Bank of Uganda headquarters in Kampala.

Commercial banks in Uganda are struggling with many loan defaulters as the economy continues to face severe backlash from the impact of Covid-19, the Bank of Uganda (BoU) Monetary Report for August 2021 shows.

According to the BoU report, despite the fall in the industry Non-Performing Loans (NPLs) ratio, credit risks remain high, largely due to the expected expiry of the credit relief measures, the impact of the second lockdown measures on business activities, and the slow pace of economic recovery.

The report adds that annual Private Sector Credit (PSC) growth fell to an average of 6.8 percent in the quarter to June 2021 from 9.8 percent in the quarter to March 2021, with May 2021 registering the lowest growth rate of 5.4 percent.

 PSC, including loans disbursed by the Uganda Development Bank (UDB) grew by 8.8 percent in the quarter to June 2021 from 12.9 percent in the quarter to March 2021.

“PSC is expected to grow at a moderate pace in the near-term largely due to heightened uncertainty related to Covid-19 pandemic and the slow pace of economic recovery. In the medium- to long-term, however, PSC growth is expected to be stronger largely due to improved health metrics on account of wide vaccination outreach, which should pave way for a full reopening of the economy,” the report adds.

Growth in PSC in the quarter to June 2021 was dominated by household (which takes up to 18 percent of total banks’ loans), real estates (which takes up to 20.4 percent) and manufacturing (which takes up 11.9 percent) sub-sectors.

 However, growth in PSC in the trade sub-sector, which is one  of the dominant contributors to PSC, with approximately 18 percent, and business services remained  subdued, declining to minus 3.5 percent and minus 3.6 percent, respectively in the quarter to June 2021  relative to minus 3.8 percent and minus 3.1 percent in the previous quarter

 BoU adds that the value of loan approvals, which is a proxy for supply of credit increased in the quarter to June 2021, rising to Shs.2.3 trillion, up from Shs.2.2 trillion in the previous quarter.

However, the value of loan, which is a proxy for the demand for credit decreased by 24.4 percent to Shs.3.8 trillion from Shs.5.0 trillion in quarter to March 2021, reflecting the slow pace of the recovery in economic activity.