According to BMI Research, Ugandan banking sector will benefit from rising credit growth and robust government securities issuance in 2017 on the back of a lower CBR which is likely to cause banks to reduce lending rates, making credit more affordable to Ugandan businesses and consumers.
“The Bank of Uganda (BoU) cut the Central Bank Rate (CBR) by 50 basis points (bps) to 11.50% earlier in February, amounting to 550bps worth of total easing since April 2016. A hiking cycle in H2 2015 pushed the CBR up to 17.00% by the end of that year, causing credit growth to slow to a record low of 6.2% y-o-y in 2016 compared to a 10-year average of 21.7%. While we do not expect the growth rate to return to such a level, it will grow at a double-digit rate. This is because Ugandan small-to medium-sized enterprises (SMEs), which are responsible for a large share of economic output, are often dependent on credit to grow and invest.” noted BMI Research.
Given that expansion had been stymied by higher lending rates in 2016, SMEs are likely to take advantage of lower lending rates by ramping up borrowing in 2017. Moreover, the high rate of return on government securities also gave banks less impetus to lend to the private sector, which further decreased access to credit.
“Although government securities issuance will remain robust in 2017, the rate of return will not be high enough to discourage banks from lending. Thus, double-digit credit growth is likely by Q317. Asset Quality Set To Recover In turn, the non-performing loan (NPL) ratio is set to decrease.” BMI Research.
The NPL ratio soared from 3.8% in September 2015 to 10.5% in December 2016, reflecting how the rise in lending rates meant that existing loans – the majority of which had variable interest rates – became more unaffordable for borrowers. As borrowing costs become cheaper, the NPL ratio is likely to fall in the coming quarters and previously delinquent borrowers will be more likely to pay off their debts.
Government borrowing is set to tick up in the coming months as investment in public infrastructure gains momentum. While Christine Lagarde encouraged Ugandan politicians to rely less on credit and more on domestic revenues for infrastructure development in an official visit to Kampala in January, Finance Minister Matia Kasaija said that there were “so many demands on the treasury at the moment yet our tax revenue cannot meet all the demands we have”, indicating an uptick in domestic borrowing.