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