According to a report from the Finance Ministry, government banks merely emulate the actions of private banks
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Loading... - Catherine Saidi
- 13 Jun 2023
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Government-owned financial institutions, according to a report from the Ministry of Finance, are merely followers of private banks that prioritize profits over economic transformation. The report, titled Public Investment Financing Strategy, reveals that out of the total assets of Shs38.3 trillion held by the banking sector, approximately 61 percent is controlled by five predominantly foreign private banks. These banks have established an oligopolistic structure that tends to push interest rates upward.
The report highlights the undercapitalization of public banks, rendering them unable to influence the market. Instead, they act as followers of private commercial banks. This stands in contrast to other East African member states where public banks hold a significant market share and consequently have the ability to influence market movements. The report points out that Uganda has invested the least in public banks compared to its counterparts. For example, government-owned banks in Kenya possess a market share of 22 percent, while in Tanzania, it is 27 percent, whereas Uganda lags behind at only 7 percent.
This lack of market influence limits the government's capacity to shape domestic lending, particularly for strategic sectors of the economy and interest rate trends. The report also observes that commercial banks, driven primarily by profit motives, have reduced lending risks by focusing on safer sectors such as government securities and trade.
A majority of the banking industry's assets, approximately 61 percent, are held by five foreign-owned commercial banks. These banks contribute to the rigidity of interest rates, as their behavior has a significant impact on credit policies and operations of other banks. Additionally, most foreign banks prioritize lending to trade and government securities, minimizing their local lending involvement.
While the government fully owns three commercial banks, namely Uganda Development Bank, Post Bank, and Pride Microfinance, and holds a substantial stake in Housing Finance Bank, these banks do not possess the status of domestic systematically important banks. The latter category, including Stanbic, Standard Chartered, Centenary, dfcu, and Absa, are the ones that influence market movements.
The report also sheds light on Uganda's higher lending rates compared to other East African Community (EAC) member states. Uganda's average lending rates stand at 22 percent, whereas other EAC states have rates ranging from 14 to 16 percent. This discrepancy is attributed to the informal nature of Uganda's private sector, which makes it challenging for banks to assess and price risks accurately. Consequently, borrowers are required to provide additional security or collateral, and prudential rules demand higher provisions by banks, leading to capital constraints and limited lending.
Furthermore, the private sector faces constraints in accessing loans due to a lack of collateral possession. Commercial banks typically require collateral as a prerequisite for lending, yet only 20 percent of Ugandans possess assets such as land, buildings, and other movable or immovable properties that can serve as collateral.
Another constraint identified in the report is the absence of a framework for managing non-performing loans. This results in the tie-up of capital through loan provisioning for nonperforming loans, further hindering private sector lending.
Banks in Uganda also face challenges arising from high regulatory costs, inadequate infrastructure, inefficient public services, limited technology, and a shortage of skilled personnel.
