bank of uganda speech by prof. emmanuel tumusiime - mutebile, governor, bank of uganda chief guest the annual dinner of the uganda institute of banking and financial services friday, november 25, 2016 kampala serena hotel good evening ladies and gentlemen. let me begin by commending the institute of banking and financial services for the excellent work it is doing, especially in providing professional training for staff of the financial services industry. the institute is making a truly invaluable contribution to the success of the industry in uganda. as we approach the end of the year, i would like to take this opportunity to reflect on the last 12 months from the standpoint of the banking industry and try to draw some lessons. we cannot deny that it has been a difficult year for the industry, with very low asset growth, a sharp deterioration in asset quality and a decline in returns on equity. the key challenge has been the rise in nonperforming loans ( npls ), from 3. 8 percent of the total loans of commercial banks in september 2015 to 7. 7 percent in september 2016. over the year to september 2016, the commercial banks had to make provisions of shs 345 billion for npls, which is double the amount set aside in the previous 12 months. these provisions squeezed profits, with average after tax returns on equity falling to 14. 9 percent in the 12 months to september 2016 compared to 17. 1 percent in the previous 12 months. the squeeze on bank profitability would have been much worse were it not for the fact that banks widened their net interest margins. the high interest rates which prevailed over the course of most of the last 12 months helped banks to recoup some of the losses they suffered as a result of bad debts. on a more positive note, the latest quarterly data indicates that we may have passed the peak of npls in the banking system. in absolute terms, the value of npls fell by 6 percent between july and september of this year, although it is still too early to be very confident that npls are really on a downward trend. the deterioration in loan quality has been one of the major factors impeding the growth in lending to the private sector. over the 12 months to september 2016, the value of loan applications rose, albeit at a relatively modest 7 percent compared to the previous 12 months, whereas the value of loans actually approved by banks fell marginally, by 2 percent. this suggests that the main constraint to loan growth has

- targeting rules have some attractive properties in theory, they could be difficult to communicate and implement in practice due to time - inconsistency problems as well as uncertainty about underlying economic parameters. 10 i prefer flexible inflation averaging that would aim to achieve inflation outcomes that average 2 percent over time. flexible inflation averaging would imply supporting inflation a bit above 2 percent for some time to compensate for the inflation shortfall over previous years and anchor inflation expectations at 2 percent. flexible inflation for unusually severe recessions, such as the financial crisis, such an approach could be augmented with purchases of 10 - year treasury securities to provide further accommodation at the long end of the yield curve. the requisite scale of such purchases — when combined with medium - term yield curve ceilings and forward guidance on the policy rate — should be relatively smaller than if the longer - term asset purchases were used alone. see, for example, lars e. o. svensson ( 2020 ), “ monetary policy strategies for the federal reserve, ” nber working paper series 26657 ( cambridge, mass. : national bureau of economic research, january ). see the discussion of formal makeup strategies in the minutes of the september 2019 federal open market committee meeting ( pp. 2 – 3 ), available on the board ’ s website at https : / / www. federalreserve. gov / monetarypolicy / files / fomcminutes20190918. pdf. see also david reifschneider and david wilcox ( 2019 ), “ average inflation targeting would be a weak tool for the fed to deal with recession and chronic low inflation, ” policy brief pb19 - 16 ( washington : peterson institute for international economics, november ), https : / / www. piie. com / sites / default / files / documents / pb19 - 16. pdf. - 8averaging would bring some of the benefits of a formal average - inflation - targeting rule, but it could be more robust and simpler to communicate and implement. following several years when inflation has remained in the range of 1 - 1 / 2 to 2 percent, the committee could target inflation outcomes in a range of 2 to 2 - 1 / 2 percent for a period to achieve inflation outcomes of 2 percent, on average, overall. by committing to achieve inflation outcomes that average 2 percent over time, the committee would make clear in advance that it would accommodate rather than offset modest upward pressures to inflation in what could be described as a process