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.

THE LANDLORD & TENANT ACT: DODGING A BULLET? ONLY JUST!

In April President Yoweri Museveni assented to the Landlord & Tenant Act.

The law when it was introduced in 2016 among other things tried to limit rent increments and to restrict landlords to charging rent in shillings, a position this column opposed vehemently.

"No long term good comes from trying to control prices by administrative fiat. It is a tempting option for populists and demagogues but inevitably ends in tears....

This column argued at the time that the decision not to control rent in the 1980s was not only brave at the time, but farsighted and is responsible for the boom in real estate construction over the last three decades.

The housing situation was so bad in the 1980s that for lack of accommodation, whole middle-class families were shacking up in garages, but consoled themselves that at least they were doing so in the “upmarket” parts of Kampala.

By avoiding rent controls investors spread out of the city, introducing us to places like Naalya and beyond, Zaana and beyond and Munyonyo. We argue about the chaos of this urban sprawl, but that’s a discussion for another day. By allowing rent to be determined by the market, investors have found it worthwhile to build estates and apartment blocks, relegating middle class housing shortages to history.

Had government bowed to the populist rhetoric to place rent controls by people, some of whom are now landlords and probably charging in dollars, this real estate boom would not have happened and in fact we would be paying higher rents for the few hovels around.

Thankfully sense prevailed and the MPs adjusted the clauses that insisted on rent controls – putting a cap on annual rent increments and landlords charging dollars to the mutual agreement of landlord and tenant. In my mind they should just have eliminated the clauses all together rather than bite their tongues.

That being said government needs to come up with a strategy, or if its there, execute it, which recognizes the growing housing needs of the low-income earners.

A strategy, which takes into account the lack of affordable credit in shillings, incentives for developers among other things, is important. As it is there is a lot of uncoordinated troop movements as to suggest that there is no strategy for this critical sector to the economy.

For instance, in the recent budget finance minister Mathia Kasaija announced a threshold of sh2.8m in annual rent below which owners will not be liable to tax. That’s monthly rent of just under sh250,000. Landlords who collect more will be charged 12 percent on their revenues. Previously landlords were allowed their expenses including mortgage interest, so this will be a disincentive to real estate owners trying to rent out properties in their own names.

But even if you were a real estate company things were not better. The minister allowed only 50 percent of expenses as tax deductible and maintained a 30 percent tax on the net income.

With this move he discouraged people from taking out mortgages to develop real estate as individuals but must have real estate companies wondering whether its worth the pain. The people who will be left to develop the real estate sector are the few individuals who can develop property using cash alone, and we know who those are!

As mentioned earlier real estate development is a critical aspect of the economy. In our case it is so because most of the inputs are locally available – from the bricks to the wood to the cement and even the iron bars. So, encouraging the real estate sector is a way to create and maintain jobs along the whole value chain. The government should be encouraging developers help it provide housing, which they have failed to do, rather than discouraging them.

While the ideal would be for massive real estate developers, the reality is that the vast majority of our housing is being provided by private individuals so it makes little sense to discourage them when you are not providing incentives for the massive developers to come in.

But that this has become law also throws up another disturbing indicator. It suggests that those making these decisions – in government and our MPs, are either not landlords or that if they are, build their rental properties with cash.