Banking sector Solid but shallow
In 2007/08, USA faced a financial crisis following the bursting of the U.S. housing bubble that caused the
values of securities tied to U.S. real estate pricing to plummet, damaging
financial institutions globally. It resulted in
the threat of total collapse of large financial institutions, the bailout of
banks by national governments, and downturns in stock markets around the world.
In many areas, the housing market also suffered, resulting in evictions,
foreclosures and prolonged unemployment. The crisis played a significant role
in the failure of key businesses, declines in consumer wealth estimated in
trillions of US dollars, and a downturn in economic activity leading to the
2008–2012 global recession and contributing to the European sovereign-debt
crisis. The signifies importance of a strong banking
sector to a country’s economic growth and development which is also well
established in the literature
In Uganda, the banking
sector which accounts for 80% of the financial sector faced a crisis in the
1990s when several indigenous commercial banks were declared insolvent, taken
over by the central bank and eventually sold or liquidated. These included
Uganda Cooperative Bank, Greenland Bank, International Credit Bank, Teefe Bank
and Gold Trust Bank, which were closed or sold.
The banking sector is now in a healthy financial
condition, recording strong profits in 2012, in part because of high interest
margins. Banks’ profits after tax stood at Ushs.370 billion in the nine months
to March 2013 relative to Ushs.430 billion in the same period to March 2012.
Overall total assets of commercial banks grew by 9.7 percent from Ushs14.4
trillion in June 2012 to Ushs.15.8 trillion in March 2013.The banks’ capital
position remained very strong, with core capital for the banking system as a
whole standing at 18.8 percent of risk weighted assets in December 2012. At the
beginning of March 2013, the statutory increase in the minimum paid up capital
of banks from Ushs 10 billion to Ushs 25 billion took effect, with all 24 banks
in operation now in compliance. Core capital which is the primary form of
capital grew by 16.0 percent from Ushs.1.87 trillion in June 2012 to Ushs.2.17
trillion at the end of March 2013. There was also an increase in the liquid
assets to deposit ratios of the banking sector from 37.6 percent in the March
2012 to 42.7 percent in March 2013.Credit to the private sector grew by 6.0
percent from Shs.7.19 trillion in June 2012 to Ushs.7.62 trillion by end March
2013, reversing the stagnation experienced during the period September 2011 to
June 2012. However, a slight decline in
the stock of loans and advances was registered between December 2012 and March
2013 mainly due to the closure of the lands registry which impeded the banks’
ability to verify land titles which are used as collateral for commercial bank
lending.
The banking sector remains an effective transmission
conduit of monetary Policy. In particular in 2011, the economy faced high
inflation levels hitting 30.5% in November. To curb inflation, the BOU
aggressively tightened monetary policy by raising the CBR. The CBR was
increased from 13 percent in July 2011, when it was first introduced, to 23
percent in October, and remained at 23 percent until February 2012. The
increase in the CBR was quickly passed on to interbank rates and other market
interest rates. The average interbank rate increased from 10 percent in June
2011 to 27 percent in December 2011. Commercial banks’ lending interest rates
increased from 21 percent to 27 percent; and yields on treasury bills and bonds
also increased. Consequently annual headline inflation has since subsided to
single digit figures at 3.6% in May 2013and the CBR rate is at 11%
However, according to
World bank and IMF estimates, Uganda’s average private sector credit as a
percentage of GDP for years 2009 to 2012 at 13.9% is among the lowest by East
African countries; Kenya ( 34.4%),Tanzania(19%), Rwanda (13.1%) and Burundi at
15.3%. Noteworthy, Commercial banks private sector credit growth subsidized in
2011/12 to 14.6% of GDP from 16.6% in the previous financial year. Nearly all new credit over the last 2 years has been
extended in foreign currency, and is posed to increase in the next few months
since commercial banks are slow at lending in Local currency.
Linkages with the agriculture sector which employs
over 66% of population is still weak. Private sector Credit is largely skewed
to construction, trade and salaried loans. The building and construction sector
constituted the largest share of total credit, dominating at 23.3 percent. The
share of the trade and commerce sector to total lending, which in the previous
year constituted the largest share at 21.5 percent, increased slightly to 21.7
percent. Personal and household loans
constitute 21.1%, manufacturing at 8.9% and
agriculture at
6.4%.
There are about 5
million accounts. This is equivalent to a 14% commercial bank penetration rate
given the current population of 35 million. Access per 1000 adults for commercial banks remains low for Uganda by
east African countries, the Ugandan average accounts per 1000 adults for period
of 2008- 2012 is 168 compared to Kenya(523) and Rwanda (215)
Drastic growth of Mobile money to over 11million accounts with a total
transaction value exceeding 20% percent of GDP (bigger than the size of
proposed budget for FY 2013/14 ) pose a negative risk to the banks potential profit growth but is a
welcome move to compliment the banking sector increase financial access.
Financial 2011/12 was a
difficult year for Uganda- facing the worst inflation in 2 decades and
consequently slower growth at 3.4%. This in turn inflicted down turn risks on
the households and corporate. The commercial loss expense provisions in the
wake of high interest rates have since increased and the data from Bank of
Uganda data shows that commercial Banks’s expense provisions grew by 260% from UGX
77.9 bn(US$ 31.6 M) in December 2011 to UGX 205.9Bn(US$ 82M) in 2012. Also the non-performing loans share of the
total lending stood at 4.5% in December 2012 which is twice the amount the
previous years.
Despite the central bank reducing the CBR to 11%, the
decrease was not met with a proportionate cut in credit rates as banks only
adjusted lending rates marginally downwards to an average of 24%. Hovering
uncertainty, high alternative sources coupled with slow adjustment of credit
risk continue to forestall deeper cuts of credit rates by lenders
The banking industry remains solid with high capital and profit levels
but penetration rate remains low. The banking sector will grapple with downturn
risks of slow growth in the last two years. There is need for commercial banks
with high non-performing loans to ensure that
lending standards remain high and that loan quality does not deteriorate
further. The growth in foreign denominated credit poses an indirect credit risk;
the growth in banking volumes due to cross border transactions will require
vigilance by both banks and central banks.
Private sector credit to GDP at
14.6% remains lowers than the EAC macro-economic convergence criteria of the
30%. Banking sector linkages with
agriculture sector is still weak. The
passing of the anti-money laundering legislation will come in handy in
mitigating misuse of the banking sector to lauder proceeds. Interesting times ahead though for Uganda as
further deepening of the financial sector. Agency banking, Islamic banking,
liberalisation of the pension sector should boost the banking sector. The
transition requires BoU vigilance
http://www.africanexecutive.com/modules/magazine/articles.php?article=7360&magazine=450
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