In a classic case of overshadowing private businesses in the credit market, commercial banks’ lending to government grew by Shs 2.2tn in 2017 compared to a paltry Shs 168bn lent to private enterprises.
Commercial banks saw a record increase in the amount of money they invested in treasury bills and bonds in 2017 but at the same time starving private business of credit, according to the Bank of Uganda’s latest annual supervision report.
According to the 2017 report, commercial banks’ investment government securities increased by Shs 2.2tn while only increasing their lending to the private sector by a meagre Shs 168.4bn in 2017.
This meant that commercial banks held Shs 9.9tn in liquid assets [assets that can easily be turned into cash] at the end of December 2017 – this was 18.6 per cent more than the level held at end of 2016.
Commercial banks prefer lending to government because it carries not risk of default. Government has the ability to tax and pay back unlike private businesses where if anything goes bad, the likely outcome is default.
However, this overshadows the private sector’s need for money for investment since they are in the market competing with their government for money. This means very few businesses will make investment.
This could also explain why interest rates have remained high – averaging 20 per cent per year despite the easing of monetary policy during the year. Banks are not motivated to reduce rates to levels that are afforded by many people since they are sure they can lend to government.
Government had said it would only borrow Shs 600bn from commercial banks but it ended up taking up much more.
“In 2017, bank credit to the private sector increased by 1.5 per cent to Shs 11.5tn, lower than 6.1 percent growth registered in 2016,” BOU said.
Meanwhile, loans given out in Uganda shilling grew by 8.3 per cent in 2017 to Shs 6.9tn, which was higher than the 7.5 percent growth registered in the previous year. Loans advanced in foreign currency fell by 7.1 per cent in 2017, down from the 4.4 percent growth registered in 2016.
“Foreign currency denominated loans constituted 40.7 percent of total loans as at end of December 2017, down from 44.4 percent as at end of December 2016,” BOU said.
“Banks continued to exercise caution in lending due to the high default rates suffered in 2016, even though 2017 registered significant improvement in loan performance,” said BOU.
The central bank also reported concerns pertaining to some banks’ information and communications technology (ICT) infrastructure.
“Some banks’ core banking systems were obsolete, with weak embedded IT controls and unable to adequately support operations, leading to routine operational challenges,” BOU said.
“Moreover, some banks’ systems could not adequately assess money laundering/terrorism-financing risks, and support robust financial reporting.”
A couple of banks have had their systems hacked and customers’ money stolen due to lack of stronger firewalls. Commercial banks don’t usually come to say it as they fear to derail customer confidence in them.
BOU said it had also found cases of non-compliance with some provisions of the Financial Institutions Act (FIA) 2004 and its implementing regulations, BOU directives and guidelines, by some banks.
“BOU issued specific and time-bound directives to all banks for them to address all identified supervisory concerns. There were cases where BOU enforced punitive measures on the banks for non-compliance with supervisory directives,” the report said.