On the 22 June 2015, Bank of Uganda (BoU) published the annual
supervision report for the year 2014 in line with its statutory provision of
prudential regulation and supervision of financial institutions. This report
illustrates increased accountability and serves to instill confidence in the
public that the bank failures of late 1990s will not recur. This report is comprehensive, covering the
supervision of financial institutions-on-site inspection and the off-site
analysis, regulatory reforms undertaken, the financial stability assessment, and
risk assessment of the sector and recent developments like the mobile money
service. The report also elaborates stringent supervision by BOU which led to the
closure of Global Trust Bank Limited (GTBL) in July 2014, in line with the Financial
Institutions Act of 2004. While the financial sector comprises of the
commercial banks, credit and micro-finance deposit-taking institutions, the
National Social Security Fund (NSSF), a postal bank, insurance companies,
development banks, foreign exchange bureaus and the Uganda Securities Exchange,
BoU only partly supervises non-banking financial institutions.
On the overall, financial outreach increased with ATMs, commercial
bank branches and mobile money transactions registering sizeable growth. The
number of ATMs and bank branches respectively increased to 830 and 564 in
December 2014 compared to 768 and 542 in December 2013 with notable expansion
outside Kampala and the metro regions of Uganda. Mobile money transactions
increased to Ushs. 496.3 million with an associated value of Ushs. 24.05 trillion
in December 2014, compared to 399.5 million transactions and the value of Ushs.
18.6 trillion in December 2013. The number of registered customers stood at
Ushs. 18.8 million in December 2014, accounting for more than 50% of Uganda’s population. Financial access however, remains low with only 20% of
adults having access to formal bank accounts.
The assessment of financial stability reveals that the financial
sector remains sound, well capitalized, liquid and profitable. In particular, the
banking sector which represents over 95% of the financial sector assets
recorded an overall improvement in performance in the year ending 2014, mainly
on account of the increase in loans and advances to Ushs 9.4 trillion. Deposits
remained strong at 81% of the banks’ total liabilities. The stress tests carried out quarterly, with
the last conducted end of December 2014, reveal that the banking sector remains
resilient to adverse shocks emanating from non-performing loans, deposit
withdrawals, decrease in the interest income from government securities, and the large depreciation of the Uganda
shilling.
The overall positive performance of the financial sector
notwithstanding, traces of vulnerability remain. First, the size of the
financial sector remains small and dominated by the commercial banking sector.
The banking sector is dominated by a few players; the top three banks account
for over 50% of the banking sector assets and the top two banks (Stanbic and
Standard chartered bank) approximately accounted for 50% of the total banking
profitability in 2014. The limited competition among the 25 commercial banks,
in part, explains the obstinate prevalence of high interest rates and high
spreads (lending rates minus deposit rates) despite the deposits being the
largest share of bank funds at a low cost annually of 3.6%. The increasing
investment in government securities by banks is likely to increase interest
rates. Deposit base and private sector
credit remain low by regional standards, at about 17% and 14% of GDP
respectively, which is an indication of low levels of savings and financial
development.
The bank stress tests also revealed that the sector remains vulnerable
to a couple of risks; in particular, credit risk emanating from large borrowers
holding a large proportion of their portfolio in the top 5 banks (also referred
to as systematic banks). Their loan default would have significant consequences
on commercial banking sector capital exacerbating non-compliance with statutory
requirements. In addition, despite the non-performing loans reducing in 2014,
they remained sizeable at Ushs.390 billion or 4.1% of the total gross loans.
The majority reside in trade and commerce, and building and construction
sectors.
The economy became increasingly dollarized in 2014, with the foreign
denominated components of the banks’ balance
sheet growing faster than their shilling counterpart, illustrating risk
aversion on the part of shilling depositors. The foreign currency deposits to
total deposits increased by 4 basis points to 42.1%, while the foreign currency
loans to total loans were at nearly 44% in December 2014. This is partially
explained by the growing non-resident funds driven largely by the presence of regional
subsidiary banks. This does not only increase foreign currency risks to the
sector, but also, in part, explains the depreciation trend of the Uganda shilling.
The upward swing in interest rates noted in the first half of 2015,
coupled with the economy outlook risks including election related shocks, should
see the banking sector face a jagged run, in particular the bottom 10 banks
whose cost to income ratio is nearly 100%. Prudent supervision alone is not a
panacea and, therefore, there is need for a concerted effort to address the
broader structural and regulatory weakness in the banking sector.
Also another article on banking
sector being solid but vulnerable- http://www.africanexecutive.com/modules/magazine/articles.php?article=8485&magazine=558
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