BANKS AS THE SOLUTION TO OUR PROBLEMS

Last month the Uganda Bankers Association (UBA) had their annual general meeting, in which they reported on the sector’s status.

Generally the industry is still making money hand over fist.

 The industry made a net profit of sh1.41trillion off revenues of sh6.82trillion, a credible net margin of about 20 percent, in this hard economy. As a sign of the times bad loans were up above five percent, as a lot of the bad debt carried over from the pandemic continue to be resolved. Despite that, lending to the private sector grew 7.5 percent, a normalization from 2022’s 19 percent growth, that could be attributed to a recovery after the covid lockdown.

But the real story of the last week was the demonstrations on the street by youth urging an end to corruption.

For the last decade or so this column has singled out corruption as the biggest challenge for seeing the economic growth of the 40 years spread more equitably among Ugandans. Corruption concentrates wealth in a few hands, hinders service delivery and distorts markets, all leading to the unfair distribution of the economic gains we have made as a country since 1986. Hence the youth harping on the issue. Corruption is denying them opportunity.

While the banking industry is battling corruption in its own ranks (last week the second financial fraud forum was convened in Kampala) the banks can and are helping with leveling the playing field for beneficiaries of economic growth.

Or at least, that is what the numbers suggest.

The last year’s results in and of themselves, do not say much about the industry’s role in economic growth, leave alone distribution of this growth.

However, if you look back five years even a decade, there are clues that point to this benevolent tendency.

We know while the economy has grown in leaps and bounds over the last 40 years, most of this growth has come from services, construction and manufacturing, which growth has mainly been seen in the urban areas, that is how more than half of Uganda’s GDP is generated in Kampala.

The problem with this is that more than 70 percent of the population are rural based and derive their livelihood from agriculture. Agriculture over the last 40 years has rarely if ever grown beyond single digits annually, if ever.

While there are structural issues that ensure this persists and which affect the ability to finance the sector, for instance that we are mostly a small holder farm economy, the banks have been increasing support to the sector.

A decade ago agriculture accounted for eight percent of the industry’s loan book, but last year this share had increased to 13.8 percent. In nominal terms, the loans dealt out to agriculture more than quadrupled to about sh3 trillion from about sh650b in 2013.

We can debate about which part of the value chain – production, logistics or agroprocessing these funds are going to, but it would be full hardy to support one part of the value chain if production, where most Ugandans are employed, is not growing.

By inference while the sector’s share of GDP has dwindled to about 20 percent from more than 70 percent in 1986, in nominal terms its producing more and more. The successes in coffee and milk production are but one example.

So the trick for this country is how can we facilitate this increasing of shift of resources to agriculture from the banks?

The risks in supporting production are many. As mentioned above most of our farmers are small holders and still use traditional farming techniques whose yields are anaemic. Secondly, farmers need to be helped to negotiate with the market from a stronger position. And finally, access to market must be improved in terms of improved infrastructure.

The banks that have increased their interest in agriculture are finding they have to spend considerable sums to train farmers in improved farming methods and business practice. In the absence of a nationwide extension services system government would do well to offset these costs for the banks, as one way to lower the cost of loans but with the same stroke increase the adoption of improved farming practices across the country.

The government water for production scheme should be rolled out with more urgency. A World Bank report in the last decade showed that the biggest investments in agriculture should be in extension services and irrigation.

While the government struggles to beef up its extension services, relief to the banks already doing this would make sense.

The point is that while financing to the sector can make meaningful change, some things have to be set in place to speed this up.