Economic uncertainty, rising credit default risks, emerging liquidity and funding challenges amidst low deposit growth largely shaped Uganda’s banking industry performance during the first three months of 2024 as lenders confront a high interest rate environment.

A combination of weak government spending, low consumer spending and budget cuts reported within local firms have affected economic activity in many sectors while hurting banks’ credit performance indicators, latest Central Bank data shows.

The overall non-performing loan (NPL) ratio registered by the banking sector rose from 4.7 percent in December 2023 to 5.1 percent by end of March 2024 while the highest loan default rates were registered in the trade and commerce, real estate and community services segments.

Credit default rates in the trade and commerce sector stood at 7.4 percent at the end of March 2024 compared to seven percent recorded in the real estate sector over the same period under review. Bad loans recorded in the community services sector stood at 6.9 percent by close of March, Bank of Uganda (BoU) figures show.

Annual private sector credit flows grew 6.7 percent during March 2024 in contrast to an official target of 13 percent.

The total value of loans disbursed by commercial banks, credit institutions and Micro Deposit Taking Institutions remained flat at Ush21.5 trillion ($5.7 billion) by close of March 2024.

“The trade and commerce sector is likely to experience the worst NPL ratios because of economic slowdown and challenges in accessing foreign currency. Nonetheless, interest income ratios in the banking industry rose during the first quarter of 2024,” observed Dr Twinemanzi Tumubweine, BoU’s executive director for supervision.

Fresh liquidity and funding challenges felt in the banking sector are partly reflected in low deposit growth and offshore investor capital flight witnessed between January and March 2024.

Overall net profits after tax posted by the banking sector grew by 15.9 percent to Ush1.5 trillion ($396 million) on the first three months of 2024. Interest incomes rose 13.8 percent in the first quarter of this year while fees income increased 14.4 percent during the same period under review.

Overall deposits registered by BoU’s licensed credit institutions grew by just 3.4 percent to Ush34.8 trillion ($9.2 billion) by close of March 2024 while the value of offshore investor outflows amounted to Ush243.4 billion ($64 million) between January and February 2024.

Offshore investments are usually targeted at the government debt market, short term bank deposits and the stock market among others.

Quarterly deposit growth rates for all BoU licensed credit institutions stood at 1.3 percent in December 2023 and 0.4 percent in March 2024. The average liquidity ratios for all Central Bank licensed credit institutions remained flat at 45.3 percent in December 2023 and 45.7 percent in March 2024 respectively.

“This industry has experienced strong liquidity and funding pressures over the past two years. Fund managers like Old Mutual Investment Group have grown their assets to Ush2 trillion ($528 million) todate. Much of that money was previously kept in banks in form of fixed deposits and personal savings accounts. The decline in banks’ investments made in government securities is a direct response to our liquidity and funding pressures. Though some macroeconomic indicators have improved, underlying business conditions are still weak and this explains the sluggish credit growth in our market,” argued Samuel Mwogeza, Acting Chief Executive Officer at Stanbic Bank Uganda.

Overall net profits after tax posted by the country’s banking sector grew by 15.9 percent to Ush1.5 trillion ($396 million) during the first three months of 2024. Interest incomes rose by 13.8 percent in the first quarter of this year while fees income increased by 14.4 percent during the same period under review.

“The banks still lend quite a lot to government while the corporates are borrowing from overseas. The citizens are borrowing indirectly from government through programmes like the Parish Development Model. But this is not a sustainable way to grow Uganda’s economy,” said Izabela Karpowicz, Resident Representative for the International Monetary Fund in Uganda.

Commercial banks account for roughly 80 percent of local lenders’ assets — a financial item that includes loans and advances, according to previous World Bank research data.