Rédaction Africa Links 24 with Uganda Monitor
Published on 2024-03-23 18:20:51
Bank deposits in Uganda have hit a two-year low, signaling a significant drop in the money that banks rely on to lend out to customers. This decline in deposits is a crucial element of the banking sector’s business model. Additionally, data from the central bank reveals that people’s borrowing activity has also reached a seven-year low.
Recent data shows that the total value of deposits held by Ugandan banks decreased from Shs3.2 trillion to Shs2.65 trillion in January 2024 compared to the previous 12-month period. Bank deposits saw a steep decline of Shs300 billion in just one month, from December 2023 to January 2024. Corti Paul Lakuma, a senior research fellow at the Economic Policy Research Centre, attributes this decline in deposits to financial challenges faced by the population due to the impact of the Covid-19 pandemic and the depreciation of the shilling against the dollar.
The decrease in deposits has also impacted banks’ income streams. The spread, or net interest margin, which is the difference between the interest rate earned on loans and the interest rate paid on deposits, has decreased for local banks. This decrease in the spread indicates higher funding costs for lenders. Lending rates for shillings remained high across major economic sectors, leading to concerns about asset quality and an increase in non-performing loans.
As a result of these challenges, some commercial banks have had to downgrade to tier-two financial institutions due to stringent capital requirements set by the national treasury. Banks like Opportunity Bank and Guaranty Trust Bank are struggling to raise the minimum paid-up capital of Shs120 billion within the stipulated deadline. The Bank of Uganda argues that increased capital requirements aim to strengthen the financial system’s stability and enhance resilience to economic shocks.
The banking sector in Uganda is also grappling with an increase in non-performing loans (NPLs). The ratio of total NPLs to gross loans at banks rose from 5.3 percent to 5.7 percent, reflecting challenges in the business environment. Despite these challenges, supervised financial institutions are taking measures to mitigate credit risk, including prudent provisioning for expected credit losses and improving credit risk management.
Furthermore, interest rates in the banking sector are a cause for concern. Banks have been adjusting interest rates independently of the Central Bank Rate (CBR), impacting the government’s efforts to regulate the money supply in the economy. The stock of outstanding private sector credit has declined, primarily due to loan repayments outpacing new credit approvals.
Overall, the banking sector in Uganda is facing multiple challenges, including low deposits, high non-performing loans, and discrepancies in interest rates. To address these issues, banks must focus on improving asset quality, enhancing credit risk management, and maintaining competitive standards in the market.
Read the original article on Uganda Monitor
