For the last two years the Uganda financial sector has been struggling, amid sluggish economic growth and a rising portfolio of bad loans, according to Michael Kimondo, Head of Treasury Operations at Fusion.

“The return from the Government papers have averaged double digits and because of this, the Ugandan Banks have continuously relied on these investments that ensure higher returns and lower risks,” he said.

Private-sector lending in Uganda, which only grew by 6% year on year during the first half of 2017, has been recovering slowly, as a result of mainly two factors: the continually high rates of interest, despite systematic monetary easing by the central bank, and a weak economic environment, with real GDP growth coming in at an estimated 3.8% in 2017. 

“Unless banks transmit the lower central bank rates into the credit market, where double-digit interest rates remain the norm (averaging 22.3% in August), credit will remain too costly for most potential borrowers in the private sector,” Kimondo said.

In the recent months, though the government yields have been falling slowly (from an average of 15.9% on 91-day securities in 2016 to 8.4% in November 2017), this relatively low risk/high return lending option will continue to draw capital away from the private sector. 

“The BoU's limited capability to drive economic growth through policy intervention is therefore likely to support the trend of government borrowing crowding out the private sector,” added Kimondo.

The BOU Annual Supervision Report 2016, revealed the poor performance of banks in 2016. 

The sector's profitability declined by 44.2% year on year, to USh302.1bn ($84m) while the total asset growth slowed considerably to 0.9% over the year and was largely driven by increased commercial bank holdings of government securities; these increased by 25.6% across the financial sector, implying a sharp slowdown in private-sector lending. 

The aggregate of bad loans more than doubled in 2016, around half of which was accounted for by the now defunct Crane Bank. 

Kimondo said that the former fourth- largest bank was taken over by the BoU because of its severe undercapitalization, and later had the majority of its assets transferred to another bank, DFCU. 

“This drove up the ratio of non-performing loans (NPLs) from 5.3% at the end of 2015 to 10.5% a year later. This high increase in NPLs has resulted in a risk aversion by banks, which has led to a decline in the growth of the private sector credit,” he said.