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Private Sector Credit in Uganda on steady rise-new report

The growth in Private Sector Credit (PSC) in Uganda has been on a sustained gradual increase since August 2020, reflecting the lower cost of borrowing following the easing of monetary policy by Bank of Uganda (BoU), a new State of the Economy Report says. Total PSC grew by 10.1 percent in Feb-21, up from 6.7 percent in August 2020.

 According to the report, annual growth in the stock of Private sector credit (PSC) grew on average by 8.9 percent in the quarter to April 2021 mainly on account of the rebound in economic activity. The average year-on-year growth in the stock of PSC (net of capitalized interest) averaged 9.5 percent in the quarter to April 2021, up from 8.2 percent in the quarter to January 2021.

“Capitalized interest was a net repayment of Shs.114.9 billion in the quarter to April 2021 compared to a net build-up of 290.5 billion in the quarter to January 2021 reflective of reduced uptake coupled with increased redemptions of obligations under the credit relief. As at the end of March 2021, the restructured loans under BoU’s COVID-19 credit relief measures amounted to Shs. 6.6 trillion of which Shs. 3.7 trillion remain outstanding.”

It says the reduction in capitalized interest is likely to lower banks’ risk aversion and support credit growth going forward.

It adds that foreign currency lending is likely to be supported by the exchange rate appreciation observed in the recent period. Net of exchange rate valuation changes, the annual growth in the stock of PSC was 10.1 percent year-on-year in the quarter to April 2021.

“However, the likely impact of the new Covid-19 strain and… a second wave of the pandemic pose downside risks to credit growth. Notably in April 2021, annual PSC growth fell to 7.0 percent from 9.7 percent in March 2021 partly driven by a reduction in credit supply due to increased risk aversion by lenders. It is likely that the risk aversion will prevail in the short-term, while in the medium to long-term, credit growth will be dependent on the pace of economic recovery.”

Credit growth was majorly driven by personal loans and manufacturing sectors, which grew by 10.2 percent and 12 percent respectively relative to 8.0 percent and 9.9 percent in the previous quarter. However, average annual credit growth to the agriculture and building, mortgage, construction & real estate grew lower by, 5.2 percent and 9.1 percent respectively in the quarter ending April 2021, compared to, 8.0 percent and 9.9 percent.

Lending to the trade and business sectors continues to remain subdued due to the adverse effects of the pandemic, growing on average at3.7 percent and -0.4 percent respectively, relative to -2.9 percent and 6.9 percent.

 Lending interest rates

Commercial banks’ lending to households and businesses, which is largely determined by lending interest rates, is an important channel through which monetary policy affects the real economy. Lending rates have declined gradually over the first half of the FY 2020/21, reflecting an accommodative monetary policy stance. From 20.9 percent in July 2020, commercial banks’ lending interest rates on shilling loans declined to 17.1 percent in December 2020.

However, Commercial banks became more risk averse as their asset quality deteriorated driven mainly by reduced borrowers’ cash flows as a result of the pandemic. Consequently, lending rates on shilling loans rose to 19.9 percent in February 2021, which is an average of 18.9 percent for the quarter to April 2021 and higher than the average of 18.1 observed in the quarter to January 2021. Lending interest rates on foreign currency denominated loans also recorded an increase to an average of 5.9 percent from 5.4 percent over the same period.

PSC increases goes more to community and social services

During the quarter to April 2021, the report says, notable increase in lending rates on shilling loans was observed in the Community, Social and Other Services sub-sector at an average of 21.8 percent from 18.9 percent in the quarter to January 2021. Similarly, interest rates for the Agriculture and Trade sectors rose to 21.8 percent and 18.4 percent respectively from 20.5 percent and 17.1 percent. The rise in rates partly reflects increased risk aversion towards borrowers in these sectors by lenders.

Annual growth in the stock of PSC grew on average by 8.9 percent in the quarter to April 2021 mainly on account of the rebound in economic activity. The average year-on-year growth in the stock of PSC (net of capitalized interest) averaged 9.5 percent in the quarter to April 2021, up from 8.2 percent in the quarter to January 2021.

Capitalised interest was a net repayment of Shs.114.9 billion in the quarter to April 2021 compared to a net build-up of 290.5 billion in the quarter to January 2021 reflective of reduced uptake coupled with increased redemptions of obligations under the credit relief. As at the end of March 2021, the restructured loans under BoU’s COVID-19 credit relief measures amounted to Shs. 6.6 trillion of which Shs. 3.7 trillion remain outstanding.

The reduction in capitalised interest is likely to lower banks’ risk aversion and support credit growth going forward.

Foreign currency lending is likely to be supported by the exchange rate appreciation observed in the recent period. Net of exchange rate valuation changes, the annual growth in the stock of PSC was 10.1 percent year-on-year in the quarter to April 2021.

However, the likely impact of the new Covid-19 strain and/or a second wave of the pandemic pose downside risks to credit growth. Notably in April 2021, annual PSC growth fell to 7.0 percent from 9.7 percent in March 2021 partly driven by a reduction in credit supply due to increased risk aversion by lenders. It is likely that the risk aversion will prevail in the short-term, while in the medium to long-term, credit growth will be dependent on the pace of economic recovery.

Credit growth was majorly driven by personal loans and manufacturing sectors, which grew by 10.2 percent and 12 percent respectively relative to 8.0 percent and 9.9 percent in the previous quarter. However, average annual credit growth to the agriculture and building, mortgage, construction and real estate grew lower by, 5.2 percent and 9.1 percent respectively in the quarter ending April 2021, compared to, 8.0 percent and 9.9 percent. Lending to the trade and business sectors continues to remain subdued due to the adverse effects of the pandemic, growing on average at3.7 percent and -0.4 percent respectively, relative to -2.9 percent and 6.9 percent.

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