Commercial bank lending growth slows in March

Commercial banks’ lending to the private sector in March expanded by 6.2% year-on-year, less than February’s 7.5% rate, but still the sixth consecutive month credit growth has been positive.

Lending growth has been positive since October 2016 after dropping to the negatives in August and September. February’s growth rate is the highest in eleven months.

The slowdown, which was most marked in the second quarter of 2016 (see chart), was largely driven by provisioning for bad loans, which heightened risk aversion in commercial banks, according to the central bank’s State of the Economy Report, March 2017.

The report notes that private sector demand for credit has remained relatively robust despite “high lending rates”. The weighted average lending rates on shilling-denominated loans declined to 23.13% in February 2017 from 25.2% in February 2016, even as the policy rate has fallen by 6% since April 2016.

The central bank blames the sticky lending rates on loan loss provisions and “operational inefficiencies on the side of commercial banks”.

Personal loans and household loans recorded the highest growth of 19.4% year-on-year to Shs1,986.94bn, data from Bank of Uganda show. Loans for the purchase of durable goods were responsible for the growth, increasing 49.91% to Shs1,375.75bn.

Lending to agriculture increased by 17.4% compared to March 2016, driven by a 26.6% growth in loans for processing and marketing.

Personal loans and household loans made up 17.5% of total loans, while loans to the agriculture sector were 11%. Building, mortgage, construction and real estate loans had the biggest share with 21.5%, followed by trade with 18.6%.

Lending to trade expanded by 11.9% year-on-year to Shs2,116.36bn. Wholesale trade loans increased by 14.11% to Shs979.15bn, while credit to retail declined by 5.86% to Shs676.66bn. However, credit for imports rose 105.37% year-on-year to Shs244bn.

Credit to the building, mortgage, construction and real estate sector declined – just like in February – by 6.2% on an annual basis. Mortgage loans fell 8.7% to Shs1,171.27bn, with residential mortgages declining by 16.8% but commercial mortgages slightly edging up by 2.6%.

Lending to manufacturing – which was 13.1% of total lending – fell 5.8% to Shs1,484.58bn, mainly due to a 3.9% decline in credit for food, beverages, and tobacco industries.

On a month-on-month basis, credit growth to the private sector fell by 1.2% to Shs11,371.9bn, the lowest level in five months. This was because of a 0.9% decline in credit to the building, mortgage, construction, and real estate sector, and a 1.4% fall in lending to the manufacturing sector.

Monthly credit growth to business services also fell 22.9% to Shs521.56m.

It grew by 5.4% to agriculture and 3.2% to trade.