By Herbert Bukenya
2017 was a tough year for Uganda’s economy as growth dropped to just 4% down from 4.8% the year before which is below the average 5% it’s been growing at over the past three years, according to information released by Bank of Uganda and the Uganda Bureau of Statistics.
The banks were not spared either as interest rates paid on government paper which is one of their major areas of assets invested in remained under 9.5% especially for the short term securities which are treasury bills as shown by the closing Treasury bills prices and yields for the first week of January 2018.
In his remarks earlier in 2017 at a Bankers’ Association get together, Central Bank Governor Tumusiime Mutebile said there has been no real value in growth terms of credit issued by banks after adjustment for inflation over the past two years, the slowdown having started in 2012.
Loans approved dropped from 70% as of the first half of 2012 to just about 51% of total loan applications for the first half of 2017. The Governor attributed this to an increase in non-performing loans and difficulty in realising the value of collateral when attached as the property markets too have been depressed.
This has left the banking industry stagnated as lenders have shied away from expanding lending to more SMEs that make up the largest part of the economy. Interest rates on loans remain high too increasing the payment burden of the borrowers which in turn keeps away some borrowers and increases chances of default among those who borrow.
More prudent risk management practices and reduced cost of borrowing are some of the interventions the governor suggested to stimulate sustainable borrowing and expansion of the industry.
This is compounded by average operation costs in Uganda being quite high compared to international standards taking up a whole 11% of total income generating assets. When interest cost of deposits and provision for bad debts are added this cost goes up to 18% constraining the banks’ ability to bring down lending rates further.
Switching to digital and electronic banking which will cut down on large branch networks and other costs will play a part in ensuring costs go down and lending rates too consequently as the banks look at more affordable and appropriate technology that won’t compromise quality of customer service heading into 2018.
Beyond that experts say as the year 2018 gets under way, banks will need to adopt more robust security measures to counter cybercrime which is likely to rise as banks go online, digital and increase the amount of electronic business they are doing.
On the side of the regulator, they too will need to strengthen their capacity to monitor the security and soundness of banks Information technology systems besides encouraging adoption of more international best practices to push the industry forward in 2018 and beyond.
As the economy bounces back with predictions from the World Bank group showing Uganda’s economic growth will hit about 6% in 2019, the banking industry too will grow and thanks to a good regulatory framework, the soundness of the sector will remain intact protecting depositors’ funds effectively going forward.
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