The banking landscape in Uganda is composed of 25 commercial banks, among other financial institutions, such as credit institutions, microfinance deposit taking institutions and so on. Banks must remain financially healthy otherwise the economy would be doomed for financial crisis. Banks also play a catalytic role in activating and sustaining economic growth as they promote capital formation through lending and intermediation of deposits.
In order to continue with their mandate of financial intermediation and capital formation, banks must promote public confidence by safely keeping public deposits and availing them wherever and whenever they are needed by the depositors. This means that as banks lend these deposits, they must make sure the loans are paid back in full and on time.
Over the years, the banking sector has been growing. Total assets reached Shs22 trillion which is almost a quarter of the Gross Domestic Product (GDP) of the country. By end of last year, loans outstanding with the public amounted to Shs11 trillion, while deposits mobilised from the public stood at Shs13 trillion. Unfortunately, about 5.3 per cent of the loans had not been paid back in time, and therefore non performing.
Nevertheless, the banking sector continued to be profitable and adequately capitalised. The sector cannot afford to underperform on these parameters. The expansion of financial services continued as indicated by the increase in the number of bank branches which rose from 564 to 573 in 2015. The ATM network also expanded from 830 to 842 in 2015. Noteworthy is the challenge for banks to extend more services outside the metro regions of Uganda.
As a sector, various challenges are being faced due to both internal and external factors, for example, slowdown in the economy, delay in payments by Government, difficulties being faced by regional markets and many others, there has been a stress in the performance of loans as noted above. When loans become non-performing, banks are required to make loan loss provisions which keep eating up the profits and capital of the bank.
Banks are required to maintain minimum ongoing capital, such that every time capital goes below that minimum level, bank owners shall be asked to bring in more capital. Like all enterprises, it is not comfortable to keep injecting capital into the business with no return. Also, as loans are not collected in time, the liquidity of the bank will be affected, which will potentially affect public confidence in the banks.
As the bank customers get distressed, banks have various mechanisms of working together with the clients to resuscitate the situation. Banks may restructure the loans, although regulation allows only two times of restructuring of loans. Contrary to the public perception, banks don’t rush to foreclose or to sell of securities pledged for these loans, because this does not lead to a win-win situation. Remember when a client loses, banks also lose not only a client, but a business for which banks exist. Secondly, banks are not in the business of selling off securities, or business of real estate. Thus it is only in rare cases when all options are exhausted that the option of selling off securities is adopted.
From time to time, banks have been challenged by volatile exchange rates and increase in inflation which potentially leads to increase in costs of operations. Banks are, therefore, always required to manage foreign exchange exposures within acceptable limits in relation to their capital levels. Therefore, as our clients, and indeed the whole economy is affected by the above factors, banks are equally affected and they have to manage such situations, much the same way our clients are expected to manage those situations.
The other challenge faced by banks is the lack of long-term funding. Our economy is faced with one of the lowest savings rates, now at about 13 per cent of GDP. With that, banks have little access to funds that would support long-term projects. Therefore, some banks resort to borrowing from other long-term lenders such as NSSF, Africa Development Bank, World Bank, European Union Investment Bank etc, which lend at competitive rates on a floating basis, in most cases. Banks, therefore, expect clients to align their funding needs to the funding sources to avoid mismatches.
Banks are also challenged by increasing fraud, especially cyber fraud in light of the increase in automation and digitisation of processes. This is in addition to outreach constraints as well as infrastructure challenges which affect the cost structure of banks.
Regulations and taxation are other challenges facing banks. Banking is the most heavily regulated industry, which also adds massive costs to the operations of banks. In the same light, the tax man is looking at banks with a sharp eye. I am sure we all know that excise duty was introduced for all the charges levied by banks, which adds to the cost of banking. Just this year, stamp duty was increased such that the borrowing public will be required to pay more as they get their securities registered. Therefore, as banks try to lower costs of banking, there are other external factors beyond the control of banks.
Finally, banks face a challenge of perception as being very expensive especially for the borrowing public. Interest rates are viewed as being high. We need to understand the factors that influence interest rates. These include the cost of funding. We have talked about the various sources of funding, including depositors funds, long term funding from other agencies and so on, which attract different costs. When all these costs are weighted, the bank will get a resultant cost of funding. There has been an observation that even when the Central Bank Rate is lowered, banks take time to adjust their rates. We need to note that banks do not borrow from the central bank alone, after all the central bank is a lender of last resort. Even the funds lent by the central bank are short-term mainly for liquidity management.
Therefore, the central bank rate should be viewed as a signal as to which direction the rates should take. Banks do not necessarily immediately follow the direction because there are many factors to consider before the interest rates are adjusted. The other factor that determines interest rates is the default rates of the loans. We have already noted the increase in default rate, meaning that credit risk is increasing therefore, the price of the loans has to reflect that situation.
The third factor that determines the interest rate is the cost of operation which have to be covered. With the challenges of forex rate,inflation volatility, and outreach constraints, costs of operations are negatively affected. With all those factors, going north, it becomes a challenge for banks to continuously lower interest rates.
What are the solutions?
Banks are always in search of solutions to ensure a win-win situation with their clients. Uganda Bankers Association and, indeed, individual banks are carrying out financial literacy for the public to ensure that clients clearly understand how to meaningfully deal with banks.
It is now a requirement that every client accessing banking services, fills a key facts document which specifies the details of the terms such that if a client is not comfortable with the terms he or she negotiates and goes to another bank which offers better terms. It is also a requirement that in all banking halls, the tarriff guides are conspicuously displayed for all clients to study and decide whether to access the services or not. There will always be a guide on complaints handling in all banking halls.
Banks are also trying to develop as many products for as many sections of the population especially those who were viewed as being excluded from the financial systems, for example the youth and women.
Recently, government and Bank of Uganda reviewed the banking laws to allow banks use agents to deliver services in all corners of the country. Through agency banking, banks will be enabled to deliver services at affordable costs, which should enable reduction in costs of banking including interest rates. The new laws will also enable delivery of products such as Islamic banking and bancassurance.
Banks are also carrying out other initiatives to lower costs of banking, for example, introduction of use of mobile banking etc. Discussions are also underway with third party vendors such as surveyors, auctioneers, advocates etc to agree on Standard charges for services rendered to bank clients. Discussions are also on to consider forming an asset reconstruction company that would assist in either resuscitating ailing borrowers of smoothly disposing of the securities without causing undue anxiety on the part of the banks and the customers.
Banks are partners rather than foes to the business community. Banks will only grow and succeed if their clients are also growing and succeeding. We expect the customers and the business community to work together with the banks to face the current challenges in the economy. Uganda Bankers Association is always at hand to address any issues affecting bank customers.
Fabian Kasi is the chairman of Uganda Bankers Association.