Soft policy actions by Uganda's central bank in recent months have yielded little mileage towards credit growth in an environment plagued by increased default rates despite loan campaigns targeted at consumers.
Latest data from the Bank of Uganda shows that private-sector credit flows grew by single digits between March and August this year, despite policy actions intended to slash the cost of funds incurred by commercial banks, accelerate credit growth and boost economic activity.
This trend is blamed on steep default rates by lenders since the end of last year, and low consumer demand that has discouraged many businesses from borrowing.
The data indicates that average annual credit growth between June and August was 5.8 per cent, down from 6.1 per cent posted during March to May, reflecting a slowdown in lending.
Shilling-denominated loans grew by eight per cent between June and August, down from 8.5 per cent recorded during the March to May period. Forex denominated loans increased by 2.7 per cent between June and August, down from 2.8 per cent posted during the three months ending May.
The data also hinted at a gap between the number of loan applications and approvals, but verified figures were not available by press time.
Policy actions by BoU saw the benchmark interest rate decrease to a record low of 9.5 per cent last month, from 10 per cent in August. The Central Bank Rate was reduced to 10 per cent in June, from 11 per cent in April, leading to a drop in interest rates pegged to government securities and prime lending rates.
The latest surge in liquidity levels in the interbank market, a major source of short-term funds and foreign-currency flows for commercial banks, has raised hopes of increased lending in the banking sector. However, pressure to meet tight liquidity ratios set by the regulator could dampen these expectations.
The local interbank market registered total outstanding repurchase agreements (REPOs) worth Ush411 billion ($112 million) and Ush1.88 trillion ($512.7 million) in deposit auctions issued by BoU recently.
The overnight and one-week interbank rates stood at 6.5 per cent and 9.5 per cent respectively during the same period. In comparison, total reverse REPOs and deposit auctions amounted to Ush308 billion ($84 million) and Ush1.82 trillion ($496 million) at the beginning of this month.
Overall, non-performing loans (NPLs) have averaged 6 to 8 per cent since January this year, a fairly large default ratio compared with the less than four per cent recorded in 2014.
This scenario has created a hostile factor mostly blamed for the weak lending appetite by several banks despite reduced funding costs evidenced in the market.
Whereas some commercial banks have embarked on loan promotion campaigns targeted at retail clients in an effort to expand their credit books and book interest incomes for the first quarter of 2018, analysts seem pessimistic over the impact of these campaigns on credit growth patterns and general economic activity.
Though the key policy rate has dropped significantly this year, the number of loans approved remains lower than the loan applications received by banks mainly because of high NPLs experienced by banks.
The looming implementation of changes in the International Financial Reporting Standard 9 in January 2018 has also put many banks off lending to high-risk sectors like trade and commerce.
Due to high default risks and falling yields from government securities, some banks could change their revenue ratios from 60:40 in favour of interest income, compared with non-interest income at 50:50, through additional investments in new Treasury products and cost cutting. Loans and advances disbursed between January and July to the manufacturing sector declined, followed by a slight recovery in August.
Whereas BoU reports appear optimistic about credit and output recovery in the manufacturing sector over the last quarter of 2017, bank executives are divided, citing potential gains from ongoing infrastructural projects and uncertainty in the business environment.
"There is low aggregate demand in the economy this year largely because of pressure from the Uganda Revenue Authority on taxpayers. This has left many businesses broke and less willing to spend or take new loans.
"URA needs to go slow on taxpayers, while the government needs to spend less on politics in order to increase aggregate demand and effective demand for credit as well," said Robert Mpuga, head of treasury operations at Bank of Africa, Uganda.