Stiff monetary policy moves, stringent financial compliance ratios, and low customer deposit growth have pushed Ugandan lenders into choosing fixed deposits. This development promises higher returns for local fund managers and higher customer borrowing costs.

The Central Bank Rate (CBR) was raised to 10 percent in February, amid sharp depreciation of the shilling against the dollar, prompting an increase in commercial bank lending rates, interest rates pegged to treasury bills and bonds, plus interbank lending rates.

Steep declines witnessed in the value of the shilling saw the unit hit a record low of 3,900 to the dollar in the first quarter of 2024.

Currency traders blame the depreciation pressures on capital flight by foreign investors seeking higher returns on financial assets available in their home markets.

The CBR was raised further to 10.25 percent in March, despite the modest recovery recorded by the shilling. Financial market reports say the shilling traded at 3,820 against the dollar mid-last week.

Deposits held by licensed financial institutions supervised by the Bank of Uganda (BoU) — commercial banks, credit institutions, and micro deposit-taking institutions (MDIs) — grew by 3.4 percent to Ush34.8 trillion ($9 billion) by the close of March 2024, which points to more reliance on fixed deposits, compared with retail customer deposits for purposes of satisfying financial compliance requirements, according to Central Bank officials.

The liquid assets-to-deposits ratio applied to credit institutions — Tier 2 lenders — stands at 20 percent while MDIs are subjected to a similar requirement of 15 percent.

The aggregate consolidated liquidity coverage ratio, which is a measure of financial institutions’ liquidity patterns, dropped from 285.7 percent in December 2023 to 239.6 percent in March 2024, against a minimum compliance ratio of 100 percent. Average interest rates offered on fixed deposits increased from eight percent in March 2022 to 11 percent in March 2023 and March 2024 respectively, BoU data shows.

Current accounts are cheap but could be lost anytime because of overnight withdrawals by customers. A fixed deposit account helps you lock in funds for a long period in your books but is more expensive. Yields on treasury bills — a common benchmark pricing tool for fixed deposits — have risen to a range of 9-14 percent to date, with the 91-day Treasury bill, 182-day Treasury bill and 364-day Treasury bill gaining by one percent over a 12 month period.

Results from a Treasury bill auction conducted on May 22, 2024 show that the 91-day Treasury bill yield stood at nine percent while the 182-day T-bill registered a yield of 12.7 percent. The 364-day bill posted a yield of 13.8 percent.

An increase in yields earned on T-bills directly translates into higher interest rates attached to fixed deposits and increased borrowing rates charged to bank customers.

“Total deposits grew 3.3 percent in the first quarter of this year, largely on account of sharp growth in time deposits,” said Dr Twinemanzi Tumubweine, BoU’s executive director for bank supervision.

“This means financial institutions are relying more on time deposits than ordinary customer deposits to sustain liquidity levels. This trend has partly affected their operating expenses and earnings. And this is an issue treasury managers should be discussing.”
Globally, the trend is similarly shifting from IPOs to PE funds.

Last year, media platform CNBC, citing a survey of North American family offices, said family offices now have more of their money invested in private markets than the public stock market.

“We have experienced a decline in liquidity levels for some time. That means a bank must choose between current accounts and fixed deposit accounts in terms of their role in tackling the liquidity gap faced in this market.

Some banks may be desperate for large deposits because of limited customer deposits while those with huge customer deposits are less hungry for fixed deposits,” explained Benoni Okwenje, head of treasury operations at Centenary Bank Uganda.

The value of funds obtained by commercial banks from BOU’s Standing Lending Facility (SLF) jumped from Ush13.4 trillion ($3.5 billion) between September 2023 and November 2023 to Ush18.1 trillion ($4.7 billion) between December 2023 and February 2024, Central Bank data shows.

The SLF is a standby lending window managed by BoU and was established in 2022. Funds secured from this facility are priced at the existing CBR rate plus a two percent margin for every 24 hours.

“Demand for fixed deposits is fairly high these days because banks have become innovative in mobilising deposits. Our asset allocation for fixed deposits is 30 percent but it may be higher for unit trust funds that have a shorter investment cycle and bigger liquidity requirements. The pricing of fixed deposits is based on yields recorded on T-bills plus a small risk premium of 1-2 percent,” argued Simon Mwebaze, CEO of Old Mutual Investment Group Uganda.

“That premium might rise depending on the profile of the unit trust fund in which money is drawn for placement in a fixed deposit bank account. But the amounts of money provided are quite flexible. We may choose to place Ush10 million ($2,614) on a fixed deposit account in case that is what the bank needs. However, the quality of financial performance ratios registered by a bank carries more consideration and weight to us than the amount of money the bank wants from us.”

Mubbale Kabandamawa Mugalya, investment manager at Sanlam Investments Uganda, said that both government and commercial banks have lately shown a big appetite for money.

“Fortunately for us, the amount of money available in this market is much higher than it was 10 years ago. But you cannot price a fixed deposit account at eight percent interest while the one-year Treasury bill has clocked 13 percent. Some banks may ask for Ush500 million ($130,738) to be fixed in their books at a wholesale rate while others might ask for either Ush10 billion ($2.6 million) or Ush15 billion ($3.9 million), depending on their liquidity needs. Interest rates offered on fixed deposits also tend to go up before election time. For example, fixed deposit rates shot up to 15 percent shortly before the 2021 general election,” he said.