Closing Remarks by
Prof. Emmanuel Tumusiime-Mutebile,
Governor, Bank of Uganda
Launch of the Eighth Edition of the World Bank's
Uganda Economic Update:
"Step by Step - Let's Solve the Finance Puzzle to
Accelerate Growth and Shared Prosperity"
Kampala, Serena Hotel
February 7, 2017
Ms. Christina Malmberg Calvo, World Bank Country
Manager for Uganda,
Members of the Diplomatic Corps,
Distinguished Panelists,
Staff of the World Bank in Uganda,
Distinguished Guests,
Ladies and gentlemen.
I would like to begin by commending the World Bank for
publishing the eighth edition in the series of Uganda
Economic Updates, which over the last few years, have
provided a valuable source of economic analysis for
everyone with an interest in the Ugandan economy.
I would also like to thank the presenters, discussants and
other contributors for all of the important insights they have
given us this morning.
Given the main theme of this latest Economic Update, I
would like to take this opportunity to offer my own
perspective on the development of the financial sector in
Uganda, its role in the economy, and the challenges which it
faces.
To begin, I think that it is important to recognise the
progress which the financial sector, and especially the
banking sector, has made over the last decade.
Between the 2005/06 and 2015/16 fiscal years, commercial
bank credit to the private sector expanded by more than
threefold in real terms, at an average real rate of 12 percent
per annum.
Although bank deposits also grew strongly over this period,
by two and a half times in real terms, there was a marked
rise in bank intermediation, with the ratio of bank loans to
bank deposits rising from 53 percent to 70 percent.
Secondly, there has been a notable strengthening of
competition in banking markets. The Herfindahl Hirschman
Index of market concentration in the banking market fell
from 1,508 in June 2006 to 909 in June 2016, denoting a
substantial reduction in market concentration and an
implicit rise in competition.
The fact that competitive pressures have intensified in the
banking market over the last 10 years is also reflected in a
secular fall in the industry's after tax returns on equity, from
32 percent in 2005/06 to 14 percent in 2015/16.
It is no longer tenable to argue that banks in Uganda make
excessive profits.
Thirdly, although there have been occasional incidents of
bank distress and failure over the last 10 years, prompt
regulatory interventions by the Bank of Uganda have
ensured that the interests of depositors have been fully
protected, as was the case with the resolution of Crane Bank.
This is in line with the mandate given to the BOU under the
Financial Institutions Act, which priorities the safety of
deposits.
In that regard I do not understand why the Economic
Update should have concluded that there are "low levels of
public confidence in formal financial institutions" which
discourage the public from holding bank deposits. This
conclusion is not borne out by the rapid growth in both the
number of bank accounts and the real value of bank deposits
over the last 10 years.
Notwithstanding the strides made by the banking industry,
it still faces major challenges. The cost of doing banking
business is high, partly because the industry has not yet
realised optimal economies of scale.
As a result, annual operating costs average approximately 11
percent of income earning assets, which accounts for a major
share of the large interest rate spread. Spreads will only be
reduced when banks can become more efficient and reduce
their operating costs.
I believe that automation and new technologies to deliver
financial services will offer avenues for banks to reduce their
operating costs over the medium to long term, although this
will also expose banks to new forms of operating risks.
Banks may also be able to exploit synergies with other
financial services, such as insurance, to improve efficiency.
The Economic Update argues that the "high cost and limited
access to credit has become a binding constraint on
Uganda's economy".
While I do not dispute that bank lending rates are too high
and need to be reduced in a sustainable manner over the
long term, I do not think that this claim is really tenable. It
implies that, if only banks and other financial institutions
could lower their lending rates and expand the volume of
their lending, substantial numbers of businesses in the real
sector of the economy would be able to borrow money for
investment in order to expand their output and thereby both
service their debt and increase their incomes.
Unfortunately the conclusion that access to credit is the
binding constraint on economic growth is premised on a
rather over-optimistic view of the real sector and its
borrowing capacities. Formal sector, creditworthy
businesses, which are the main business clients of the
commercial banks, comprise a small share of the Ugandan
economy. There is a much larger pool of informal businesses
and micro-enterprises, but the capacity of this sector to
utilise credit effectively is constrained by a raft of problems,
including scarcities of business and technical skills, the high
costs of inputs, and often volatile market conditions.
The ability of these businesses to make profits consistently
and thereby service loans is precarious.
The problems are most acute in small holder agriculture
where qualitative changes in agricultural practices are a
prerequisite for farmers being able to utilise credit
productively.
Land reform is also needed to support the transformation of
agriculture in many parts of Uganda.
The argument that micro-loans alone can transform the
fortunes of household enterprises, whether in agriculture or
other sectors, is not supported by empirical evidence, either
in Uganda or elsewhere in Africa.
In addition, attitudes towards borrowing are poor
throughout society; loans meant to fund business expenses
are sometimes diverted for personal expenses or speculative
purposes and the culture of loan repayment is weak.
Until a much stronger private business sector can develop in
Uganda, characterised by good, modern business
management, and a clear separation of business and
personal interests on the part of business owners; it will be
very difficult for banks and other financial institutions to
further raise the level of intermediation in Uganda.
To conclude, I believe that it is necessary to be realistic about
what can be expected from the financial sector.
The shallowness of the financial system in Uganda reflects
the structure of our economy much more than the
deficiencies of the financial sector itself or of the institutional
and regulatory environment in which it operates.
In many respects - technology, productivity, levels of
professionalism, the application of modern business
practises - the financial sector is one of the most advanced
sectors of our economy.
Most of the other sectors of the economy are not as advanced
as the financial sector, and some lag far behind it. It is the
structural problems afflicting the real sectors of our economy
which provide the largest obstacle to greater use of financial
services, and especially credit, in Uganda.
Thank you for listening.