bank of uganda remarks by prof. emmanuel tumusiime - mutebile, governor, bank of uganda uganda bankers ’ association annual bankers ’ conference july 19, 2017 the keynote speaker, prof. njuguna - ndugu, emeritus governor of the central bank of kenya, the chief executives and senior staff of banks present, the senior management of the uganda institute of banking and financial services, distinguished guests, ladies and gentlemen. good morning to you all. let me begin by commending the uganda bankers ’ association for organising this inaugural annual bankers ’ conference. we have a very busy schedule of sessions on a variety of important topics to look forward to today. in my brief remarks i would like to outline what i believe are some of the key challenges for the ugandan banking industry in the years ahead. page 2 of 14 as will become clear, these challenges are in some respects interrelated, as progress in one area will make it easier to make progress in others. a major challenge for the banking industry ; one which is of the greatest importance for the rest of the economy, is how to strengthen bank lending to the private sector. bank lending expanded rapidly in the first decade of this century ; in real terms the stock of credit expanded four - fold between 2001 and 2011, and this enabled many new borrowers to access credit. but since 2011 credit growth has slowed and over the last two years, there has been virtually no growth in real terms ( after adjusting for inflation ). page 3 of 14 the main reasons for the stagnation of bank lending lie on the supply side of the credit market. over the last five years, since the first half of 2012, loan demand, as proxied by the value of loan applications received by banks, has grown robustly, by about 17 per cent per annum in real terms, but the value of loans actually approved by banks has grown much more slowly. consequently, whereas in the first half of 2012, banks approved loans in value amounting to 70 per cent of the total loan applications that they received, that figure had fallen to 51 per cent in the first four months of 2017. it is clear that, against a background of rising nonperforming loans and difficulties in realising the value of loan collateral in property markets, banks have become much more wary about the creditworthiness of loan applicants and as a result have become more reluctant to extend credit to them. page 4 of 14 unfortunately, the pool of prime borrowers –

lending, taking into account operating costs, provisions, and the costs of funds, banks would make losses on their loan portfolios. they would respond by curtailing their lending to those borrowers to whom lending involves the highest costs, in the form of high transaction costs for loan evaluation and monitoring, and / or because of higher credit risk premiums. the banks might also attempt to recover some of their losses by increasing the fees and charges levied on their customers. page 8 of 14 if lending rates were capped, the borrowers who would suffer the most, in terms of losing access to credit, would be smes. this is because smes are both more risky and involve higher transaction costs for the banks as a share of the amount that they borrow than prime borrowers. given these costs, banks can only extend credit to smes in a commercially viable manner if they are free to set lending rates at levels, which can cover the expected costs of lending, including the default risk. instead of lending to smes, capping lending rates would encourage the banks to concentrate their reduced loan portfolios on their prime borrowers, which already benefit from the lowest lending rates in the economy. page 9 of 14 thus capping lending rates would be highly counterproductive in that it would damage the sme sector by constraining its ability to obtain working capital and finance for investment to expand capacity. as the sme sector is crucial for the future growth of the economy and the creation of employment, capping lending rates would constitute an act of economic selfharm. we already have the salutary experience of the 1970s and 1980s to teach us how damaging the control of interest rates can be. in that period, the banking sector shrank dramatically because many types of banking business, including lending to the private sector, were not financially viable. uganda cannot afford to repeat the mistakes of the past ; mistakes, which proved so ruinous to our economy. page 10 of 14 i cannot stress strongly enough that it will only be possible to reduce bank lending rates in a financially sustainable manner if banks can lower their operating costs. bringing down operating costs will almost certainly entail greater use of innovative technologies, including it, to deliver banking services. a major shift towards digital, or electronic banking is already underway worldwide, as we will be discussing in the session on the digital financial revolution later this morning. the adoption of mobile and online banking, together with smart atms, will help banks reduce their costs, although