Bank of Uganda (BoU) has requested commercial banks and other supervised financial institutions to remove charges for early repayment of loans due to a rapid increase in non-performing loans and a volatile lending environment.
The directive was communicated in a letter from the Uganda Bankers’ Association (UBA) to the Bank of Uganda executive director supervision, signed by UBA Executive Director Wilbrod Owor. According to the letter, a decision to eliminate these charges was reached during an October 13 meeting across UBA’s membership.
The decision followed a series of meetings and discussions among chief executives of commercial banks, central bank executives, and other members of the Uganda Bankers’ Association (UBA). However, the letter does not specify the initiator of the proposal to eliminate a long-standing practice in the banking sector.
When asked about the decision-making process, Ms. Patricia Amito, the UBA corporate affairs manager, mentioned that Bank of Uganda had raised the issue, and after extensive discussions with UBA members, they agreed to eliminate the practice.
People with knowledge of the matter informed that the Central Bank had proposed this change to address the growing rate of non-performing loans, which was affecting the profitability of commercial banks. Many banks had to allocate significant amounts of capital for loan provisioning.
Bank of Uganda’s annual report for the period ending June 30 revealed that non-performing loans had increased by 12.7 percent, compared to 4.7 percent for gross loans in the year ending June 2022. The report emphasized that supervised financial institutions were taking measures to manage credit risks.
It remains unclear whether the surge in non-performing loans prompted the directive from Bank of Uganda. The Bank of Uganda director for communications, Kenneth Egesa, did not provide a direct response regarding the reasons behind the directive but expressed appreciation for UBA’s decision to eliminate the charges.
In a statement, UBA announced that regulated financial institutions had collectively decided to discontinue the practice of early loan repayment charges, effective from December 1. This decision was communicated to Bank of Uganda to meet the minimum 30-day notice requirement for customers. UBA believes this change will enhance loan market flexibility and contribute to the growth of private sector credit in challenging economic circumstances.
