The Ugandan banking sector experienced an 8.4 per cent growth in assets during the last financial year. This growth was supported by high inflation, which resulted in a slowdown in private-sector borrowing. Despite weak economic growth prospects and elevated geopolitical tensions in 2022/2023, the sector remained resilient.

In the annual performance report, the Bank of Uganda revealed that banks’ assets increased from 44.6 trillion to 48.3 trillion shillings between June 2022 and June 2023. The increase in holdings of government securities by 12.2 per cent contributed significantly to this, as credit growth slowed down.
“Concerns about slowing economic growth induced greater caution in banks towards extending loans to the private sector. This resulted in an increase of just 4.4 per cent in loans and advances, far slower than the 12.2 per cent growth registered the previous year, ” says the report. Commercial banks’ gross loans and advances grew from 18.6 trillion to 19.4 trillion shillings by the end of the year.

The net extensions amounted to 635 billion Shillings, indicating the bank’s positive attitude towards leading.
“This is suggestive of a potential shift in banks’ risk tolerance vis-à-vis private sector lending, which could stimulate economic expansion moving forward,” says BOU.

However, it says, like in the previous year, net capitalized interest on loans, which accounted for 895.5 billion Shillings, remained a significant contributor to the overall increment in loans. Capitalised interest refers to the addition of the accruing interest to the loan principal, hence increasing the loan size, and resulting in the customer paying interest on interest.

On the strength of banks, BOU says that commercial banks maintained strong capital buffers, majorly due to the increase in the regulatory minimum capital requirements and profitability. This followed the issuance of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2022 last year by the Minister of Finance, Planning and Economic Development, aimed at enhancing financial institutions’ resilience.

The minimum required paid-up capital was, effective 31 December 2022, increased to 120 from 25 billion for Tier 1 (commercial banks), and will be increased to 150 billion Shillings in 2024.

For Tier II (credit institutions), the minimum capital requirement was raised from 1 to 20 billion this year and to 25 billion shillings by 2024. Most banks, “including all Domestic Systemically Important Banks (DSIBs)”, have met the minimum capital requirements, according to the regulator.

The institutions also improved their liquidity and funding conditions towards the end of the financial year despite initially encountering challenges. This was partly due to maturities of banks’ investment in treasury bonds that were not rolled over in the bond switch, and an increase in retail deposits from customers.

The industry liquidity coverage ratio (LCR), a measure of the ability of banks to withstand a 30-day liquidity stress period, increased from 184.5 percent in June 2022 to 373.4 percent at the end of June 2023, well above the 100 percent benchmark. However, there remains concern about asset quality (the likelihood of loans and advances being paid on time) in lending activity and an increase in non-performing loans.

The banks’ aggregate non-performing loans–to–gross loans ratio increased from 5.3 percent to 5.7 percent during the year ended June 2023, as the stock of non-performing loans increased by 12.7 percent compared to only 4.7 percent for gross loans.

“However, SFIs continue to take measures to address credit risk, including prudent provisioning for expected credit losses and write-off of impaired loans. The Financial Institutions (Credit Reference Bureau) Regulations 2022 that were recently gazetted will enable banks to enhance credit risk management, including expanding credit information sharing among the banking institutions and other accredited credit providers,” the Bank says. Tier II or Credit Institutions assets grew by 10.2 percent to  490.6 billion shillings as at end-June 2023