Banks in strong growth
May 07, 2006
IN 2005, commercial banks continued to post healthy profits but their earnings are coming under scrutiny as concerns mount about the disparity between lending and interest rates paid to depositors.
By Paul Busharizi
IN 2005, commercial banks continued to post healthy profits but their earnings are coming under scrutiny as concerns mount about the disparity between lending and interest rates paid to depositors.
There is a growing view that the central bank should step in to narrow the spread, an intervention the Bank of Uganda (BOU) is unwilling to consider.
Last year, profit growth for all but two banks – Standard Chartered and Stanbic banks, recorded double digit growth.
Stanchart and Stanbic’s earnings were dampened by higher operating costs.
Industry earnings were boosted by increased lending to the public financed by growing deposits.
A cursory analysis of the top six banks – Stanbic, Stanchart, Barclays, dfcu, Crane and Nile indicates that the average cost of funds – mainly what they pay in interest to depositors, is about 2%.
On the other side of the spectrum, base lending rates – the rate at which banks lend to big corporate customers, is about 18%, but lend to individuals at as high as 30%.
Published accounts of the banks show very little provision for bad loans, suggesting that banks have healthy loan portfolios.
Banks have to declare their non-performing loans and take money from their income to cover for these bad loans.
The top banks provisioning for bad loans during the year was under 1% of their loan portfolios.
Bankers continue to insist that the wide spread is meant to guard against the high risk of lending.
“What you see in the accounts is loss for that particular year, what you do not see are the non-performing loans which stand at about 2% of gross advances. The question then is do you mitigate for risk when it happens or before?†said Uganda Bankers Association vice-president Nick Mbuvi, who also is the managing director of Barclays Bank.
“Improvements in lending rates will come with the entrance of the credit reference bureaux because then, we will be able to have price differentiations for individuals unlike now when we are pricing loans across the portfolio,†he said.
Another senior banker agreed with Mbuvi on the risk of lending to Ugandans.
“That is one way of looking at it. However, we have loans we assign “watch status.†“They are not yet underperforming but we are watching vigilantly.
“In addition, there is a lot of fraud in this market.
“You are talking about at least two attempted frauds a week and even then, I am in danger of understating the situation. So there is still risk that we have to provide for,†said a senior banker on condition of anonymity.
Industry watchers remain unconvinced and say the central bank should be more proactive in reining in the banks.
“If we are serious about private sector growth, something has to be done about lending rates.
“The current situation is that because money is so expensive. Businesses can not grow without using underhand methods,†one businessman said.
“I do not blame the banks. They are businesses. Why should they forgo income which they can legitimately take?
“The central bank is to blame. They (BOU) need to put a cap on gross margins (difference between lending and deposit rates),†the businessman said.
The BOU, while noting that the banking sector is more solid all around, is reluctant to exert more influence on banks than they already do.
“The BOU governor will continue with the moral suasion with regard to lending and deposit rates and bank charges. Banks will respond positively,†the BOU spokesman, Juma Walusimbi, said in response to the question on whether the central bank will intervene to cap the banks’ gross margins.
“The central bank has no intention to put a cap on deposit/lending margin. No policy reversals please,†he said.
The central bank through various measures has used its power to influence the workings of banks.
Last year, the central bank announced it would withdraw all government accounts from commercial banks as part of a liquidity management measure, the net effect of this is that commercial banks may be forced to raise interest rates on deposits as they compete for more deposits to bridge the hole created.
The flip side maybe that lending rates will increase as demand for credit outstrips supply.
IN 2005, commercial banks continued to post healthy profits but their earnings are coming under scrutiny as concerns mount about the disparity between lending and interest rates paid to depositors.
There is a growing view that the central bank should step in to narrow the spread, an intervention the Bank of Uganda (BOU) is unwilling to consider.
Last year, profit growth for all but two banks – Standard Chartered and Stanbic banks, recorded double digit growth.
Stanchart and Stanbic’s earnings were dampened by higher operating costs.
Industry earnings were boosted by increased lending to the public financed by growing deposits.
A cursory analysis of the top six banks – Stanbic, Stanchart, Barclays, dfcu, Crane and Nile indicates that the average cost of funds – mainly what they pay in interest to depositors, is about 2%.
On the other side of the spectrum, base lending rates – the rate at which banks lend to big corporate customers, is about 18%, but lend to individuals at as high as 30%.
Published accounts of the banks show very little provision for bad loans, suggesting that banks have healthy loan portfolios.
Banks have to declare their non-performing loans and take money from their income to cover for these bad loans.
The top banks provisioning for bad loans during the year was under 1% of their loan portfolios.
Bankers continue to insist that the wide spread is meant to guard against the high risk of lending.
“What you see in the accounts is loss for that particular year, what you do not see are the non-performing loans which stand at about 2% of gross advances. The question then is do you mitigate for risk when it happens or before?†said Uganda Bankers Association vice-president Nick Mbuvi, who also is the managing director of Barclays Bank.
“Improvements in lending rates will come with the entrance of the credit reference bureaux because then, we will be able to have price differentiations for individuals unlike now when we are pricing loans across the portfolio,†he said.
Another senior banker agreed with Mbuvi on the risk of lending to Ugandans.
“That is one way of looking at it. However, we have loans we assign “watch status.†“They are not yet underperforming but we are watching vigilantly.
“In addition, there is a lot of fraud in this market.
“You are talking about at least two attempted frauds a week and even then, I am in danger of understating the situation. So there is still risk that we have to provide for,†said a senior banker on condition of anonymity.
Industry watchers remain unconvinced and say the central bank should be more proactive in reining in the banks.
“If we are serious about private sector growth, something has to be done about lending rates.
“The current situation is that because money is so expensive. Businesses can not grow without using underhand methods,†one businessman said.
“I do not blame the banks. They are businesses. Why should they forgo income which they can legitimately take?
“The central bank is to blame. They (BOU) need to put a cap on gross margins (difference between lending and deposit rates),†the businessman said.
The BOU, while noting that the banking sector is more solid all around, is reluctant to exert more influence on banks than they already do.
“The BOU governor will continue with the moral suasion with regard to lending and deposit rates and bank charges. Banks will respond positively,†the BOU spokesman, Juma Walusimbi, said in response to the question on whether the central bank will intervene to cap the banks’ gross margins.
“The central bank has no intention to put a cap on deposit/lending margin. No policy reversals please,†he said.
The central bank through various measures has used its power to influence the workings of banks.
Last year, the central bank announced it would withdraw all government accounts from commercial banks as part of a liquidity management measure, the net effect of this is that commercial banks may be forced to raise interest rates on deposits as they compete for more deposits to bridge the hole created.
The flip side maybe that lending rates will increase as demand for credit outstrips supply.