In Uganda, data released ten days ago by Central Bank reveals that loans to the country by commercial banks grew 9.5% at end-January 2016, against 15.6% at end-September 2015. In the meantime, foreign currency loans also dropped.

Many factors explain this trend. Among these, rates of loans in Shillings reaching 24.6% at the end of 2015, against the 20.7% the year before. Also, to adapt to strengthening of US dollar and rising inflation, the Central Bank had to raise its main intervention rates to 17%, from 11% initially, thus translating into amendment of lending terms.

Analysts from the rating agency Moody’s in a recent report said, the situation could impair the banks’ assets quality, as it makes it difficult for borrowers to refinance their debts. Uganda’s banking system is effectively dominated by short-term loans or loans with variable rates. In these conditions, interests which customers are to pay progressively increased and, coupled with inflation, the risk of an increase in the level of bad debts becomes real.

Beyond this structural weakness, Moody’s also indicated that US dollar loans in 2015 reached almost 45% of total volume. In this context, even with rates remaining at 9.5% for this category, the depreciation of Ugandan shilling against US dollar could still affect the country’s overall debt. Data from Central Bank also shows that loans concentration is significant, thus exposing the system to a risk of instability in the event of default of a limited group of debtors.

Idriss Linge