Table of Contents
- Non-Performing Loans Decline
- Subdued Credit Growth
- Sectoral Analysis
- Increased Lending Rates
- Net Credit Extensions
- Banking Sector Performance
Non-Performing Loans Decline
In the second quarter of 2024, Uganda’s banking sector witnessed a decrease in the ratio of non-performing loans (NPLs), which fell to 4.9% in June from 5.2% in March. This improvement was mostly reflected in shilling-denominated loans, where the NPL ratio dropped to 5.4% from 5.7%. However, foreign currency-denominated loans saw an increase in NPLs, rising from 3.4% to 4.1% during the same period.
Subdued Credit Growth
Despite the decline in NPLs, the Bank of Uganda’s report highlighted subdued growth in private sector credit. Overall, credit growth fell to 7.1% in the three months ending in June, down from 8.3% in the previous quarter. This slowdown affected various key sectors of the economy, including agriculture, trade, housing, and personal loans.
Sectoral Analysis
A deeper sectoral analysis revealed that agriculture, trade, and business services faced the highest levels of non-performing loans. The report attributed this to underperformance in specific sub-sectors such as fishing, forestry, and restaurants. The agriculture sector’s credit decline was particularly driven by lower financing for production and marketing, while the trade sector saw reduced advances for retail, restaurants, and import-related credit.
The housing sector also experienced a reduction in credit growth, mainly due to lower financing for mortgages, land purchases, and property development. These declines point to a challenging economic environment for borrowers in these key sectors.
Increased Lending Rates
Lending rates remained elevated throughout the second quarter, with the weighted average shilling-denominated lending rate increasing to 18.1% in June, up from 17.6% in March. Foreign currency-denominated loans also saw a slight increase in interest rates, rising to 9.1% from 8.9%.
The rise in lending rates was most pronounced in the manufacturing, housing, transport, and communications sectors. However, some relief was noted for borrowers in agriculture, trade, and personal loans, where lending rates slightly decreased during the same period.
Net Credit Extensions
Despite the overall subdued credit growth, net credit extensions in the quarter rose significantly to Shs723.7 billion, up from Shs70.7 billion in March. However, this increase was primarily skewed towards prime corporate borrowers, with smaller businesses and personal loan applicants facing continued challenges in accessing credit.
The demand and supply of credit both increased, with demand rising to Shs5.7 trillion from Shs5.3 trillion and supply growing to Shs4 trillion from Shs3.4 trillion. Credit application approvals also saw a positive trend, improving to 70% from 65.5% in the previous quarter.
Banking Sector Performance
According to Dr. Kenneth Egesa, director of communications at the Bank of Uganda, the overall performance of the banking sector improved by June 2024. The sector’s risk profile has reduced, thanks to stable economic conditions and an easing of monetary policy. However, some structural challenges, such as deposit concentration and incidents of fraud, continue to pose risks.
The Bank of Uganda continues to monitor risks in the banking system closely, with expectations of continued credit growth and improvements in asset quality. However, lending rates are expected to remain high in the short term, as private enterprises and households compete with government borrowing for available credit.
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