Several financial institutions are actively pursuing additional funds to bolster their cash reserves and expand lending services in response to the challenges posed by a tight economy, characterized by high capital requirements, increased credit demand, and a surge in default of loans.
The International Finance Corporation (IFC), the private investment arm of the World Bank Group, recently disclosed its provision of a concessional loan to the Bank of Africa Group SA. This financial injection is aimed at supporting the lending services of its subsidiary banks, including Bank of Africa (BOA) Uganda. The $171.2 million funding comes at a crucial time as the economy rebounds from a lockdown-induced slowdown that disrupted trade and various economies.
The funding initiative specifically targets the enhancement of lending to small and medium-sized businesses (SMEs), responding to the heightened demand in this sector over the past three years. The IFC clarified that the funds are allocated to a project proposed by the Bank of Africa Group SA, focusing on recapitalizing its subsidiaries in countries affiliated with the International Development Association (IDA) and those facing fragile and conflict-affected situations.
The beneficiaries of this financial support are nine financial institutions under the Bank of Africa Group SA umbrella, namely Bank of Africa Uganda, Bank of Africa Benin, Bank of Africa Burkina Faso, Bank of Africa Cote d’Ivoire, Bank of Africa Kenya, Bank of Africa Mali, Bank of Africa Niger, Bank of Africa Senegal, and Bank of Africa Togo.
“The facility will support the group in scaling up its lending to micro, small, and medium enterprises (SMEs) in the context of high-interest rates, which led to tightening liquidity in the region,” stated the IFC in a disclosure. The overarching goal is to demonstrate the commercial viability of lending to SMEs and stimulate increased competition in the SME finance market.
SMEs, as per IFC data, are defined as businesses with 10–300 employees and assets ranging from $100,000 to $15 million. The IFC’s project, excluding BOA Uganda, will be processed under the Base of the Pyramid (BOP) program, focusing on providing financial services and support to individuals and businesses at the lower end of the income pyramid to promote inclusive economic development.
BOA Uganda, with the additional financial support, is expected to expand its loan book beyond the Shs468 billion recorded in 2022. This expansion aims to strengthen its annual return on assets and equity, which has witnessed a decline of more than four percent.
The local lender had previously depleted its resources and share premiums to meet the Bank of Uganda’s increased core capital requirement of Shs150 billion, up from Shs47 billion. This regulatory measure, undertaken by Bank of Uganda and the National Treasury, aimed to safeguard local banks from economic headwinds. By December 2023, three banks had not met the Shs150 billion core capital requirements, indicating the significance of the financial challenges faced by these institutions.
