The taking over of Crane Bank by Bank of Uganda late last year (October 2016) came as a shock to many.
In fact, a year ago, Bank of Uganda in its financial stability report FY 2015/16 had re- affirmed that banking system remained sound, with liquidity and capital buffers remaining well above the minimum requirement.
Crane bank, which had won several awards for excellent service and stood out as one of the most profitable financial institutions in the country, was reported to be undercapitalized.
It later emerged that Crane Bank wrote off more than 180 loans and advances amounting to more than Shs101b.
In 2016, officials said Crane Bank’s deposit base had been eroded by Non-Performing loans which stood at a staggering Shs122b.
This implied a growth of 635 percent of the bank’s NPLs, representing a market share of 29.7 percent.
Other banks were not spared. Other banks were not spared.
Diamond Trust Bank’s NPLs stood at Shs 5bn in 2013 and 2014. A year later, the NPLs increased to an overwhelming Shs69bn.
Bank of Baroda’s NPLs were registered as Shs 7bn in 2015 before growing to Shs 77bn, hence a growth of Shs 70bn in NPLs.
Stanbic Bank’s NPLs were worth Shs 30bn as of 2015 before hitting Shs 65bn in 2016.
Centenary Bank’s NPLs were recorded as Shs 27bn in 2015 before rising to Shs 35bn in 2016, marking a growth of Shs 8bn in NPLs.
Kenya Commercial Bank (Uganda Ltd) struggled with non-performing loans of Shs15bn as of December 2013. One year down the road, the NPLs were reduced to Shs 12.8bn. But in 2015, KCB’s NPLs doubled to 27.9bn – hence an increase of Shs 15bn NPLs (117 percent).
According to official statistics from the Finance Ministry, Equity Bank had Shs 8bn in NPLs as of December 2013 before trimming the figure to 7.6bn in 2014. In 2015, the Kenyan bank’s NPLs were worth Shs18.5bn thus a Shs10bn increase in NPLs (141 percent growth). In 2016, Equity Bank’s NPLs rose to Shs 31bn.
Housing Finance Bank’s NPLs were at Shs 16bn in 2015 only to hit Shs 30bn a year later thus a growth of Shs 12bn in NPLs.
In 2016, Tropical Bank’s NPLs rose to Shs 38bn from Shs 14bn.
As if this is not enough, NC Bank Uganda Ltd had its NPLs rise to Shs 13bn from Shs 9.9bn in one year (2015-16).
Exim Bank’s NPLs grew to Shs 22bn in 2016 from Shs 5bn a year before.
DFCU Bank which boasts several branches across the country; registered NPLs of Shs 25bn in 2013 before the figure rose to Shs 47bn a year later and consequently Shs 71bn in 2015.
This meant that DFCU’s NPLs had grown to 23.6bn in a space of one year (50 percent), representing a market share of 10.3 percent.
The Bank’s NPLs as of 2016 stood at Shs 58bn.
Several experts have since weighed in on the causes of the NPLs in the industry.
According to economists, domestic arrears are thought to be one of the leading reasons for non-performing loans.
The size of arrears outstanding is almost 10 percent of the approved budget for Financial Year 2017/18 (excluding domestic debt roll-over).
In simple terms, the situation is more like “Government record arrears are constraining private sector”.
In literal sense, government doesn’t pay its debts; corporates don’t pay banks and thus the struggle with non-performing loans to gross loans reaching 10.5 percent in December 2016.
According to the Office of the Auditor General report for the Financial Year 2015/16, the trend of government outstanding commitments/domestic arrears have continued to escalate for the past three years.
“Whereas the consolidated financial statements put the figure of domestic arrears at Shs 2.2tn,” said the AG, “the audited position of the Internal Auditor General puts the figure at Shs 2.7tn as at June 30 leading a variance of Shs 446bn.”
The AG also noted that in a “number of entities, Accounting Officers are paying for domestic arrears which previously were not disclosed nor budgeted for, and that some entities did not fully disclose their arrears position as a result of the guidance provided by the Permanent Secretary to the Treasury.”
The movement of arrears from June to December 2016 indicates that the Office of the president was yet to clear Shs 32bn.
The Ministry of Defence had arrears of Shs 718bn, Ministry of Justice and Constitutional Affairs Shs 673bn, UNRA Shs 222bn, National Medical Stores Shs 137bn, NITA-u Shs15bn and Ministry of Finance Shs 136bn among others.
An economist who preferred to speak anonymously explained that domestic arrears are essentially regarded as domestic debt but categorically not included in the debt accounting framework as this increases debt burden when included.
“The accumulation of arrears also is a manifestation of weak enforcement as accounting officers continue to commit beyond the appropriated,” said the economist.
“This to some extent means that systems alone are not sufficient if there is no enforcement. This is what we see with commitment control system.”
The composition also shows that nearly 50 percent is in foreign obligation and court awards.
Outstanding amounts to suppliers are approximately over 10 percent of total loan/credit portfolio (the same size of NPLs to Gross Loans in December 2016), corroborating the fact that NPLs rise with arrears.
Invoice discounting and Bid guarantees are all tied onto performance of contracts with government.
They are short term by design and when government releases come a couple of quarters (in some cases years after); it’s improbable that loan performance won’t be affected.
Bank of Africa for instance finances up to 80 percent of the contract sum. Their financials for 2016 reflect that trend by the provision made for impairments.
Bank of Uganda also admitted in its BoU Financial Stability Report 2015/16 that government had “built up a large position in arrears to domestic suppliers, which was estimated at Shs 1.27 trillion in June 2016.”
“Anecdotal evidence shows that this may have affected the ability of the suppliers to service their debt with the banking sector in 2015/2016.”
The International Monetary Fund said in its report dated June 21, 2017 that “credit o the private sector has stalled, driven by rising non-performing loans that partly reflect government arrears.”
Remarkably, the ideal percentage for Portfolio at Risk (PAL) is 2 percent. But statistics indicate PAL stands at 6.22 percent, symbolizing a bigger problem in the banking industry.
Also recall that annually, banks are forced to make write offs for bad loans which is a direct hit on their Profit and Loss (P & L), also known as Statement of Comprehensive Income.
With economic growth slowing to 3.9 percent in FY 2016/17 (lower than the East African Community peers), it remains imperative for government to sufficiently budget for outstanding arrears.
The arrears are approximately 10 percent of the appropriated budget for FY 2017/18) yet the provisions in the same budget for arrears is only 1 percent.
Notably if government does not pay its obligations to private sector yet it has already outcompeted the private sector in terms of sourcing credit from the domestic market, private sector growth which has slowed in last couples of years could remain subdued over the coming years.