Meaning
By Muhwezi D - C/man CMIC
This is a money market situation in which loans are hard to get. Credit crunch occurs usually when a government tries to control inflation by imposing restrictions on lending to consumers and small businesses. Also called "credit squeeze". There thus is a sudden reduction in the availability of loans or ("credit") or a sudden increase in the cost of obtaining a loan from the bank.
Cause
Credit squeeze has been caused by the global economic crisis which was sparked off by the business of Le Mann Brothers business in the USA. This incidence has created fears within the financial institutions that give credit to the public.
Of recent, yuo have heard rumours that Barclays bank wants to close, however, this has been made clear by the Bank of Uganda that they just been rumours.
What does this mean to Ugandans
Different experts can give you different answers for this question. Recently a financial expert explained on NTV that in order to get ready for the financial crisis on a short term baasis, one should;
1. Save what he/she has instead of investing it in assets. To her, this is not the right time to invest in assets because as the situation worsens, those who will have invested in assets will not have money to purchase necessities, except those who will have invested the extra incomes.
2. Purchase only what is a necessity. She said this is not the best time to waste money in luxuries. Instead of buying luxuries, this money should be saved for use in the worst days likey to come in future.
In my opinion, this time is best for investment especially for those who want to invest in long term options such shares, unit trusts, land and buildings. The reason why I say this is because their prices are still low and once the crisis ends, those who will have invested are the ones who will enjoy the fruits of the "global crisis". It should however be noted that, if you have UShs 1,000,000 you must invest the whole of it. It is up to you to first consider your budget for the next three months, compare your earnings and decide on how much to save.
It may be better, if you invest 70% of your off-budget income and save 30% for in case purposes. This will help you to be prepared for both the unpredictable future as well as be able to enjoy the fruits with those who will have invested once the crisis is delt away with.
Meanwhile as we wait for the African financial experts to meet and brainstorm on the way forward for the global crisis, be a good planner, be ready for any worst and follow your frugal budget. Above all think about your job-if you are secure and remember; The "Global Crisis" has not ended.
Thursday, February 5, 2009
The Impact of the Financial Crisis on the African Financial Systems
As the immediate crisis faced in the last couple of months subsides, and policymakers begin to consider the longer term impact of the crisis in Africa, an emerging view is that the impact on the financial sector in Africa may actually be more significant and longer lasting than first assumed, and the impact on the non-financial sector in Africa will be more notable than has been the case in developed countries.
By Samuel Munzele Maimbo, World Bank Group
Conventional wisdom has hitherto suggested that the impact of the financial crisis in Africa will be limited because the transmission mechanisms between the financial systems in Africa and the rest of the world are weak. African financial institutions, it has been argued, are not exposed to risks emanating from complex instruments in international financial markets because most of the banks in Sub-Saharan Africa rely on deposits to fund their loan portfolios (which they keep on their books to maturity); most of the inter-bank markets are small; and the markets for securitized or derivative instruments are either small or nonexistent. Exceptions to this position are then made for countries like Nigeria and South Africa which are seen as the only countries having meaningful transmission mechanisms with the global financial systems.
Increasingly, this conventional position is being questioned for the following reasons:
Weakened local investor confidence in equities and bonds on African Stock Exchanges
Expectations that investors weary of the markets in developed countries will seek opportunities in African and other developed economies are misplaced. The small size and illiquidity of Africa’s stock markets (partly a reflection of the low levels of economic activity) is likely going to be amplified rather than overlooked as both international and local investors adopt more cautious investment strategies. Thus, while the price-earnings ratios for many African stock markets were above their sectoral equivalents in mature markets in 2007, the ongoing fallout from the subprime mortgage crisis in the US will dampen investment plans. Already, examples are emerging. The market turnover on Uganda’s bourse dropped 60 percent during the third quarter (Busuulwa, 2008). In South Africa, Kenya and Ghana, the stock markets have also been bearish.
This is disappointing. Up until the recent crisis, African stock markets were displaying resurgence and an energy that had not been seen for years. Prior to 1989, there were just five stock markets in sub-Saharan Africa and three in North Africa. Today there are 19 stock exchanges ranging from starts ups like Uganda and Mozambique stock exchanges to the Nigeria and Johannesburg stock exchanges. With the exception of South Africa, most African stock markets doubled their market capitalization between 1992 and 2002. Total market capitalization for African markets increased from US$113,423 million to US$ 244,672 million between 1992 and 2002. Ghana had five new equity listings in 2004; the Kenya Electricity Generating company Initial Public Offering (IPO) in 2006 – the country’s first in five years attracted strong demand and enormous public interest. Since then, the 2008 cellphone company IPOs of Safaricom and Celtel in Kenya and Zambia respectively have both been oversubscribed. This emerging confidence in the African stock markets is going to be negatively affected by the on-going financial crisis.
Slowdown in private sector lending
Unfortunately, it is not unimaginable that in the near term banks will have seen the results of the sub-prime market and decide to ease their hitherto aggressive loan book expansion. Real private sector credit, in particular, has been growing at an accelerating rate, and its median value has doubled in the past decade. Even as a share of Gross Domestic Product (GDP), it has turned the corner, with the median share approaching 18 percent in 2007, about a third higher than at its anemic trough in 1996. Much of this increase was on the back of innovative non-collateralized lending practices. Salary and other cash flow based lending have been on the emergence with positive outcomes for customers in the form of consumer loans. In October 2008, the Pan-African micro-lender Blue Financial’s loan book grew 236 percent and posted earnings growth of 167 percent in the six months to August 2008.
The possibility of overreaching their adoption of conservative credit appraisals processes and procedures does not bode well for the growth of private sector lending on the continent. Trade finance will come under tremendous pressure. With high fuel and food prices, foreign exchange constraints will persist on the continent for a while. A reluctance to lend by commercial banks will make it even harder to find trade financing sources. Of equal concern is the impact of the current crisis on the sources of long term funding. Where credit is still available, banks have already started in increase the cost of long-term finance. Shortening tenure of such loans is equally likely.
This is disappointing after recent years when funds were starting to enter African markets looking for both equity and portfolio investments. This slowdown will increase the need for domestic financing – pensions funds, insurance firms and domestic savings to fill the gap.
Weakened balance sheets and possible bank failures resulting from economic slowdown
In countries where the fall in investments is simultaneous coupled with drops in export earnings, a slowdown in GDP growth, and a sharp drop in domestic asset prices e.g. a local housing market correction, weakened bank balance sheets could result, including in some cases, bank failures. As the financial crisis surges into all parts of the real economy in developed economies, African countries will experience a substantial decline in exports as the rapid pace of trade expansion in this decade decelerates sharply. The IMF now projects that growth in world trade volumes in 2009 will be 4.1 percent compared to 9.3 percent in 2006. A notable part of this fall will be African. In Zambia for example, the economy is likely to take a hit from a share decline in copper prices (-24%ytd).
In this environment, large projects in Africa that require external financing to complement shorter term bank financing will face difficulties in attaining these finances, and where they do, will face higher interest rates, because of flight to safety and greater risk aversion of lenders. At the same time, portfolio outflows will put pressure on currencies for devaluations. Reduction in Official Development Assistance, remittances and tourism receipts will also have a negative impact on the economy. As investments falls, some projects will not be completed making them unproductive and saddling bank’s balance sheets with non-performing loans. Lower commodity prices, combined with a credit crunch and increased risk aversion will make it more difficult to finance and develop capital investments. The economic downturn will result in pressure on the balance sheet of some of the weaker banks in the systems as non-performing loans in some sectors increase. For some banks, failures will occur.
Renewed debate on the role of governments in the financial system
The government bailout of financial institutions in developed countries will be abused by those keen to entrench government involvement in the financial sector – even when such entrenchment is detrimental to the financial system. While many government led programs in the financial sector have been well intentioned, the unintended consequences have often been severe on the level of interest of the private sector in investing in the financial sector as well as the credit culture of beneficiaries. Global experience suggests that despite the seeming advantages of government intervention in broadening access to credit, especially through government-owed banks, public banking services in developing countries have generally not been successful.
There is a close association between such participation and lower levels of financial development, less credit to the private sector, wider intermediation spreads, greater credit concentration, slower economic growth and recurrent fiscal drains. Despite these arguments, the recent massive government purchase of shares in financial institutions will in some cases not be seen as a short term remedial measure, but rather a long term repudiation of government exclusion from the sector – the unintended consequences of this position in the 1970’s and 1980s may yet again revisit the continent if this view finds traction with policy makers for existing and planned government owned financial institutions (Scott, 2007).
Conclusion
The present financial crisis will affect financial systems in African countries differently depending on the present quality of the financial sector. To each there is a litany of policy and technical options for the governments on the continent to consider. These include implementing: management takeovers1; blanket guarantees on all deposits2 reduce reserve requirements3; offering to buy bad loans from commercial banks4 and revise deposit insurance guidelines5 to name but a few that were exercised by various governments during the month of October 2008 alone. Most of these options are for countries that are directly affected by the crisis and are in need of immediate assistance. For longer term financial sector reform options, the governments in Africa may wish to consider longer term options.
Three such options include
(i) Strengthening local investor confidence in equities and bonds on African Stock Exchanges by enhancing, though legislative reforms, the participation of local institutional investor. Pension funds, especially state control pension funds will need to be instrumental in sustaining the development of the market;
(ii) Encouraging private sector lending, especially for Small and Medium Enterprises, by attracting new sources of trade finance by, in some cases, rethinking support for new and existing export promotion facilities, and facilitating Risk sharing facilities in a bid to not only restore confidence in the financial sector, but also sustaining private sector enterprise, and;
(iii) Putting in government ownership policies that ensure that such ownership only takes place when; it is necessary to strengthen the capital base of banks to remove fears of insolvency; the managers have proved unable to raise equity capital from private sources; the bank is essential for the payments and credit systems, and the bank can reasonably be expected to be made viable in the long term. Importantly, governments must have policies in place that ensure that the government’s ownership is temporary and aimed at disposing of the investment once the financial system returns to normal operations and when it is commercially suitable.
References
Berggren A., and Scott, D., (2008) Temporary Government Ownership of Financial Institutions in Times of Crisis, forthcoming
Busuulwa, B. (2008) Uganda Bourse Turnover drops by 60pc, The East African (Nairobi) available at http://allafrica.com/stories/printable/200810290778.html accessed on October 29, 2008.
Caprio, G., Demirguc-Kunt, A., and Kane, E., (2008). The 2007 Meltdown in Structured Securitization. Policy Research Working Paper No. 4756. World Bank: Washington D.C
Cheikhurouhou, H., et al (2007). Structured Finance in Latin America. Directions in Development Finance. World Bank: Washington D.C.
Feyen, E. (2008) Overview of Recent Policy Responses to the Current Crisis, Policy
Honohan, P., and Beck, T., (2007) Making Finance Work for Africa. World Bank: Washington D.C
Irwin, T. (2007) Government Guarantees: Allocating and Valuing Risk in Privately Financed Infrastructure Projects. Directions in Development Finance. World Bank: Washington D.C.
Lin, J., (2008) The Impact of the Financial Crisis on Developing Countries, paper presented at the Korea Development Institute, Seoul, Korea.
Mmegi/The Report (2008) Mature Markets Boost Blue Earnings, The Reporter (Gaborone) available at http://allafrica.com/stories/printable/200810271403.html accessed on October 29.
_______________________________________
1 Oct. 21: Argentina's government announced it might take over the management of $28.7 billion in private pension funds that sharply declined in value this year
2 Oct. 13: Blanket guarantee on all bank deposits in Australia. New Zealand took similar measures. Australia also guarantees wholesale bank funding
3 Oct. 21: Central Bank of Brazil continues acting to tackle the liquidity in the local money market. It announced a program to reduce reserve requirement able to free up to BRL100b to the market
4 Oct. 5: In Chile viable banks were offered the possibility of selling bad loans to the Central Bank, with a repurchase agreement based on future profits
5 Oct. 7: Leaders of France, Germany, Britain, Italy, the European Central Bank and the European Commission agree on bank bail-out guidelines and deposit insurance of E50,000 but stopping short of a Europe-wide solution to recapitalize banks
This article was first published in Access Finance. Access Finance is a bi-monthly newsletter of The World Bank Group published by the Financial and Private Sector Development Vice-Presidency. It disseminates information on improving access to financial services. The four key pillars highlighted are: Inclusive Financial Systems, Credit Reporting, Payment Systems and Remittances. Comments/suggestions can be sent to accessfinance@worldbank.org
By Samuel Munzele Maimbo, World Bank Group
Conventional wisdom has hitherto suggested that the impact of the financial crisis in Africa will be limited because the transmission mechanisms between the financial systems in Africa and the rest of the world are weak. African financial institutions, it has been argued, are not exposed to risks emanating from complex instruments in international financial markets because most of the banks in Sub-Saharan Africa rely on deposits to fund their loan portfolios (which they keep on their books to maturity); most of the inter-bank markets are small; and the markets for securitized or derivative instruments are either small or nonexistent. Exceptions to this position are then made for countries like Nigeria and South Africa which are seen as the only countries having meaningful transmission mechanisms with the global financial systems.
Increasingly, this conventional position is being questioned for the following reasons:
Weakened local investor confidence in equities and bonds on African Stock Exchanges
Expectations that investors weary of the markets in developed countries will seek opportunities in African and other developed economies are misplaced. The small size and illiquidity of Africa’s stock markets (partly a reflection of the low levels of economic activity) is likely going to be amplified rather than overlooked as both international and local investors adopt more cautious investment strategies. Thus, while the price-earnings ratios for many African stock markets were above their sectoral equivalents in mature markets in 2007, the ongoing fallout from the subprime mortgage crisis in the US will dampen investment plans. Already, examples are emerging. The market turnover on Uganda’s bourse dropped 60 percent during the third quarter (Busuulwa, 2008). In South Africa, Kenya and Ghana, the stock markets have also been bearish.
This is disappointing. Up until the recent crisis, African stock markets were displaying resurgence and an energy that had not been seen for years. Prior to 1989, there were just five stock markets in sub-Saharan Africa and three in North Africa. Today there are 19 stock exchanges ranging from starts ups like Uganda and Mozambique stock exchanges to the Nigeria and Johannesburg stock exchanges. With the exception of South Africa, most African stock markets doubled their market capitalization between 1992 and 2002. Total market capitalization for African markets increased from US$113,423 million to US$ 244,672 million between 1992 and 2002. Ghana had five new equity listings in 2004; the Kenya Electricity Generating company Initial Public Offering (IPO) in 2006 – the country’s first in five years attracted strong demand and enormous public interest. Since then, the 2008 cellphone company IPOs of Safaricom and Celtel in Kenya and Zambia respectively have both been oversubscribed. This emerging confidence in the African stock markets is going to be negatively affected by the on-going financial crisis.
Slowdown in private sector lending
Unfortunately, it is not unimaginable that in the near term banks will have seen the results of the sub-prime market and decide to ease their hitherto aggressive loan book expansion. Real private sector credit, in particular, has been growing at an accelerating rate, and its median value has doubled in the past decade. Even as a share of Gross Domestic Product (GDP), it has turned the corner, with the median share approaching 18 percent in 2007, about a third higher than at its anemic trough in 1996. Much of this increase was on the back of innovative non-collateralized lending practices. Salary and other cash flow based lending have been on the emergence with positive outcomes for customers in the form of consumer loans. In October 2008, the Pan-African micro-lender Blue Financial’s loan book grew 236 percent and posted earnings growth of 167 percent in the six months to August 2008.
The possibility of overreaching their adoption of conservative credit appraisals processes and procedures does not bode well for the growth of private sector lending on the continent. Trade finance will come under tremendous pressure. With high fuel and food prices, foreign exchange constraints will persist on the continent for a while. A reluctance to lend by commercial banks will make it even harder to find trade financing sources. Of equal concern is the impact of the current crisis on the sources of long term funding. Where credit is still available, banks have already started in increase the cost of long-term finance. Shortening tenure of such loans is equally likely.
This is disappointing after recent years when funds were starting to enter African markets looking for both equity and portfolio investments. This slowdown will increase the need for domestic financing – pensions funds, insurance firms and domestic savings to fill the gap.
Weakened balance sheets and possible bank failures resulting from economic slowdown
In countries where the fall in investments is simultaneous coupled with drops in export earnings, a slowdown in GDP growth, and a sharp drop in domestic asset prices e.g. a local housing market correction, weakened bank balance sheets could result, including in some cases, bank failures. As the financial crisis surges into all parts of the real economy in developed economies, African countries will experience a substantial decline in exports as the rapid pace of trade expansion in this decade decelerates sharply. The IMF now projects that growth in world trade volumes in 2009 will be 4.1 percent compared to 9.3 percent in 2006. A notable part of this fall will be African. In Zambia for example, the economy is likely to take a hit from a share decline in copper prices (-24%ytd).
In this environment, large projects in Africa that require external financing to complement shorter term bank financing will face difficulties in attaining these finances, and where they do, will face higher interest rates, because of flight to safety and greater risk aversion of lenders. At the same time, portfolio outflows will put pressure on currencies for devaluations. Reduction in Official Development Assistance, remittances and tourism receipts will also have a negative impact on the economy. As investments falls, some projects will not be completed making them unproductive and saddling bank’s balance sheets with non-performing loans. Lower commodity prices, combined with a credit crunch and increased risk aversion will make it more difficult to finance and develop capital investments. The economic downturn will result in pressure on the balance sheet of some of the weaker banks in the systems as non-performing loans in some sectors increase. For some banks, failures will occur.
Renewed debate on the role of governments in the financial system
The government bailout of financial institutions in developed countries will be abused by those keen to entrench government involvement in the financial sector – even when such entrenchment is detrimental to the financial system. While many government led programs in the financial sector have been well intentioned, the unintended consequences have often been severe on the level of interest of the private sector in investing in the financial sector as well as the credit culture of beneficiaries. Global experience suggests that despite the seeming advantages of government intervention in broadening access to credit, especially through government-owed banks, public banking services in developing countries have generally not been successful.
There is a close association between such participation and lower levels of financial development, less credit to the private sector, wider intermediation spreads, greater credit concentration, slower economic growth and recurrent fiscal drains. Despite these arguments, the recent massive government purchase of shares in financial institutions will in some cases not be seen as a short term remedial measure, but rather a long term repudiation of government exclusion from the sector – the unintended consequences of this position in the 1970’s and 1980s may yet again revisit the continent if this view finds traction with policy makers for existing and planned government owned financial institutions (Scott, 2007).
Conclusion
The present financial crisis will affect financial systems in African countries differently depending on the present quality of the financial sector. To each there is a litany of policy and technical options for the governments on the continent to consider. These include implementing: management takeovers1; blanket guarantees on all deposits2 reduce reserve requirements3; offering to buy bad loans from commercial banks4 and revise deposit insurance guidelines5 to name but a few that were exercised by various governments during the month of October 2008 alone. Most of these options are for countries that are directly affected by the crisis and are in need of immediate assistance. For longer term financial sector reform options, the governments in Africa may wish to consider longer term options.
Three such options include
(i) Strengthening local investor confidence in equities and bonds on African Stock Exchanges by enhancing, though legislative reforms, the participation of local institutional investor. Pension funds, especially state control pension funds will need to be instrumental in sustaining the development of the market;
(ii) Encouraging private sector lending, especially for Small and Medium Enterprises, by attracting new sources of trade finance by, in some cases, rethinking support for new and existing export promotion facilities, and facilitating Risk sharing facilities in a bid to not only restore confidence in the financial sector, but also sustaining private sector enterprise, and;
(iii) Putting in government ownership policies that ensure that such ownership only takes place when; it is necessary to strengthen the capital base of banks to remove fears of insolvency; the managers have proved unable to raise equity capital from private sources; the bank is essential for the payments and credit systems, and the bank can reasonably be expected to be made viable in the long term. Importantly, governments must have policies in place that ensure that the government’s ownership is temporary and aimed at disposing of the investment once the financial system returns to normal operations and when it is commercially suitable.
References
Berggren A., and Scott, D., (2008) Temporary Government Ownership of Financial Institutions in Times of Crisis, forthcoming
Busuulwa, B. (2008) Uganda Bourse Turnover drops by 60pc, The East African (Nairobi) available at http://allafrica.com/stories/printable/200810290778.html accessed on October 29, 2008.
Caprio, G., Demirguc-Kunt, A., and Kane, E., (2008). The 2007 Meltdown in Structured Securitization. Policy Research Working Paper No. 4756. World Bank: Washington D.C
Cheikhurouhou, H., et al (2007). Structured Finance in Latin America. Directions in Development Finance. World Bank: Washington D.C.
Feyen, E. (2008) Overview of Recent Policy Responses to the Current Crisis, Policy
Honohan, P., and Beck, T., (2007) Making Finance Work for Africa. World Bank: Washington D.C
Irwin, T. (2007) Government Guarantees: Allocating and Valuing Risk in Privately Financed Infrastructure Projects. Directions in Development Finance. World Bank: Washington D.C.
Lin, J., (2008) The Impact of the Financial Crisis on Developing Countries, paper presented at the Korea Development Institute, Seoul, Korea.
Mmegi/The Report (2008) Mature Markets Boost Blue Earnings, The Reporter (Gaborone) available at http://allafrica.com/stories/printable/200810271403.html accessed on October 29.
_______________________________________
1 Oct. 21: Argentina's government announced it might take over the management of $28.7 billion in private pension funds that sharply declined in value this year
2 Oct. 13: Blanket guarantee on all bank deposits in Australia. New Zealand took similar measures. Australia also guarantees wholesale bank funding
3 Oct. 21: Central Bank of Brazil continues acting to tackle the liquidity in the local money market. It announced a program to reduce reserve requirement able to free up to BRL100b to the market
4 Oct. 5: In Chile viable banks were offered the possibility of selling bad loans to the Central Bank, with a repurchase agreement based on future profits
5 Oct. 7: Leaders of France, Germany, Britain, Italy, the European Central Bank and the European Commission agree on bank bail-out guidelines and deposit insurance of E50,000 but stopping short of a Europe-wide solution to recapitalize banks
This article was first published in Access Finance. Access Finance is a bi-monthly newsletter of The World Bank Group published by the Financial and Private Sector Development Vice-Presidency. It disseminates information on improving access to financial services. The four key pillars highlighted are: Inclusive Financial Systems, Credit Reporting, Payment Systems and Remittances. Comments/suggestions can be sent to accessfinance@worldbank.org
Banks Turn To Personal Loans
Jeff Mbanga
Commercial banks in Uganda face a difficult time in the first quarter of 2009 as the risk free government securities market dries up.
Analysts warn that this is likely to force banks, desperate to begin the year on a high, into risky ventures, mostly in the credit market.
Failure to manage those risky loans appropriately could taint the banks’ books of accounts, and force them to tighten their purses in the future. That in turn could have a negative bearing on consumer spending, the biggest contributor to the growth of Uganda’s Gross Domestic Product.
The latest figures from Bank of Uganda indicate that commercial bank credit to the private sector grew immensely in the first six months of 2008. For example, Stanbic, Uganda’s largest bank, increased the amount of its loans and advances during the first six months of 2008 from Shs358 billion witnessed the year before to Shs570 billion, representing a 38% increase.
On an entire industry scale, credit to the private sector shot up to Shs2,840 billion in the year ending June 2008, representing a 56.7% jump, compared to the 23.2% increase registered the previous year. Much of this credit went towards personal loans, which accounted for almost half of the loans.
The banks, whose sales executives are planning to go an extra mile to have customers take up more loans, have received a cautionary note from the International Monetary Fund, which offers advice on macroeconomic policies to nations.
In a press statement about the Fund’s fourth review under the Policy Support Instrument for Uganda released two weeks ago, Takatoshi Kato, the deputy director of the IMF, points out that “Uganda’s banking sector remains generally sound. However, vulnerabilities exist in some areas, reflecting the rapid expansion in bank lending and the significant share of foreign-exchange loans in banks’ portfolios. Prudential supervision needs to remain vigilant to address potential risks.”
Before June 2008, the effect of the global credit crunch, which is partly responsible for the current stress faced within the government securities market, was yet to be felt in Uganda. The rate of inflation, although rising, had not yet reached alarming levels. And share prices on the USE were on a bull run. Even with different investment options, commercial banks still showed a strong appetite to lend to the private sector.
It is on that basis that the Bank of Uganda last week suspended auctions of Treasury Bills because there was not enough liquidity to match BoU’s demand. Thus banks are expected to sail into unchartered territories in the credit market in search of good return on investment.
There is no safe haven on the USE where the value of shares on almost all counters continues to fall. For example, the USE All Share Price Index – a benchmark instrument used to measure the performance of the market – has fallen from 827.82 two months ago to 742.99 early this week, meaning that 11% of the value of share prices has been wiped away.
Luigi Cordeiro D’Souza, Crane Bank’s head of Treasury, believes that “banks might venture into risky assets but they will take strong due diligence to avoid pushing up their non-performing loans (the rate of bad loans).” The industry average of the non-performing assets is estimated at 2.5%, with a number of banks struggling to bring that figure to less than 1%.
The central bank’s annual report 2007 - 2008 shows that even credit to the agricultural sector that had for long been ignored due to the high risks associated with farming, saw an increase in lending.
Although banks are expected to take particular interest in the fast growing mortgage sector, the high rate of inflation is not making it any easier for the banks. With the inflation at about 14%, banks will find it difficult to push up interest rates from their already exorbitant level of 25%. The private sector already complains that interest rates are too high, a situation that could force banks to soak up any inflationary pressures if they are to expand their loan book.
But Cordeiro added that banks are likely to offer loans bearing in mind the lessons learnt from the recent subprime lending in the United States economy, where the high rate of default continues to disrupt the global financial system.
Recent market entrants such as Global Trust Bank, Fina, Eco Bank and Equity Bank are not expected to take an aggressive approach in the credit market at the moment as they invest in infrastructure development, according to financial experts.
Richard Byarugaba, Managing Director of Global Trust Bank, which started operations two months ago, says that the bank will start massive expansion strategies of their loan books within “the next two to three years.”
According to Cordeiro, the new banks are, in the short term, expected to concentrate on opening up new branches to build up their customer numbers before venturing into spreading their credit.
jeff@observer.ug
Commercial banks in Uganda face a difficult time in the first quarter of 2009 as the risk free government securities market dries up.
Analysts warn that this is likely to force banks, desperate to begin the year on a high, into risky ventures, mostly in the credit market.
Failure to manage those risky loans appropriately could taint the banks’ books of accounts, and force them to tighten their purses in the future. That in turn could have a negative bearing on consumer spending, the biggest contributor to the growth of Uganda’s Gross Domestic Product.
The latest figures from Bank of Uganda indicate that commercial bank credit to the private sector grew immensely in the first six months of 2008. For example, Stanbic, Uganda’s largest bank, increased the amount of its loans and advances during the first six months of 2008 from Shs358 billion witnessed the year before to Shs570 billion, representing a 38% increase.
On an entire industry scale, credit to the private sector shot up to Shs2,840 billion in the year ending June 2008, representing a 56.7% jump, compared to the 23.2% increase registered the previous year. Much of this credit went towards personal loans, which accounted for almost half of the loans.
The banks, whose sales executives are planning to go an extra mile to have customers take up more loans, have received a cautionary note from the International Monetary Fund, which offers advice on macroeconomic policies to nations.
In a press statement about the Fund’s fourth review under the Policy Support Instrument for Uganda released two weeks ago, Takatoshi Kato, the deputy director of the IMF, points out that “Uganda’s banking sector remains generally sound. However, vulnerabilities exist in some areas, reflecting the rapid expansion in bank lending and the significant share of foreign-exchange loans in banks’ portfolios. Prudential supervision needs to remain vigilant to address potential risks.”
Before June 2008, the effect of the global credit crunch, which is partly responsible for the current stress faced within the government securities market, was yet to be felt in Uganda. The rate of inflation, although rising, had not yet reached alarming levels. And share prices on the USE were on a bull run. Even with different investment options, commercial banks still showed a strong appetite to lend to the private sector.
It is on that basis that the Bank of Uganda last week suspended auctions of Treasury Bills because there was not enough liquidity to match BoU’s demand. Thus banks are expected to sail into unchartered territories in the credit market in search of good return on investment.
There is no safe haven on the USE where the value of shares on almost all counters continues to fall. For example, the USE All Share Price Index – a benchmark instrument used to measure the performance of the market – has fallen from 827.82 two months ago to 742.99 early this week, meaning that 11% of the value of share prices has been wiped away.
Luigi Cordeiro D’Souza, Crane Bank’s head of Treasury, believes that “banks might venture into risky assets but they will take strong due diligence to avoid pushing up their non-performing loans (the rate of bad loans).” The industry average of the non-performing assets is estimated at 2.5%, with a number of banks struggling to bring that figure to less than 1%.
The central bank’s annual report 2007 - 2008 shows that even credit to the agricultural sector that had for long been ignored due to the high risks associated with farming, saw an increase in lending.
Although banks are expected to take particular interest in the fast growing mortgage sector, the high rate of inflation is not making it any easier for the banks. With the inflation at about 14%, banks will find it difficult to push up interest rates from their already exorbitant level of 25%. The private sector already complains that interest rates are too high, a situation that could force banks to soak up any inflationary pressures if they are to expand their loan book.
But Cordeiro added that banks are likely to offer loans bearing in mind the lessons learnt from the recent subprime lending in the United States economy, where the high rate of default continues to disrupt the global financial system.
Recent market entrants such as Global Trust Bank, Fina, Eco Bank and Equity Bank are not expected to take an aggressive approach in the credit market at the moment as they invest in infrastructure development, according to financial experts.
Richard Byarugaba, Managing Director of Global Trust Bank, which started operations two months ago, says that the bank will start massive expansion strategies of their loan books within “the next two to three years.”
According to Cordeiro, the new banks are, in the short term, expected to concentrate on opening up new branches to build up their customer numbers before venturing into spreading their credit.
jeff@observer.ug
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