Uganda is so far succeeding in safeguarding financial stability, although risks remain as the east African country battles the economic effects brought about by the ongoing COVID-19 pandemic, the central bank said here in a recent report.
Decisive monetary and macro-prudential policies have reduced short-term risks to financial stability, said the financial stability report for the third quarter by the Bank of Uganda (BOU).
The report issued Monday showed that since June, the central bank has maintained an accommodative monetary policy stance, with its rate maintained at 7.0 percent. This has continued to support loan repayments and private sector credit growth.
Through the quarter, liquidity conditions in the banking system continued to improve, partly supported by the BOU’s policies and strong growth in deposits.
The cost of borrowing in the money markets has been reduced, with the weighted average interbank seven-day and overnight rates reduced to 7.3 percent and 6.8 percent in September, from 10.2 percent and 8.7 percent in the same period last year, respectively.
In addition, offshore investor inflows into the domestic financial markets continued to grow, enhancing the availability of funding for banks and supporting the Ugandan shilling’s stability.
Offshore investors’ total assets in the banking system rose to 1.6 trillion shillings (438.4 million U.S. dollars) in September, from 1.4 trillion shillings (383.6 million dollars) at the end of May.
This reversed the trend of outflows that was experienced in March and April at the height of the uncertainty and risk aversion in global financial markets.
Banks also experienced growth in liquidity assets, which was largely supported by the rising investment in government securities amid low credit growth and a pickup in deposit growth. The buildup of liquid assets, according to the report, resulted in an improvement in the resilience of the banking sector to systemic liquidity risk.
According to the report, banks, in the year to September, increased their investment in domestic government debt. The investment grew by 24.7 percent, driving the growth in total assets of 19.0 percent. Commercial banks hold about 40 percent of the government domestic debt.
This increased investment in government debt partly reflects risk aversion due to concerns about asset quality amid the pandemic. Although the asset quality, as measured by the ratio of non-performing loans to total loans (NPL ratio) worsened across the banking industry over the year ended in September, on a quarterly basis, commercial banks’ NPL ratio for September was an improvement compared to 6.01 percent in June.
“The improvement in the NPL ratio across the banking industry during the quarter to September 2020 partly reflects intensified loan recovery efforts, increased prudent write-offs and higher loan repayments following the lifting of the lockdown,” the report said.
The improvement in the NPL ratio is also attributed to the central bank’s COVID-19 credit relief program, which has allowed distressed borrowers to restructure their loans, including accessing loan repayment holidays. While the short-term risks to financial stability arising from the pandemic have been relatively contained, the outlook remains highly uncertain and depends on the evolution of the pandemic and the pace of economic recovery, the report said.
“Risks to financial stability are likely to remain heightened going forward, until economic recovery is stronger,” the report said.
The report warned that as banks move to digital or electronic transactions, including mobile money, to avoid the spread of COVID-19, there is a higher potential for cyber risk, fraud and operational risk.
The BOU said it will continue to engage banks to ensure that they implement enhanced risk management and contingency plans in a bid to address the operational and cyber risk.