Jjagwew (Pictured) says the average lending rates have generally been coming down to below 20% and all efforts are underway to keep bringing these down further and further.
Paul Busharizi
Public editor @New Vision


The Uganda Bankers’ Association (UBA) recently released their research report “Decreasing the cost of doing business in the banking sector in Uganda”. 

Business Vision’s Paul Busharizi sat down with UBA’s Director of Strategy and Innovation, Eva Ssewagudde Jjagwe, to talk about the report. Below are excerpts from the interview.

Q. Our lending rates are high, can you give a regional context to this?

A. If you look at the reports, you'll find that that our interest rates as a country, are higher than in Kenya or Tanzania. 

The average cost to income ratio including provisions for impaired loans and advances for Uganda for the year 2021 was 66% down from 78% in 2020. 

Comparatively, the average cost to income ratio for commercial banks in Kenya over a period of 7 years (2013 – 2019) was 42.7%.  

There are different operating environments and macroeconomic factors which drive both costs and interest rates. 

Some of the macro-economic factors that underlie interest rates include inflation, the central bank reference rate, cash reserve margin, other numerous compliance requirements, operating costs, non-performing loan books & related collection challenges among others. 

This is why as the Ugandan banking sector; we're trying to find ways to sustainably reduce the operating costs. If everything is held constant, but the average operating costs are reduced, it means the sector is able to revise the average lending rates downwards. 

Q. So how much do provisions for loans and advances impact operating costs?

Non-performing loan provisions are a cost in that they are charged out against income. The higher the non-performing loans, the higher the charge out. 

When the income is impacted either through provisions & write off of bad loans, the capital of a bank is impacted negatively. 

Erosion of capital is very dangerous for a financial institution in terms of adequacy for absorbing shocks and maintaining stability. 

Remember that financial institutions are regulated custodians of people’s money and it is that money they lend out to borrowers.

Considering the financial results for 2021 that have just been published, the average cost to income ratio is 66%, out of which 11% was provisions for impaired loans and advances. 

Provisions for loans and advances significantly grew year on year by 22% and this figure is at risk of going higher due to the impact of COVID-19 on the bank lending books if businesses do not recover post end of restructures in September 2022. 

QIn ideal times you will be looking to provide credit to clients who are doing well, have a solid plan and outlook and are less of credit risk to the bank with a high potential for repayment of said loan. 

Now the evaluation of the bank clients has evolved where banks will provide recovery credit to businesses which are distressed and are not doing well to support them in recoveryThrow some light to this change of evaluation

You are right to a great extent and this should help everyone appreciate the role of financial institutions.

Indeed, these are unique times and businesses have been under stress. It is however important that they are supported to recover since finance is lifeblood to any business and at the end of the day, the business that financial institutions undertake comes from the underlying business across the economy. 

It is against this background, that financial institutions have provided accommodations by way of restructures and short term lending support to enable the underlying businesses build back cashflows, and re-start or repair their businesses in the hope that this chain triggers recovery across the board. 

Such is the case with the Small Business Recovery Fund recently established and launched in November 2021 by the Ministry of Finance, Planning and Economic Development, which is meant to support SME businesses.

We are optimistic that this will be the case supplemented by government’s settlement of arrears and increased spending & investment in key growth multiplier sectors which then trickle down to large, medium and small-sized businesses.

Q. Your report goes into some detail about how the industry should handle these costs. Give us an idea of what you are thinking?

The whole objective of the report is to focus on those components of costs for which we as a sector have control over and can make internal decisions as individual financial institutions or collectively as an industry to address.

The 2nd objective is to highlight that portion of our cost base outside our realm but that through working with other stakeholders and organs of government, regulators can be cushioned over the medium to long term by doing things differently.

Over the years, banks have been more successful in finding efficiencies through changing their operating models, deploying more and more technologies to bring about efficiencies, using more shared platforms to harness economies of scale, outsourcing certain processes to those who can do it better and the shared experiences in this journey have given us learnings on rationalization.

Some of these initiatives undertaken include deployment and use of the Shared Agent Banking System (SABS) to provide banking services across the country, integrating with NIRA to digitize identity authentication for opening of personal accounts as well as processing of transactions embedding alternative dispute resolution via mediation & arbitration in loan recovery through International Centre for Arbitration and Mediation (ICAMEK) to shorten the time otherwise lost & money tied via litigation in court cases & related backlog, delays and acrimony.

We believe such initiatives will enable the industry to reduce costs systematically and sustainably. We are looking at cost-efficient ways that enable SFIs expand the reach of service and ensure these services are affordable and accessible to the targeted clients across the country.

The report further recommends managing cash operations more seamlessly and ultimately decreasing cash operations and increasing non-cash methods of payment through digitization.

Obviously, some of these changes come with some risks and expose the sector and customers alike. 

In the last two years, incidents of e-fraud & cyber-attacks have gone up in the industry as digitalization has scaled up. It is for this reason that the industry is working on a shared Cyber Security Operations Centre (C-SOC) for us to not only share, detect, prevent or mitigate cyber or e-fraud incidences but also troubleshoot and build experiences working with numerous other partners local, regional & global.   

The C-SOC is purposed to establish a common a shared platform for SFIs in Uganda to collaborate, share knowledge and practices in cyber security and leverage lessons learned and unique experiences to mitigate emerging cyber threats and vulnerabilities to safeguard the banking and financial system. 

It is also aimed at addressing current and emerging cyber threats and vulnerabilities and provides SFIs a unique opportunity to discuss practical solutions to common challenges, explore leading practices and just in time collaborative advisory to address specific cyber security needs.

Q. Assuming your best intentions, how much can you reduce lending rates by implementing your recommendations?

A. Financial Institutions differ in many ways including operating and cost models, strategies, sourcing and use of funds, different makeup of assets & liabilities, different ownership structures and even differences in the market segments they target and all these inform loan pricing.

Collectively, however, the industry has taken a position that we must work to build efficiencies and pass on the benefits arising therefrom to customers through lower tariffs. 

The average lending rates have generally been coming down to below 20% and all efforts are underway to keep bringing these down further and further. 

Many customers with good borrowing history enjoy far better rates than even 17.5%. Compared to the past, there is an improvement that has been registered during the journey. 

Q. Is there a uniform appreciation through the industry that they must come together to address this issue?

A. Yes there is. That realization that there is value in working together and collaborating is what gave this whole study impetus. 

UBA Member Institutions understand that there are a lot of benefits of working together. 

There are some things you can do alone but more value can be achieved by collaboration. 

There is an African saying, “if you want to travel fast travel alone, but if you want to travel far travel together”.

A key aspect of change in an industry is the regulatory reforms. There are legal and regulatory aspects which are constraining the banking industry. A report on proposed changes in regulation and guidelines was published last year and was handed over to the regulator Bank of Uganda. 

There are, however, many other recommendations & interventions that are being considered outside the proposed regulatory changes for the banking industry to bring the costs of operations down. 

The proposed changes are embedded in the operating frameworks of the supervised financial institutions including contracting methodologies, and optimization of channels to mention but a few.

 Q. What would you like to see government doing to help the process?

A. Government has a key role to play in respect of factors that affect the operating costs through the macro-economic policy frameworks that make our environment competitive and not expensive to do business in. Government is the biggest business generator and must have a framework to settle its obligations to service providers in reasonable time so they are not crippled and in turn cripple those who provide those service providers with the much needed financing. Government must undertake initiatives that open new markets for businesses to thrive. Government must focus on the necessary infrastructure that acts as enablers for business to flourish.

Further, there are aspects of the tax regime which are constraining the deepening of financial services including access or reach. 

An economy including the tax base can only expand with more and more of the population playing in the formal financial system than outside it. 

We are engaging government through the Ministry of Finance Planning and Economic Development to consider specific fiscal policy frameworks that speak to the challenges above as well as attract more financial flows to the country.

We are encouraged by the wonderful spirit of dialogue exhibited by the ministry and will build on this to work towards achievement of the said aspirations.

Q. The way I see it the banking industry is facing an existential threat from the rise of mobile money and other Fintechs. Is this a fair comment and does the industry appreciate this?

A. The answer to this very much depends on how one chooses to view these players. 

For us, as an industry, we have concluded that MNOs and Fintechs are partners and enablers with whom we must work to deliver mutual objectives. 

These partners have over the years enabled us reach segments that we had over the years never reached, they have assisted the sector in driving efficiency, they have removed operational burdens we used to carry, and frankly speaking, they are helping us re-define banking and financial services and the roles, contributions and responsibilities each party in the chain plays. 

The various players are all part of the financial system ecosystem and there is an unfulfilled need for financial services that we can comfortably co-exist. 

The banks are and will remain integral and central to the financial system and all that is required is to enhance collaboration and partnerships with all players in the financial system ecosystem to ensure that there is better financial inclusion and that the delivery of services to customers can be seamless, affordable, safe and secure. 

These partnerships will further enable learning and faster uptake of services whilst lowering the cost business of banking. 

The research study undertaken has advised potential areas of partnership and collaboration and these must be leveraged to ensure an overall positive impact on customers and sustainability for all players.


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