Dr. Fred Muhumuza
Local investors in Uganda are running to Tanzania as a result of the tough operating environment, Business Focus has learnt.
This is attributed to among others, a drop in private sector lending.
Data shows that lending to the agricultural sector, manufacturing, trade, transport and communication, business services and personal all dropped between April 2023 and April 2024. However, lending to housing continues to grow.
As a result of the drop in private sector lending, experts argue that Ugandan investors are increasingly rushing to Tanzania. These are now exporting to Uganda on a tax free system given by the East African Community (EAC) arrangement.
In fact, major imports are now coming from Tanzania. China is second in terms of the origin of products on the Uganda market.
This came to light during a gathering organized by Kigo Thinkers at Golden Tulip Hotel to discuss bank closures in Uganda.
Economist, Dr. Fred Muhumuza delivered a keynote speech, where he said that commercial banks are preferring to lend to the government over other key sectors of the economy.
He noted that either the government restructures the size of public servants or the country continues to borrow more. This as the government consumption grows to 9% from 7% of the size of the economy as local investment by the private sector drops to 22% from 24.8%. On the other hand, imports have increased from 6% nine years ago to 10% of the size of the economy.
In the last few months, the Bank of Uganda has had to close two financial institutions, EFC Uganda Limited and Mercantile Credit Bank. “The state of the economy affects the banks,” said Dr. Muhumuza. Other reasons for bank closure, Dr. Muhumuza said are: interest rates, cost of mobilizing funds and the quality of their (bank) loans and related lending as interest rates rise.
However, Dr. Muhumuza said that when a bank closes, it does not mean that depositors lose their money.
The Deposit Protection Fund ensures that clients/depositors are reimbursed a minimum of Shs 10 million.
Those with more than Shs 10 million have to wait for the liquidation process to establish assets and liabilities, dispose the assets including recovery of loans, and then pay the depositors.
“If a bank is placed under receivership, BoU becomes the receiver, and the procedures for liquidation are described in the law,” said Muhumza. He added that “The procedures specify a number of issues such as: “Treatment of shareholders, Respective responsibilities of the BoU, and the role and responsibilities of the bank liquidator.”
According to Dr. Muhumuza, a liquidator or receiver, appointed to resolve a failed bank, has a number of options that include: The whole bank may be sold to qualified investors or merged with a sound bank to be restructured and run as a going concern; The liquidator may split the bank into parts, sell the viable parts to sound banks and liquidate the remaining parts and that the Central Bank as a supervisors and/or liquidator, may pay off the secured depositors and liquidate the bank’s remaining assets.
He explains that merger and acquisition initiatives with larger international banks; Issuing additional shares’ and Downgrading the banking licenses from Tier I to Tier II are some of the options the BoU gives to the struggling financial institutions.
“Given the high concentration nature of the market, the regulation was bound to cause some banks to exit, merge, downgrade or risk being closed. The top 5 banks in Uganda control over 50% of the total market share while the top 10 control over 80% of the total market share,” Muhumuza added.
According to Dr. Muhumuza, interest rates remain high and trending up mainly due to the need to anchor inflation on the medium term target and Bank of Uganda borrowing. He adds that some banks faced liquidity challenges as uptake of the Standing Lending Facility rose to Shs 26.2 trillion in the 3 months to May 2024 from Shs 19.0 trillion in the 3 months to February 2024.
“Overnight rate increased to 11.8% in the three months to May 2024, from 10.4% in the three months to Feb 2024. The cost of mobilizing funds was on the increase as the 7-day interbank weighted average rate rose to 12% from 10.8% in the same period,” said Dr. Muhumuza.
Muhumuza says that tight monetary conditions and increasing domestic financing needs of the government crowding out the private sector, while the annualized average PSC growth reduced to 7.8% in the 3 months to April 2024, from 8.4% in the three months to January 2024. Both gross credit extensions and recoveries declined in the 3 months to April 2024 with the decline in gross extensions being faster than the that in gross recoveries, as banks increasingly cut back on renewing credit lines for borrowers.
Muhumuza suggests that the government other downsizes of continues to heavily borrow.
Uganda’s public debt has risen to unprecedented levels, reaching Shs 96.1 trillion ($25.3 billion or 52 percent of GDP) as of June 2023, according to an Auditor General’s report released recently. Of this 44.6 trillion is domestic while 52.8 trillion is from foreign sources.
Dr. Kenneth Egesa, the Director Communication at the BoU, says that banking is the business of selling trust. “You have to trust that you will deposit your money and still find it tomorrow. That is why there is no free entrance and free exit,” said Dr. Egesa. “The exit should not undermine the trust of depositors. The closure is done to protect depositors.”
Dr. Egesa says that the BoU closes a financial institution after on-sight and off-sight assessments.
According to Dr. Ronnie Mutebi, an auditor and a former banker, although depositors are paid their money when a bank closes, the process takes time. “Who pays for time the depositor has to wait when the bank goes into liquidation?” wonders Mutebi. He argues that the BoU is able to see the trend and should be able to look into the matter. Dr. Mutebi appealed to the BoU to sensitize the public on what they (depositors) must know “in the banking game.”
Dr. Egesa insists that the BoU does not close any banks without following the right procedures.
Despite the recent cloures, Egesa argues that the banking sector remains “very” stable.