016.
Bankers attributed the hike in NPLs to regional instability especially south Sudan and bad performance of speculative sectors like real estate – these failed businesses and borrowers [of these businesses] could not honor their loan obligations.
The average return on equity (ROE) and return on assets (ROA) declined from17% and 2.7% to 15% and 3% respectively.
However, as at the end of Sept. 2016, the total capital to risk weighted assets increased by 3 percentage points to 23% compared with 20% during the same period last year.
On a positive note, the BoU report described the sector as sound, citing favorable status of liquidity and capital buffers remaining well above the minimum requirement.
Latest data
Latest data from the BoU’s State of the Economy Report released last December indicates that over the last five years, Uganda’s economy has grown at an average of 4.5% compared with an average of about 7.5% between the years 2000 and 2011.
“The domestic economic growth outlook remains subdued, although the low point of the cycle appears to be behind us,” reads in part the BoU report.
It is this gloomy outlook and harsh economic environment that is currently making banks unsure of whom to extend credit especially on personal loans.
The BOU’s take-over of Crane Bank in October last year was reportedly attributed to few huge companies and powerful individuals who borrowed and failed to honor their loan obligations due to a bad economy.
It is on this basis that banks could still concentrate their bigger efforts towards lending to the government through treasury bills and bonds which are risk free at the expense of private sector borrowers.
But even in the TB segment, BoU reports indicates that yields on all categories of TBs were on a downward trend hence signaling limited profitability.
According to the report, the yields on the 91-day, 182-day and 364-day Treasury bills (T-bills) averaged 14, 15, and 16 % in the three months to November 2016, down from 20, 22 and 23%, respectively during the same period in 2015.
Also for T-bills, the yield on the benchmark 2-year Treasury bond (T-bond) also declined to 16% from 21% during the same period.
But business executives say the only way to avoid NPLs is for commercial banks to lower interest rates that will also translate into lower costs of doing business.
“There is nobody who gets a loan and fails to pay, whoever fails it means the terms and conditions are not favorable,” said Martin Okumu, the head of communications at the Uganda National Chamber of Commerce and Industry.
Okumu, like his friends at Kampala City Traders Association, Private Sector Foundation Uganda and Uganda Manufacturers Association, argues that higher interest rates lead to high costs of operations that eventually lead to high prices.