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As the Chairperson of UBA, please give an overview of the banking sector’s performance in Uganda and how it enhances economic growth and development.
The banking sector has been relatively stable, save for the two financial institutions that were closed by the Bank of Uganda, whose closure did not present any systemic risk across the industry.
Most of the member Supervised Financial Institutions (SFIs) met the new capital requirements as of 30th June 2024, and three (3) of our members opted to transition to Tier II status as a strategic direction.
Deposits increased from UGX34.3 trillion as of June 2023 to UGX37.4 trillion reported at the end of July 2024, and most supervised financial institutions continue to meet the prudential requirements.
Electronic payments continue to grow, including those processed by our partners and mobile network operators. The value of mobile money transactions increased to UGX252 trillion in the year ending June 2024 compared to UGX191.3 trillion in the year ending June 2023.
Credit has grown, too, though the rate at which it is growing, 7.8%, is lower than that of the prior year, 2023, of 9.8%, which is reflective of tighter lending standards by some financial institutions. Gross loans as of June 2024 were UGX20.9 trillion, compared to 20.2 trillion in June 2023. Asset quality has slightly improved to 5.4% from 5.9% at the same time last year, but this is mainly due to write-offs by financial institutions. However, non-performing loans remain persistently high, particularly in the road construction sector.
Aggregate profitability has improved over the year ending June 2024, although slower than the previous year. Interest from Government securities and reduced provision for bad debts have been the major contributors.
The industry has continued to support the government’s liquidity needs through the various treasury instruments of bills and bonds. The industry will also continue to extend credit across all sectors to support the economy’s growth.
The critical areas of concern for the sector include,
- Government outstanding arrears to domestic service providers to whom the banking industry has extended credit. Some of these service providers contribute to the non-performing portfolio noted above.
- Potential Loan exposures are likely to arise from RAPEX (Rationalization of Agencies and Public Expenditure) as several staff in the various entities have borrowed from the member financial institutions on terms under their previous employer, and yet the rationalisation may impact their loan repayment abilities or instalments. The industry has engaged the Ministry of Public Service and Bank of Uganda over this matter.
- Uganda’s downgrade by international rating agencies is concerning. Financial Markets participants have held discussions with Moody’s Credit Rating Agency to examine the implications of our country’s downgrade from B2 to B3 rating. These discussions provided the industry with a deeper understanding of the factors underpinning the B3 rating and identified areas for improvement.
What are the industry’s priorities, trends and opportunities, especially considering the post-June deadline for new capital requirements for financial institutions? Please share the status of compliance with the new requirements.
As mentioned above, most member banks and financial institutions met the new capital requirements by the end of June 2024, with three (3) financial institutions transitioning from Tier 1 to Tier 2. The industry players can now focus on further consolidating their capital positions to seize the prevailing opportunities in the economy.
There are several opportunities in the market, ranging from facilitating trade to supporting investments in the oil and gas sector, boosting agroindustrialization and manufacturing, growing exports to both existing and new markets, supporting the services sector, and real estate and infrastructure development.
Member financial institutions also continue to partner with several institutions, including fintechs, that reach the bottom of the pyramid. This aims to drive financial inclusion by extending payment solutions and microcredit, which have been fast-growing over the last few years. The Government is finalising the 4th National Development Plan (NDPIV) with a very aggressive GDP growth target of nearly tenfold up to 2040.
The increased levels of capitalisation and digitisation drive position the industry to facilitate investments in a range of sectors, support the government development agenda and drive financial inclusion among the population. We will align with those plans as financial intermediaries to support the growth process.
We recently concluded a joint study with the Petroleum Authority of Uganda to better position the banking sector to scale up its support of players in the oil and gas sector.
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The FY2024/25 budget implementation commenced on 1st July 2024; what are your views as an Association about this budget, and what are your opinions about the expectations for the new financial year?
As you know, the national budget increased by 37% to UGX. 72.1 trillion in FY 2024/25 from UGX. 52.7 trillion in the previous year. The portion of the budget financed by domestic debt amounts to UGX. 8.9 trillion (a 12.4% share of the resource envelope).
The industry will continue to support the government in this regard. What we collectively need to be mindful of is that this government borrowing should keep the private sector and raise interest rates. We further remain optimistic about the government’s commitment to clearing domestic arrears since they affect both the businesses that have borrowed and the lending financial institutions prospecting to extend credit.
Fraud has remained a significant challenge for the banking and financial services sector. What is the industry doing to resolve this? What role is UBA playing in strengthening the relationship between the banking industry & its broader base of customers & other stakeholders?
Indeed, fraud is a challenge we face every day. It is evolving and getting more sophisticated, with banking, payments, and the overall financial ecosystem being a primary target. Technological advancements have made it even more complex, given the speed with which transactions are enabled today.
However, the benefits of technology and 24/7 digital systems, including lowering transaction costs and convenience, far outweigh the risks. Therefore, the challenge is how to benefit from technology while managing its associated risks.
The banking sector is very much alive to this and, therefore, continues to invest in its products, processes and systems, people, and customers through awareness and collaboration with many other stakeholders.
We have witnessed a reduction in specific categories of fraud, such as impersonation, identity theft, forgeries, and cash suppression, from 40.4% in March 2023 to 31.4% in March 2024. Electronic fraud, including card, mobile, digital, and cyber fraud, increased from 31.9% in March 2023 to 45.2% in March 2024, clearly indicating where fraud is happening.
There had been a slight downward trend in loan-related frauds from 25.7% in March 2023 to 22.3% in March 2024. However, in quarter two (2) of this year, massive loan fraud hit the industry, taking the percentage to 46.5% in June 2024.
Addressing fraud, however, requires a collective effort, and the industry is actively driving collaboration among stakeholders.
On June 24, 2024, we successfully co-hosted the second fraud forum in partnership with the Bank of Uganda, Uganda Communications Commission, and the National Payment Systems Providers Association (NPSPA), with support from VISA, Stanbic Bank, MTN Momo, and Jubilee Allianz General Insurance. We focused on electronic fraud, including its evolving and cross-border nature. The forum also emphasised the strong collaboration required with law enforcement agencies.
As an industry, we are implementing several other measures to minimise fraud incidences, including:
- The Banking Industry Guidelines to Mitigate Fraud (BIGF) were developed and adopted. They provide standardised procedures for reporting fraud, facilitating information sharing among financial institutions, expediting investigations, and watchlisting such fraudsters.
- Implementing the Revised Industry Code of Conduct and Ethics to ensure observance and adherence to banking best practices and high ethical standards by staff in the Uganda banking industry.
- Development of minimum technology and digital financial services integration guidelines for interfacing with Bank systems and service channels by 3rd party service providers.
- Developed and enhanced a cyber and fraud incident portal to act as a central repository for fraud-related incident reporting. This is being complimented by capacity-building sessions for UBA member financial institutions on cyber security and fraud to empower them with prosecution-led investigation procedures.
- We contracted a leading law firm to review and make recommendations on enhancing the legal framework for fraud detection, prevention, and remediation in the financial services industry in the face of increasingly sophisticated fraud-related incidences enabled by technological advancements. We recommend stiffer and more punitive sentences for persons convicted of such fraud incidents.
- In terms of our customers, we joined other stakeholders and implemented the “Beera Steady Campaign,” whose aim is continuously sensitizing and driving public awareness of fraud types, methods, safeguards, etc., especially in the digital/electronic space.