Commercial banks in Uganda significantly increased their reliance on the Bank of Uganda's (BoU) Standing Lending Facility in the three months to November, marking a dramatic rise in emergency borrowing, according to the BoU’s December State of the Economy report.
The report revealed that banks borrowed Shs25.2 trillion from the facility in November, a sharp increase from Shs3.7 trillion in August. This represents a sixfold increase, underscoring heightened liquidity challenges in the banking sector.
“The utilisation of the Standing Lending Facility surged significantly to Shs25.2 trillion from Shs3.7 trillion in the three months to August, highlighting increased demand for short-term liquidity by banks,” the report stated.
The Standing Lending Facility, established in 2020 to address liquidity challenges during the Covid-19 pandemic, has remained a critical lifeline for commercial banks dealing with liquidity shortages. However, the report does not elaborate on the reasons behind the recent surge in borrowing.
Earlier in 2023, the facility had seen a decline in utilisation as the banking sector recovered from the Covid-19-induced shocks. Borrowing had fallen to Shs3.7 trillion in August after peaking at Shs21.52 trillion in June. However, the three months leading to November saw a sharp reversal, with borrowing rising to Shs9.97 trillion in September before skyrocketing to Shs25.2 trillion in November.
This resurgence signals ongoing liquidity constraints within the banking sector, partly attributed to banks’ significant investments in long-term government debt. These investments have tied up substantial capital, coinciding with the government’s increased appetite for domestic borrowing to finance its budgetary needs.
The increased demand for liquidity also exerted pressure on overnight interbank lending rates, which rose from an average of 9.9 percent to 11.2 percent during the three-month period. This, in turn, influenced yields on government securities, which edged higher despite a reduction in the Central Bank Rate (CBR) to 9.75 percent in October. BoU had lowered the CBR citing improved inflation projections, which are expected to remain below the 5 percent target.
The rising borrowing by commercial banks has also had ripple effects on private sector credit growth, which slowed during the same period. Between September and November, growth in private sector credit fell to 8.2 percent from 9.1 percent, with both shilling- and foreign currency-denominated loans declining. Weighted average shilling lending rates edged up to 19.1 percent from 18.1 percent, while prime lending rates held steady at 20.7 percent.
The report further indicated that while demand for credit increased to Shs7.4 trillion in November, banks could only supply Shs4.6 trillion, an improvement from Shs4.1 trillion but still insufficient to meet growing financing needs across various sectors. Additionally, credit approval rates declined to 62.6 percent from 68.4 percent as banks became more cautious in their lending due to heightened risks and stiff competition for funds.
The latest data paints a complex picture of Uganda’s banking sector, where increased demand for liquidity, government borrowing, and cautious lending strategies have strained credit availability and impacted the broader economy.
