Loans and deposits at Uganda’s commercial banks will grow strongly this year on the back of a robust economy, according to analysts at BMI, a subsidiary of Fitch Solutions.
The research firm forecasts that deposit growth will rise to 14 per cent year-on-year by the end of 2024, up from 13.3 per cent at the end of 2023. This trend will be supported by an increase in economic activity, facilitating savings by businesses and households. In addition, the depreciation of the shilling will raise the value of foreign currency deposits, which accounted for 31.6 per cent of total deposits last November.
Still, the incentive for bank customers to save “may not be as compelling,” the firm notes, given that “deposit rates have remained relatively low, registering at 2.7 per cent in November 2023, compared to the significantly higher lending rates of 16.8 per cent.”
Loan growth will rise from 8.5 per cent at the end of 2023 to 12 per cent at the end of this year, BMI says in a note. This is in contrast to last year when growth slowed from 9.2 per cent in January due to slower growth, high interest rates, and inflation. As these headwinds subside this year, demand for loans is expected to rise, aided by lower lending rates, say the analysts.
BMI predicts that loan growth will be driven by personal and household loans, borrowing from the agriculture sector, and the construction sector. Personal and household loans, which accounted for 23.2 per cent of total loans in November last year, have been the main driver of bank lending growth since March 2021 and are expected to continue to do so as the economy strengthens.
Meanwhile, borrowing by the agriculture sector is set to rebound, despite its recent modest contribution to loan growth and a dip in business confidence. This will rest on “strong coffee production” in the year, leading to a jump in loan demand. Additionally, the stronger economy and “near-record levels of sector confidence” will help boost construction borrowing.
The analysts warn, however, that government borrowing from domestic markets could crowd out private sector borrowers and put a damper on economic activity. Banks may also increase lending rates to cover the costs of meeting higher regulatory capital requirements.
The proportion of bond portfolios in total bank assets increased from 24.9 per cent in January 2010 to 33.8 per cent in November 2023. This was at the expense of lending, with the share of loans reducing from 51.7 per cent to 44.8 per cent in the same period, says BMI. This trend is expected to persist this year as the government, in an effort to reduce external borrowing, increasingly borrows from the local financial sector.
However, foreign investors may offer some respite. According to BMI, foreign ownership of domestic debt in Uganda remains high at around 8 per cent compared to the regional average of 4 per cent. It is expected to continue to rise in 2024, which will ease the pressure on banks.
Overall, the research firm expects total commercial bank assets to grow by 15 per cent by the end of 2024, up from 11.5 per cent at the end of last year, driven by stronger loan and bond portfolio growth.
By June, commercial banks will be required by the central bank to hold a minimum of Shs150bn in liquid capital as a buffer against unexpected losses. This is an increase from the current minimum capital requirement of Shs125bn, which was introduced last January. The new requirement will further strengthen the sector’s stability, especially when compared to regional peers. Uganda currently has the highest capital adequacy ratio among the ten largest banking sectors in sub-Saharan Africa at 25.4 per cent, according to BMI.
Credit quality is expected to improve as the strong economy, lower inflation, and an easing of monetary policy ease the financial burden on borrowers, allowing them to service their debt. Banks will also tighten lending standards in the face of higher minimum capital requirements.
The ratio of non-performing loans to total loans fell from 5.8 per cent in Q1 2023 to 5.3 per cent in Q3 2023, below the average of 5.4 per cent between 2010 and 2023 and the current sub-Saharan average of 5.8 per cent.
