Lending growth still low despite BoU rate cuts

Bank lending to the private sector grew at a relatively restrained pace in February, even as the central bank cut its policy rate to its lowest level ever with the hope that loan approvals will increase, boosting economic growth.

Data released by the central bank showed that total commercial bank credit to the private sector increased by 5.2% from a year earlier to Shs12 trillion. That’s the lowest year-on-year growth in three months, and the second lowest in 13 months.

With price pressures contained, the Bank has pursued an expansionary monetary policy since April 2016 to stimulate economic growth through increased bank credit to the private sector. But weak private sector growth “below historic levels” throughout the easing cycle has frustrated officials who worry it could restrain further expansion.

Despite the low credit growth levels, the economy has improved over the past one year. Economic activity increased by an estimated 6.4% in the year to February according to the central bank’s composite index. Recently released data by Ubos also shows GDP expansion of 6.3% in 2017 compared to 3% in 2016.

The increase in bank lending was supported by a 27.6% year on year rise in credit to the agriculture sector, specifically to crops, livestock and poultry farming activities and processing activities. Credit to agriculture was 12.5% of total bank loans to the private sector.

Personal loans and household loans expanded by 12.3% from the same month last year to Shs2.2 trillion, with credit to purchase non-durable goods and services climbing by 30.8%.

Credit to the trade sector increased by 11.9% to Shs2.2 trillion. Wholesale trade loans were up 20.8% while lending to retailers increased by 10.7%. Export loans however fell by 2.6%.

The building, mortgage, construction and real estate which usually receives the biggest share of bank loans – 21% in February – registered a subdued growth in credit of 3.6%. This follows a 17.2% decline in commercial mortgages, although mortgages for residential houses increased by Shs58.2bn. Loans to property developers and estate agents were also up by 17.3%.

Credit to the manufacturing sector was up by only 0.3%, while loans to transport and communication were down 13.3%. The two sectors’ shares of total bank loans was 12.5% and 6%, respectively.

The sluggish growth bank lending to the private sector has more to do with collateral concerns and other structural rigidities in the banking sector not a failure of monetary policy, according to the Bank of Uganda. Banks concerns about nonperforming loans remains the biggest handicap to private sector credit growth.

Interest rates are likely to go down following the Bank’s historically low policy rate. But the effect of this on loan growth is likely to be tempered as banks “tighten non-price terms and conditions” and “guard against inadequate security”.