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Financial institutions in Uganda not adversely affected by Covid-19-BoU report

The performance of financial institutions was not adversely affected by the COVID-19 pandemic induced disruptions to economic activity according to the annual supervision report 2020  released by the Bank of Uganda, the regulator of that sector.

The report further states that profitability of Commercial Banks increased albeit marginally by 6.37 percent to Shs.855 billion, while the value of non-performing loans was largely unchanged throughout the course of the year ending December 2020.

“Over the year to December 2020, total assets of the banking sector grew by 16.8 percent (Shs.5.5 trillion) from Shs.32.8 trillion in December 2019 to Shs.38.3 trillion in December 2020. This growth rate was slightly higher than the 16.7 percent growth registered in the year ended December 2019. This was largely on account of an increase in holdings of government securities which rose by 39.9 percent (Shs.2.9 trillion) to Shs.10.1 trillion, gross loans and advances by 12.3 percent (Shs.1.8 trillion) to Shs.16.3 trillion, and balances with banks abroad which increased by 22.6 percent (Shs.0.59 trillion) to Shs.3.19 trillion.”

Furthermore, during 2020, banks increased the investment in liquid and less risky assets i.e. government securities and cash balances in comparison to loans and advances to the private sector. Hence, the holding of government securities as a proportion of total assets increased from 21.97 percent to 26.29 percent, while the ratio of gross loans and advances to total assets reduced from 44.04 percent to 42.51 percent over the year to December 2020.

Capital adequacy

According to the report, the banking sector remained adequately capitalized, with capital buffers improving over the year to December 2020. The aggregate industry core and total capital adequacy ratios stood at 20.6 percent and 22.2 percent, an improvement compared to December 2019 of 20.1 percent and 21.8 percent respectively. The consolidated Leverage Ratio (the non-risk based capital requirement) increased from 10.7 percent to 11.0 percent between December 2019 and December 2020, and remained well above the prudential limit of 6 percent.

Total shareholder’s funds

The report says total shareholder’s funds grew by 10.9 percent from Sh.5.8 trillion in December 2019 to Shs.6.5 trillion in December 2020. The increase was largely driven by a rise in the industry’s share premium of USh.585.3 billion in the year ended or December 2020.

Funding and liquidity

Funding and liquidity Aggregate liquidity and funding conditions improved across the banking sector. Customer deposits, which constitute the largest source of funding, increased by 17.1 percent from Shs.22.9 trillion to Shs.26.8 trillion over the year ended December 2020. The growth is slightly higher than the growth of 16.7 percent in 2019. The growth in customer deposits was mostly driven by shilling deposits, which increased by 19.9 percent to Shs.17.2 trillion, while foreign currency deposits rose by 12.3 percent to Shs.9.6 trillion. As a share of the total deposits, demand deposits accounted for 56.6 percent, time deposits 22.2 percent, and savings deposits 21.3 percent.

Liquidity

Further, liquidity risk reduced as SFIs built up ample liquidity buffers during the year to withstand adverse episodes, resulting in an improvement in banks’ resilience to liquidity shocks. This positive outcome was an indication of the effectiveness of BOU monetary and macro prudential policy actions. There were also several additional complimenting factors including the partial easing of the lockdown in June 2020, and heightened risk aversion to private sector credit that led banks to increase their investment in government securities thereby boosting their liquid asset holdings.

In 2020, BoU says, the industry liquid assets–to– deposits ratio was 50.7 percent at the end of 2020, higher than 48.6 percent held at the end of 2019, and well above the minimum regulatory requirement of 20 percent. The increase in the liquidity ratio echoes the significant rise in banks’ investment in government securities and cash balances. The Liquidity Coverage Ratio (LCR), which measures whether a bank holds sufficient high quality liquid assets (HQLA) to withstand a 30-day stress scenario, stood at 229.6 percent compared to 234.3 percent in December 2019. In addition, all banks met the LCR regulatory minimum requirement of 100 percent.

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