East Africa

Uganda: Banks make big losses

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by the observer

As economy continues to limp

Leading banks have suffered significant losses or a drop in profits, as the ripple effects of the economic slow-down continue to be felt. Financial reports released in the past few weeks show that three of the six largest banks, each with assets worth at least Shs 1 trillion, saw their profits drop by 20 per cent or more.


The big three, all registering their most dismal performances in recent times, are Stanbic bank, Crane bank, and Standard Chartered bank. At least six other banks recorded losses in what turned out to be a tumultuous year for financial institutions. They are Ecobank, Orient bank, Global Trust bank, Bank of Africa, NC bank, and Imperial Bank.

Banks that posted profits, such as Centenary, Housing Finance, Tropical, ABC Capital, Barclays and Dfcu, only made marginal gains on last year’s returns compared to 2012. Profits of Stanbic Bank, the largest in the country, with an asset value of Shs 3.2tn, plunged by 22 per cent to Shs 101bn.

The bank attributed the decline to a reduction in loans and advances, increase in expenses, and a rise in the number of debts it has written off. Stanbic Managing Director, Philip Odera, said while releasing the company’s results recently that the effects of the 2011 economic slump were haunting the banking sector.

“Inflation [in 2011 and 2012] went through the roof. As a result, interest rates were pushed through the roof,” Odera said.

“The businesses that benefit from low interest rates are still trying to recover. The challenge now is how to do the opposite to stimulate the economy.”

Crane Bank, with assets of over Shs 1.4tn, saw its profits plummet by 41 per cent to Shs 47bn. Standard chartered Bank, competing with Stanbic Bank for the top spot as the biggest bank in Uganda, registered a 26 per cent slump in profits, the biggest in recent times.

The poor performance is likely to affect earnings of local shareholders who have bought a stake in the banks that are listed on the Uganda Securities Exchange. Stanbic Bank said it will pay Shs 0.977 per cent.

Ezra Munyambonera, a research fellow at the Makerere-based Economic Policy Research Centre (EPRC), hints that failure to diversify their credit portfolios could have affected the banks. Munyambonera said banks resorted to trading in government securities, which they regard as safe, compared to loans to individual Ugandans. However, this was not enough to make them significant profits.

“Up to 50 per cent of these banks’ capital assets are traded in treasury bills and bonds. This leaves little money available for the private sector,” he told The Observer.

Everest Kayondo, chairperson of the Kampala City Traders’ Association (Kacita), agrees. He noted that the government borrowed more at the expense of the private sector. This move, Kayondo said, left the private sector with no money to engage in economic activity.

“Government is coming to compete with the private sector and since banks have where they can lend, there was no incentive to reduce lending rates,” he said.

Bad debts

To be fair to banks, bad debts are an almost permanent fixture on their balance sheets. The difference this time is that the loans written off by the banks have massively increased – indicating poor economic recovery.

Centenary Bank wrote off Shs 7.8bn of bad loans, up from Shs 4bn in 2012. Dfcu Bank wrote off Shs 15bn, nearly twice as much as the Shs 8.7bn of 2012. Standard Chartered Bank’s non-performing loans and other assets increased from Shs 10bn in 2012 to Shs 120bn last year.

Non-performing loans are a sum of borrowed money upon which the debtor has not made his or her scheduled payments. Dr Adam Mugume, executive director for research at Bank of Uganda, said that slow economic activity had contributed to more bad commercial loans.

“The level of non-performing loans has increased from 4.9 per cent in September last year to 6.9 per cent in December 2013. Therefore, to the commercial banks, quality-wise in terms of the loans they give out, there is a problem,” he said.

Genesis of slump

It all started in 2011, when inflation shot up to 30.5 per cent – owing to increased demand and low food crop harvests. To control inflation, Bank of Uganda adopted a monetary policy called the Inflation Targeting Lite (ITL).

By raising the Central Bank rate (CBR), a signal rate that influences interest rates in the market, BoU tried to mop excess liquidity (cash) from the public. Commercial banks responded by raising interest rates.

Confronted with the high cost of paying back their loans, many traders who had borrowed defaulted on their payments, forcing banks to sell off a lot of properties used as collateral but also to write off billions of shillings in bad loans.

Later, when BoU gradually reduced the CBR rate, banks did not follow suit, citing uncertainties in the economy. Currently, according to the central bank, lending rates are at an average 20 per cent, which remains high. Kayondo of Kacita says the poor health of the banking sector does not come as a surprise, given the prescription that the commercial banks offered for the malaise of 2011.

“We predicted this three years back,” said Kayondo. “Their troubles started when they increased lending rates on the loans that had already been taken. We told them they were looking for short term gains but [it was] not sustainable. People defaulted and banks made losses.”

Bank of Uganda has made continuous appeals to commercial banks to reduce lending rates. However, the appeals have fallen on deaf ears, with some banks arguing that the future of Uganda’s economy remains uncertain. Kayondo cautions that the banks could be setting themselves up for more pain.

“It is now a Catch 22 situation. It is not yet over,” he said.

To make matters worse, donors cut aid in 2012 due to corruption, constraining government spending and further contributing to a slowdown in economic activity. The mortgage industry has also been blamed for the banks’ predicament. Munyambonera said real estate took a big chunk of the bank loans but suffered a slump in 2012.

Banks registered a huge number of defaulters and took over property but could not sell most of it as the market slumped even further. Announcing the April monetary policy, central bank Governor Tumusiime Mutebile said he expected banks to give out fewer loans as they scrutinise borrowers to avert effects of non-performing loans they have suffered.

“Faster recovery in credit growth may be impeded as banks focus on improving credit quality,” said Mutebile.

“Private sector credit to be further constrained over the financial year by high default rates and increasing yields on government securities,” said BoU’s April monetary policy report.

Traders cry

The poor health of the financial sector has cost traders such as Hajjati Mastulah Nanjego their businesses. In 2012, Nanjego, a trader in Kampala and Luwero districts, took a Shs 300m loan from Fina Bank, hoping to further develop her business. The money that was meant to help has since become her Achilles hill.

“Before I could realise it, I had paid the bank more than Shs 700m,” she said.

“But because I had always used the account to transfer money, whatever money I would deposit, it was what they took off my account…,” she said, tears rolling down her cheeks.

Nanjego remains one portrait of how high interest loans have affected borrowers. Recently, Apunyo City Mall was seized by a local bank after its owner defaulted on his loan obligations. Kayondo says the likes of Nanjego and Apenyo are merely a tip of the iceberg as a lot of traders are out of business, with many having lost their property to banks.

Low taxes

The poor performance by banks, which remain among the highest taxpayers, means pitiable revenues to government. Uganda Revenue Authority (URA) taxes banks according to their income.
Earlier this year, URA Commissioner General Allen Kagina told journalists that poor performance of such corporations would make it harder for the revenue body to meet this year’s target of Shs 8.5tn.

URA is expected to have a shortfall of over Shs 300bn this financial year, according to the ministry of Finance, Planning and Economic Development. Going forward, some experts advise banks to get back to the drawing board and resume business with private businesses rather than concentrate on government papers.

However, with the war in South Sudan still playing out, some traders who had taken loans are likely to default – making it hard yet again for some banks to recover their money and thus make profit.

Uganda earns about $240m (Shs 600bn) annually in exports to South Sudan. In their regional outlook report released last week, the International Monetary Fund warned of even harder times ahead.

The IMF says slower economic growth in large emerging economies such as China, the biggest funder of Uganda’s infrastructure projects, along with lower prices for key commodities for the region in global markets and tighter global financial conditions are likely to affect Uganda adversely.


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