BANKING SECTOR IN 2021 AND ITS ROLE IN SUPPORTING ECONOMIC RECOVERY POST-COVID

By the end of  April 2022, all the banks completed their statutory reporting on the state of their finances in 2021 pointing to a recovery, a hesitant one but promising nevertheless.

According to analysis by the Uganda Bankers’ Association (UBA) consolidated industry results 2021, profitability (total comprehensive income) among the tier one banks grew strongly by 33 percent due to an overall growth in revenues of, 14 percent, coupled with a three percent reduction in costs.

"Concerns about bad debts ballooning out of control  at the expiry of  the all credit relief measures and other concessions afforded to borrowers, remain a concern and the industry view is cautiously optimistic mainly to support economic recovery in a post pandemic environment....

The industry saw a six percent rise in deposits, an indication that despite the Covid-related challenges of the last two years, the general public remains confident in the sector. While marketable and trading securities held by the banks grew by a tenth compared to 2020, private sector lending almost matched this, growing 8 percent although this was a drop from the previous year’s 12 percent growth, 

On an aggregate industry basis, shareholders  saw their return on equity drop  to six percent compared to nine percent in 2020 and from double digits previously. The above not withstanding some of the individual banks posted much higher ROE.

Understandably, bankers did not burst out of the gates to support businesses, who themselves were just finding their feet, after the partial lifting of the lock down last year. The loan to deposit ratio slid to 60 percent in 2021 from 63 percent in 2020.. Signs are however that in 2022 with the total lifting of the lock down in January, the industry is expected to be more aggressive in providing the much needed credit , lifeline to businesses.

The banking industry’s centrality in the economy through its dual role as a mobiliser/custodian of resources through deposits and allocation of capital through credit as well as facilitation of payments, means it must not only up its support to businesses, but equally support government and its domestic revenue mobilization, growth & development plans.

A 2019 study by audit firm PriceWaterhouseCoopers (PwC), commissioned by UBA showed that the banking industry contributed  24 percent ( sh3.9 trillion)  of the sh16.2trillion in tax revenues (withholding tax on government securities, exercise duty, VAT, employee taxes, corporation tax etc) collected that financial year composed of sh3,886 billion arising from financial sector transactions processed and sh639 billion of direct taxes borne by the banks themselves.  

Banks are equally pulling their weight in job creation. The study found that the industry employs about 17,000 people, spending sh690b in wages and salaries. The introduction of Agency banking, accounted for another 6,594 employees in 2019 with commissions paid out to agents amounting to over  sh2.6b

The industry paid  out sh860b for domestic goods and services supporting the sector, these being SMEs who provide various services to the industry.   

"The report further indicates that banking sector invested in communities up to a total of Sh8.258 bn spent on various community initiatives in the areas of education, health and financial literacy especially within the youth and women groups....

The report also covers the industry’s efforts & initiatives in technology & innovation, tackling financial crime, financial literacy & sectors where private sector credit is being channeled.

Finally, the report touches on determinants on interest rates as well what support can be provided by Government to ensure the cost of borrowing drops. These included risk sharing mechanisms including loan guarantees, more favourable tax policies, alignment & coordination of monetary & fiscal policies, especially around domestic borrowing and public expenditure by government, and reform of government and legal operational structures to reduce transaction costs among others.

As the country positions for growth & development in line with NDP III, the banking sector will be expected to bring out its full potential in supporting national socio-economic transformation. This direction is evidenced by the proposals put forward by the Central Bank in 2021 of raising the minimum paid up capital required of supervised institutions to enable banks build a solid capital base and expand credit to support priority sectors like manufacturing, tourism, services as well as oil & gas among others.

Financial institutions are further expected to mobilise funding via syndications which can be a good source of additional capital inflows particularly for large projects. By end of 2019, bank syndicated transactions stood at sh5.7 trillion.