Banking sector remains resilient despite weak economic growth

KAMPALA, October 17, 2023 – The Ugandan banking sector remained resilient despite weak economic growth prospects, heightened inflation, and elevated geopolitical tensions, says the Bank of Uganda [BoU] in its Annual Report 2022-2023.

According to the report, total banks’ assets grew by 8.4 percent to Shs 48.3 trillion as at end of June 2023 from Shs 44.6trn as at the end of June 2022. “The increase in banks’ assets was mainly attributed to holdings of Government of Uganda securities, which rose by 12.2 percent, amidst a slowdown in credit growth,” the report says.

The report says commercial banks’ gross loans and advances increased by 4.7 percent to Shs 19.4trn in June 2023 from Shs 18.6 trn in June 2022. However, the report adds this was considerably lower than the 12.2 percent growth posted in the previous year.

Nevertheless, the report says, the growth observed this year was boosted by net extensions that amounted to Shs 635.0 billion within the period leading to June 2023. “This is suggestive of a potential shift in banks’ risk tolerance vis-à-vis private sector lending, which could stimulate economic expansion moving forward.”

However, the report noted that like in the previous year, net capitalised interest on loans, which accounted for Shs 895.5bln, remained a significant contributor to the overall increment in loans.

Banks maintain strong capital buffers

Commercial Banks in the country maintained strong capital buffers, mainly due to the increase in the regulatory minimum capital requirements and profitability, says the report.

It says Commercial banks’ core capital adequacy ratio [CAR] increased from 21.4 percent to 24.8 percent, in part due to a 25.4 percent boost in banks’ current year net profits and 71.7 percent increase in banks’ permanent shareholders’ equity. This, the report says, followed the issuance of the Financial Institutions [Revision of Minimum Capital Requirements] Instrument, 2022 on December 16, 2022 , by the Minister of Finance, Planning and Economic Development [MoFPED] aimed at enhancing SFIs’ resilience.

Under the Instrument, the minimum required paid-up capital for Financial Institutions was, effective December 31, 2022, increased to Shs 120bln and Shs 20bln from Shs 25bln and Shs 1bln, for Tier I [Commercial Banks] and II [Credit Institutions], respectively and to Shs 150bln and Shs 25bln by 30 June 2024. Most banks, including all Domestic Systemically Important Banks [DSIBs], have met the minimum capital requirements.

Furthermore, pursuant to the Financial Institutions [Capital Buffers and Leverage Ratio] Regulations 2020, the report says banks complied with the additional capital conservation buffer requirement of 2.5 percent, and the additional Systemic Risk Capital buffer in the range of 0.0 – 1.0 percent for DSIBs, depending on their level of systemic importance.

According to the BoU, although initially challenging, liquidity and funding conditions improved towards June 2023. “The improvement in funding conditions was partly due to maturities of banks’ investment in treasury bonds that were not rolled over in the bond switch, and an increase in retail deposits from customers. As a result, the industry ratio of liquid assets to total deposits (liquidity ratio) increased from 46.5 percent in June 2022 to 49.4 percent in June 2023, with all banks meeting the regulatory minimum of 20 percent.”

The industry liquidity coverage ratio [LCR], a measure of the ability of banks to withstand a 30-day liquidity stress period, increased from 184.5 percent in June 2022 to 373.4 percent at end-June 2023, well above the 100 percent benchmark.

Asset quality remains a concern

The report says asset quality remains a concern, characterised by the anemic growth in lending activity and an increase in non-performing loans. The banks’ aggregate non-performing loans [NPLs]–to–gross loans ratio increased from 5.3 percent to 5.7 percent during the year ended June 2023, as the stock of NPLs increased by 12.7 percent compared to only 4.7 percent for gross loans.

SFIs taking measures

The report says supervised financial institutions [SFIs] continue to take measures to address credit risk, including prudent provisioning for expected credit losses and write-off of impaired loans. “The Financial Institutions [Credit Reference Bureau] Regulations 2022 that were recently gazetted will enable banks to enhance credit risk management, including expanding credit information- sharing among the banking institutions and other accredited credit providers.”

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