Bank lending to the private sector continues to strengthen

Commercial bank lending to the private sector, a leading indicator of the financial sector’s contribution to economic activity, continues to improve with Bank of Uganda data showing a pickup in November.

Bank credit to the private sector rose 11.7% from a year earlier to Shs13.3 trillion, the second-highest growth rate since January 2016. The increase was driven by a rise in credit to the trade sector and personal loans and household loans.

The figures indicate that private sector credit growth has settled above the 10% mark following a lacksture run between 2016 and mid-2018. Bank of Uganda says the recovery is due to a “pickup in economic activity and the waning supply side constraints in part reflected by low nonperforming loans.”

The sharp decline in private sector credit growth recorded in 2016 and 2017 was blamed on risk-aversion by commercial banks due to an increase in bad loans. But that seems less of a concern recently.

The central bank’s latest data show that nonperforming loans as a share of total loans came in at 4.7% in the quarter ended September 2018 and at 4.4% in the quarter ended June 2018. This is “significantly lower than the highs of 7.2% recorded in the quarter ended September 2017” and the 6.1% recorded in the quarter ended June 2017.

The biggest determinants in November’s credit growth were loans to the trade sector, personal loans and household loans, and loans extended to the building, mortgage, construction and real estate category.

The increase in personal and household loans was driven by the 28.5% year on year rise in loans for the purchase of non-durable goods (consumables) and services. Credit to retail trade, on the other hand, increased by 29.4% and was largely responsible for the rise in loans to trade.

Shilling denominated loans rose 19.8% year on year to Shs8.3 trillion—which translates to 62.1% of total bank loans in the month—an improvement from the previous months’ growth of 18.7%. Foreign currency loans increased by 0.6% after a decline of 1.6% in October.

Month on month, commercial bank lending to the private sector increased by 1.5% in November, reversing a 0.2% decline in the previous month. The increase was largely due to a rise in loans to the telecommunications sub-sector and to processing and marketing activities in agriculture.

Related: Private sector lending slows in October