Half of Ugandan banks fail pandemic liquidity test

A Bank of Uganda information office in Kampala. New Treasury rules will eliminate dormant accounts. PHOTO | FILE | NMG More than half of Uganda’s commercial banks would have collapsed if the Central Bank had enforced a three-month customer loans repayments holiday at the onset of the Covid-19 pandemic, the sector regulator has revealed.

A stress test conducted on Uganda’s 25 banks showed most would not have survived the cash crunch since loan interest income accounts for 60 percent of their revenue.

Results of the stress test informed the decision to spread customer loan restructuring over a 12-month period instead of offering an outright repayment holiday, Bank of Uganda (BoU) said in a Zoom webinar.

“We asked banks to suspend dividend payments this year so as to strengthen their liquidity positions during the lockdown and also increase bad loan provisions needed to absorb expected spikes in loan defaults. It is a good idea to raise commercial banks’ paid up minimum capital in order to improve the industry’s resilience during future crises but the timing is not right. Banks are struggling with loan restructuring but if we chose to increase all financial compliance ratios now, what would happen to them?” posed Hannington Wasswa, BoU’s Director for Commercial Banking.

Uganda announced a strict lockdown of major sectors of the economy after Covid-19 positive cases were reported in the capital in March. The economic shutdown hit businesses hard, affecting borrowers’ ability to repay their loans.

An estimated 15 banks would not have absorbed the revenue loss if the 90-day loan repayment break was granted to borrowers, people familiar with the stress test said.

A significant decline in the number of customers since onset of the coronavirus pandemic in Uganda three months ago has also affected the flow of bank deposits, a relatively cheap source of liquidity for the lenders.

Uganda has an estimated 4.5 million retail bank clients, many of which comprise individuals holding multiple accounts. Small and Medium Enterprises account for about 20-30 per cent of the Ugandan banking clientele pool, according to past data published by Financial Sector Deepening Uganda and other research institutions.

Uganda’s National Social Security Fund (NSSF) says about 100,000 contributors have dropped off its register since the beginning of the lockdown; pointing to rising unemployment levels, reduced payroll tax collections and potential loss of many salary deposit accounts held by commercial banks.

NSSF Uganda has a membership of roughly 2.5 million contributors.

A report by the […]

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