The Bank of Uganda has released its annual report for the Financial Year 2022/2023, revealing notable developments in the country’s banking sector. The report, published on Tuesday, October 17, 2023, highlights various aspects of the economy and the performance of commercial banks in Uganda.
Uganda’s Economic Growth:
According to the report, Uganda’s economy expanded by 5.3 percent during the 2022/2023 fiscal year, a marked improvement from the 4.6 percent growth recorded in the previous year.
Bank Asset Growth:
One of the key findings in the report is the substantial growth in total commercial banks’ assets. From June 2022 to June 2023, these assets increased from Shs44.6 trillion to Shs48.3 trillion. The primary contributor to this growth was the increased holdings of Government of Uganda securities, rising by 12.2 percent. This surge occurred alongside a slowdown in credit growth, as banks exercised greater caution in extending loans to the private sector, citing concerns about the economy’s deceleration.
Loans and Advances:
The report also indicates that commercial banks’ gross loans and advances increased by 4.7 percent during the same period, growing from Shs18.6 trillion in June 2022 to Shs19.4 trillion in June 2023. However, this growth rate was notably lower than the 12.2 percent increase observed in the prior year. The report attributes the growth this year to net extensions totaling Shs635 billion, suggesting a potential shift in banks’ risk tolerance in lending to the private sector.
Banking Sector Resilience:
Dr. Michael Atingi-Ego, the deputy governor of the Bank of Uganda, emphasized the resilience of the Ugandan banking sector. He noted that the increase in total bank assets and strong capital buffers were partially due to the raised regulatory minimum capital requirements introduced in November 2022. Furthermore, he highlighted the growth in the services and industry sectors, specifically in trade, manufacturing, and construction, as drivers of Uganda’s economic growth.
Capital Adequacy and Regulatory Changes:
Commercial banks’ core capital adequacy ratio (CAR) experienced a substantial increase, climbing from 21.4 percent to 24.8 percent over the past year. This boost is attributed to a 25.4 percent rise in banks’ net after-tax profits and a 71.7 percent increase in permanent shareholders’ equity. The introduction of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument in December 2022 played a role in enhancing financial institutions’ resilience. This instrument increased the minimum required paid-up capital for Tier I (Commercial Banks) and Tier II (Credit Institutions).
Liquidity and Funding Conditions:
The report notes an improvement in liquidity and funding conditions leading up to June 2023. This improvement was facilitated by the maturity of banks’ investments in treasury bonds, as well as an increase in retail deposits from customers. As a result, the industry’s 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.
Asset Quality Concerns:
The report does express concerns about asset quality. It highlights anemic growth in lending activity and a rise in non-performing loans (NPLs). The banks’ aggregate NPLs-to-gross loans ratio increased from 5.3 percent to 5.7 percent during the year ending June 2023, with NPLs growing by 12.7 percent compared to the 4.7 percent increase in gross loans.