The Ugandan banking sector experienced an 8.4% growth in assets during the last financial year. This growth was primarily attributed to increased holdings of government securities, which rose by 12.2%, compensating for a slowdown in private sector borrowing. These findings come from the annual performance report for the year issued by the Bank of Uganda, despite the backdrop of weak economic growth prospects and heightened geopolitical tensions characterizing the period of 2022/2023.
The total assets of the country’s banks rose from 44.6 trillion shillings at the end of June 2022 to 48.3 trillion shillings by the close of June 2023.
The report points to concerns about slowing economic growth that led banks to be more cautious in extending loans to the private sector, resulting in a mere 4.4% increase in loans and advances. This rate of growth was significantly slower than the 12.2% registered in the previous year. Gross loans and advances by commercial banks increased from 18.6 trillion to 19.4 trillion shillings by the end of the year. However, the net extensions, calculated as the difference between advances and recoveries, amounted to 635 billion shillings. This suggests a potential change in banks’ attitude toward private sector lending, which may drive economic expansion in the future, according to the Bank of Uganda.
Despite the growth in loans, the report highlights that net capitalized interest on loans remained a significant contributor to the overall increase in loans. Capitalized interest is the practice of adding accruing interest to the loan principal, resulting in the customer paying interest on interest.
In terms of strength, the Bank of Uganda reports that commercial banks maintained robust capital buffers. This was mainly due to an increase in the regulatory minimum capital requirements and profitability. The minimum required paid-up capital for Tier 1 (commercial banks) increased from 25 billion to 120 billion shillings, effective December 31, 2022, and will further increase to 150 billion shillings by 2024. For Tier II (credit institutions), the minimum capital requirement was raised from 1 to 20 billion shillings this year, and it is set to reach 25 billion shillings by 2024. The majority of banks, including all Domestic Systemically Important Banks (DSIBs), have met these minimum capital requirements as stipulated by the regulator.
Towards the end of the financial year, banks improved their liquidity and funding conditions, despite facing initial challenges. This improvement was partly attributed to the maturity of banks’ investments in treasury bonds, which were not rolled over in the bond switch, and an increase in retail deposits from customers. The industry liquidity coverage ratio (LCR), a measure of banks’ ability to withstand a 30-day liquidity stress period, increased significantly from 184.5% in June 2022 to 373.4% by the end of June 2023, well exceeding the 100% benchmark. However, there remain concerns about asset quality and an increase in non-performing loans.
The banks’ aggregate non-performing loans-to-gross loans ratio rose from 5.3% to 5.7% during the year ending in June 2023, with the stock of non-performing loans increasing by 12.7% compared to only 4.7% for gross loans. Nevertheless, financial institutions continue to take measures to address credit risk, including prudent provisioning for expected credit losses and the write-off of impaired loans. The recently gazetted Financial Institutions (Credit Reference Bureau) Regulations 2022 will enable banks to enhance credit risk management, including expanding credit information sharing among banking institutions and other accredited credit providers.
The assets of Tier II or Credit Institutions grew by 10.2% to reach 490.6 billion shillings as of the end of June 2023.
