Uganda banks now project low credit growth

Rising interest rates and tighter credit conditions imposed by commercial banks could affect credit flows to Uganda’s private sector for the rest of 201516 financial year, with industry players projecting credit growth of less than 14.5 per cent and increased default rates.

This is in spite of a favourable outlook pegged to full-year earnings.

Private-sector credit rose by 14.5 per cent during 201415 compared with a policy target of 15 per cent according to Bank of Uganda data — a robust growth trend supported by a neutral monetary policy regime, increased liquidity levels recorded in the interbank market and aggressive provisioning for bad loans undertaken by big lenders during the period 2013-2014.

The central bank rate held steady at 11 per cent between December 2014 and April 2015, a scenario that stimulated lower costs of funding for several banks and subsequently cut average lending rates to less than 20 per cent per annum, observers said.

However, sharp growth witnessed in the value of repurchase agreements — financial tools used by the central bank to influence the volume of funds available in the interbank market — also helped bring down the cost of funding incurred by several banks and eased pressure on lending rates.

The average repo value rose from Ush120 billion ($34 million) to roughly Us00 billion ($86 million) per week during 2014, market reports show.

Foreign currency loans dominated lending activity during the past financial year amid massive depreciation of the Uganda shilling against the dollar, a pattern that saw the local unit lose nearly 22 per cent in value by the end of June 2015.

The value of foreign currency loans grew by 35 per cent in July compared with the same period last year, while the value of shilling loans increased by 14.5 per cent in August 2015 compared with the same period in 2014, BOU data shows.