Uganda: Growth in Customer Deposits Boosts Banks' Income

In the finance language world over, bank deposits are a fundamental way money moves through an economy. A bank deposit is the placement of funds in an account with a bank.

Some bank deposits at commercial banks (demand deposits) are part of the M1 money supply (a country's physical currency plus demand deposits and other liquid assets held by the central bank and calculated by it.

There are two types of bank deposits: demand deposits and times deposits. Demand deposits are the placement of funds into an account that allows the depositor to withdraw his or her money from the account without warning or with less than seven days' notice.

Checking accounts are demand deposits. They allow the depositor to withdraw funds at any time, and there is no limit to the number of transactions a depositor can have on these accounts (although this does not mean that the bank can not charge a fee for each transaction).

In banking terms, savings accounts are time deposits, meaning a bank can require the account holder to give notice before withdrawing the funds or impose a penalty for withdrawal before a specified date.

Although banks do many things, their primary role is to take in funds--called deposits--from those with money, pool them and lend them to those who need funds.

Since banks are intermediaries between depositors and borrowers, the amount banks pay for deposits and the income they receive on their loans are both called interest.

In banking, depositors can be individuals and households, financial and nonfinancial firms, or national and local governments. Deposits can be available on-demand or with some restrictions such as savings and time deposits.

Banks pay depositors less interest than they receive from borrowers. That difference accounts for the bulk of banks' income in most countries.

The financial result of 2019 reveals that customer deposits increased from Shs19.6 trillion in December 2018 to Shs23.2 trillion in December 2019.

Uganda Bankers Association (UBA) said during the year 2019, the shillings deposits stood at 14.2 trillion (62.8per cent) while foreign exchange (FX) deposits were recorded at Shs8.7 trillion (37.2%).

"Growth in the total number of accounts was recorded at 15.4m as at December 2019 compared to 12.17m as at December 2018, representing a 21 per cent growth," UBA said.

The former UBA chairman, Mr Partick Mweheire said the growth of access channels, specifically, agent banking points across the country increased to 12,154 by end of December 2019.

In the previous years, the industry operated less than 800 branches and 1,000 ATMs across the country with high costs incurred in the maintenance of these channels.

"Lending to agriculture registered the highest annual growth rate of 18.1 per cent (Shs298 billion) largely attributed to lending in the agro-processing sector totaling Shs219.2 billion.

While at any given moment some depositors need their money, most do not. That allows banks to use shorter-term deposits to make longer-term loans. The process involves maturity transformation--converting short-term liabilities (deposits) to long-term assets (loans).

Commenting about 2019 financial year performance Stanbic bank during the release of the financial results, Mweheire said: "We were able to improve on all our key performance goals. We grew our deposits by 21 per cent as more customers trusted us with their money and our loans and advances grew by 14 per cent by - availing Shs344 billion of new credit to key sectors of the economy such as manufacturing, agriculture and personal lending - where we provided more than 40 per cent of new lending."

Loans and advances

Loans refer to debts provided by a financial institution for a particular period while advances are the funds provided by the banks to the business to fulfil working capital requirement which is to be payable within one year.

The term 'loan' refers to the amount borrowed by one person from another. The amount is in the nature of the loan and refers to the sum paid to the borrower. Thus from the borrower's viewpoint, it is 'borrowing' and from the bank's viewpoint, it is 'lending'.

A loan may be regarded as 'credit' granted where the money is disbursed and its recovery is made on a later date. It is a debt for the borrower. While granting loans, credit is given for a definite purpose and for a predetermined period.

Interest is charged on the loan at agreed rate and intervals of payment.

'Advance' on the other hand, is a 'credit facility' granted by the bank. Banks grant advances largely for short-term purposes, such as the purchase of goods traded in and meeting other short-term trading liabilities.

The amount lent by the lender to the borrower for a specific purpose like the construction of the building, capital requirements, and purchase of machinery and so on, for a particular period of time is known as loan. Generally, the banks and financial institutions grant loans. The principle, it is an obligation, which needs to be repaid back after the expiry of the stipulated period.

In 2019, banks made some money by lending more to customers. Loans to customers grew by 14 per cent from Shs12.7 trillion reported in 2018 to Shs14.46 trillion in 2019.

"In the year 2019, the banking industry registered a growth in loans/ credit facilities spread across most sectors with Real Estate and Construction accounting for 20.2 per cent of the total industry loan book followed closely by trade and commerce at 19.2 per cent, personal & household loans at 18.4 per cent, followed by agriculture and manufacturing at 13.5 per cent and 12.8 per cent respectively," said UBA.

Banking phenomenon

The phenomenon of the banking industry; the primary end activity of banks, like other companies, is to generate profits. Banks generate profits from the many types of assets they own. However, some of these assets can be non-productive in terms of generating income directly. However, such non-income generating assets are important to carry out banking activities.

In financial reporting, a balance sheet matters so much for the company's management and shareholders.

A balance sheet is an accounting tool that lists assets and liabilities of a company. An asset is something of value that is owned and can be used to produce something tangible. For example, as an individual, the cash you own can be used to pay your tuition. A home you have built provides shelter and can be rented out to generate income.

Whereas a liability is a debt or something someone owe. For example, many people borrow money to buy homes. In this case, the home is the asset, but the mortgage (that is the loan obtained to purchase the home) is the liability.

In this case, the net worth is the asset value minus how much is owed (the liability). A bank's balance sheet operates in much the same way.

Net worth

A bank's net worth is also referred to as bank capital. A bank has assets such as cash held in its vaults and monies that the bank holds at the central bank ("reserves"), loans that are made to customers, and treasury bills and bonds.

There are two main types of banking assets are loans and securities held. Assets include cash, premises, real estate, and other fixed assets. These assets earn minimal or very low revenue for the bank.

The second most important revenue-earning asset for banks are the securities the bank holds. A bank earns income from securities by earning interest income on them or by trading them.

2019 financial results of banks in Uganda indicate that commercial banks' total assets increased from Shs28.1 trillion in 2018 to Shs32.8 trillion in 2019. This translates into a 16.8 per cent growth rate, implying improved quality in bank assets.


In terms of profitability, the 2019 bank financial results indicate that combined profit after tax increased to Shs887 billion, up from Shs692 billion in 2018, a growth of 28.3 per cent.

For the last two years, the central bank accommodative monetary policy has seen it lowering its policy rate significantly, boosting the uptake in private credit.

Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of no equity securities, and trade credits and other accounts receivable that establish a claim for repayment.

In Uganda, the private sector credit has been growing. In 2017, for example, the net growth rate was 6.3 per cent on a year on year basis. In 2018, the net private sector credit reached Shs1.565 trillion, representing a growth rate of 11.7 per cent. In 2019, the total private sector credit was Shs1.848 trillion which is a growth of 12.3 per cent.

The primary end activity of banks, like other companies, is to generate profits. Banks generate profits from the many types of assets they own. However, some of these assets can be non-productive in terms of generating income directly.

However, experts in the industry say such non-income generating assets are important to carry out banking activities.

The financial results for 2019 show that combined total investment in Government Securities increased from Shs6.0 trillion in 2018 to Shs7.2 trillion representing a 19.6 per cent growth.

The executive director of Uganda Banker Association, Mr Wilbrod Humphreys Owor said 2019 was packed with numerous activities as indicated in the statement of the chairman.

"Our re-branding in 2019 speaks to our new direction of transforming banking through fostering partnerships & collaborations. In 2020, we will continue with the implementation of the strategic plan 2019-2021 building on the foundation laid in 2019," he said.


The International Monetary Fund has said the Covid-19 pandemic will hit the banking sector hard.

As borrowers' income sharply drops as a result of the pandemic, banks' income is likely to be be constrained as customers ask for loans to be restructured until April 2021. Banks will also be more cautious to lend.

In April, Bank of Uganda outlined Credit Relief Measures to mitigate economic impact of COVID-19 and safeguard financial stability.

"On April 14, 2020, BoU issued guidelines to supervised financial institutions (SFIs) on how to implement measures. All SFIs that are supervised by Bank of Uganda that is commercial banks Microfinance Deposit taking Institutions and Credit Institutions shall offer these credit relief measures to their borrowers as they deem fit," the acting deputy governor, Bank of Uganda, Dr Adam Mugume said.

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