Bank lending growth robust despite hitting the brakes in July

After growing at its fastest rate in 28 months in June, bank lending slackened in July, driven by drops in year on year lending to the telecommunications sub-sector and mortgages. It is the first time in five months that the indicator is not improving from the previous month.

Commercial bank credit, a leading indicator that shows the contribution of the financial sector to economic activity, rose 9.7% in July from a year earlier to Shs12.7 trillion. Although it is a decline from June’s 10.4% growth, it is still the second highest increase in 29 months.

The Bank of Uganda’s figures show an improvement in the quality of assets held by commercial banks – an important factor in determining whether banks will lend or not – and an increase in the weighted average lending rate which declined to historic lows in June.

The ratio of nonperforming loans to total loans dropped to 4.4% in the quarter that ended in June – the best quality of outstanding loans in 11 quarters. With the Bank blaming recent poor performances of private sector credit on supply-side factors, particularly a reluctance to lend to mitigate risks, the reduction in bad loans suggests that banks could have relaxed their credit standards.

And although the average weighted lending rate increased in July to 19.2% from 17.7% in June, the private sector credit growth figure still indicates that commercial bank lending is expanding healthily given its trend over the past two years.

Additionally, at 19.2% July’s average lending rate was at the lower end of its previously recorded range. Since January 2010, it’s only been lower in October 2017 at 19% and this June, when it was at 17.7%.

The Bank of Uganda has pursued an accommodative monetary policy stance since April 2016 aimed at boosting bank lending to the private sector and strengthening economic growth. The Bank’s policy rate – which is intended to guide commercial bank lending rates by influencing their funding costs – was maintained at 9% in August, its lowest level since the adoption of an inflation targeting lite monetary policy in July 2011.

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There were steep drops in the growth of commercial bank lending in 2016 as lending standards were tightened following high default rates; the industry ratio of nonperforming loans to total gross loans rose from 5.3% in 2015 to 10.5%, an 18-year high.

But as the quality of banks’ loan books has improved, economic activity picked up, and BoU’s policy rate stayed low, there has been a gradual recovery in private sector credit.