There are no major threats to the stability of the financial system, at least as of June 2017, according to Bank of Uganda’s Financial Stability Report.
The report says Uganda’s banking sector remains sound and stable with adequate capital and liquidity buffers. The sector’s aggregate core capital relative to its total risk-weighted assets increased from 19.0% the previous year to 21.4% in June 2017, while the capital-to-risk weighted assets ratio increased from 21.7% to 23.6%.
Bank of Uganda requires commercial banks to have, as a minimum, a core capital requirement of 8% of risk-weighted assets and a total capital requirement of 12%. The two safety buffers enable banks to cover unexpected cash flows and substantial losses – to ride out crises, in short. All banks met the two requirements in the year to June 2017, the report said.
The buffers’ improvement is due to increases in equity capital and profitability in the banking sector. Total shareholders’ capital across the sector increased to Shs4.2 trillion from Shs3.7 trillion in June 2016. This was “a result of an increase in share premium of 117.5%, due to DFCU’s issue of shares to finance the acquisition of Crane Bank’s assets.”
In addition, “the increased capital base was also supported by a 43.1% increase in profits for the first half of 2017.”
Assets in the sector grew 9% between June 2016 and June 2017, up from 5.5% in the previous period. This was driven by an increase in holdings of securities just as they moved away from loans. Central Bank securities held by banks increased fourfold, from Shs0.5 trillion to Shs2 trillion, while central government securities rose 3.5% from Shs5 trillion to Shs5.1 trillion.
High defaults rates on loans, particularly from large enterprises, forced banks to tighten their lending standards. As a result, credit growth in the financial year ended June 2017 was a measly 0.9%. This is well below the 3.7% recorded the previous year or the 19.7% growth in the year that ended June 2015.
But even as lending declined, the demand for credit by the private sector rose. “The total number of loan applications to banks increased by 6.4% in the year to June 2017, compared to 0.5 percent in the year to June 2016,” the report said.
“Demand for credit increased across various economic sectors and could have been largely influenced by declining interest rates; the weighted average lending rate decreased from 23.5% at June 2016 to 21.1% at June 2017.”