Bank lending to businesses recovers in July

Bank lending to businesses in Uganda recovered in July after dropping to its second-lowest level this year in June, signalling lower risk aversion and decline in the cost of credit.

Bank of Uganda figures show that commercial bank’s total outstanding loans to the private sector increased by 12.0% year on year in July, up from 10.7% the previous month, to Shs14.2 trillion.

The solid growth in private sector credit growth over the past year was supported by “continued improvement in economic activity, an accommodative monetary policy stance, and improvement in asset quality (as reflected in lower nonperforming loans),” the central bank said in its monetary policy report for August.

“The year-on-year growth in private sector credit averaged 12.6% in financial year 2018/19, almost doubling the 6.8% recorded in financial year 2017/18. The growth in private sector credit was largely driven by shilling denominated loans, which grew by 18.8% in FY 2018/19, from 10.9% in the previous year.”

An increase in lending to the manufacturing sector and building, mortgage, construction and real estate were the main drivers of private sector credit growth in July. Lending growth to manufacturing rose 21.0% year on year while loans to the building, mortgage, construction and real estate sector increased by 12.8%.

Lending to business services also rose at the fastest pace since February 2017 to Shs604.5bn. This trend, going back to the start of the year, is a “reflection of improved risk aversion towards the sector which, if sustained, is likely to boost the business activity of small and medium enterprises, increase private investment and consumption and in turn, support economic growth,” according to BoU’s August monetary policy report.

At the subsector level, the biggest contributions were from credit non durable goods and services, part of personal loans and household loans, agriculture processing and marketing loans, and retail trade.

Compared to the previous month, commercial bank loan disbursements increased by 0.9% in July compared to 1.3% in June.