Uganda's Banking Sector Still Strong - Report

The banking sector in Uganda remains strong despite the high non-performing loans across all banks.

A new report by PricewaterhouseCoopers (PwC) Uganda shows that overall, the banking system is very strong, with bank liquidity and capital buffers well above the minimum requirement. Commercial banks in the country are required to hold a minimum capital of 25 billion Shillings.

According to its Uganda Economic Outlook report 2017, PricewaterhouseCoopers (PwC) says that the banking sector as a whole is adequately capitalized to withstand any shocks.

The tax advisory group however notes that despite the strong performance, the non-performing loans to gross loans have nearly doubled in the last 12 months rising from 3.8 percent in September 2015 to 7.7 in September 2016.

Francis Kamulegeya, a senior partner of PricewaterhouseCoopers (PwC) Uganda and a board member of PwC Africa notes that the high increase in nonperforming loans has resulted into risk aversion by banks.

Risk aversion in banking refers to a decision by banks on whether to lend individuals or enterprises depending on the risk. They may lend to one paying less interest on the loan than to one that would be charged higher interests rates but with higher risk of defaulting on payment.

Risk aversion by banks has according to the PWC report led to a decline in private sector credit hence affecting private sector growth.

The PricewaterhouseCoopers (PwC) outlook comes just few weeks after DFCU bank took over assets and liabilities of former Crane Bank Limited. The bank had accumulated high levels of non-performing loans by the time Bank of Uganda took over its management late last year.

Crane Bank's volume of non-performing loans and advances stood at over 142. billion Shillings as at December 2015, accounting for a quarter of Uganda's banking sector bad loans that stood at 573.4 billion Shillings, according to Bank of Uganda data.

A recent survey of the banking sector by Bank of Uganda found that there were over 60 percent non-performing loans across the banking sector.

The high rates of non-performing loans were associated with failure by government to pay its contractors and suppliers, cost overruns faced by borrowers due to insufficient cash flows.

The instability in South Sudan and the diversion of funds by borrowers away from their intended use were other factors explaining the high non-performing loans. 

The bank of Uganda survey also found that there was a lot of speculative borrowing to finance property development in speculation of high demand for housing in the event of take-off of the oil sector.