- Prefer government. Banks prefer to lend to government because of guaranteed repayment unlike the private sector that is more prone to defaulting.
The lack of bankable projects in the private sector is forcing banks to lend to government through securities (treasury bonds and bills), according to Mr Moses Kaggwa, the director of economic affairs at the Ministry of Finance.
Speaking in Kampala at the weekend, Mr Kaggwa said: “Banks are not lending to the private sector. Instead, they are lending to government despite the fact that interest rates that government is giving are much lower.”
“Banks tell us that there are no bankable projects that are ready to be financed. Of course they have had a high default rate in the past [and now are averse to such risks],” he added.
However, Mr Wilbrod Owor, the Uganda Bankers Association executive director, told Daily Monitor that the banking industry had recorded growth in loans advanced to the private sector despite previous troubles.
“Uptake has begun to pick up. We believe banks will continue to lend to private sector,” he said.
According to data from Bank of Uganda, private sector credit grew to Shs12.8 trillion in the first quarter of 2018 down from Shs12.5 trillion the previous year. However, the high appetite from government for local debt has created sharp competition for commercial bank credit with lenders giving first priority to government.
For instance in 2017 government borrowed more than Shs12.7 trillion from the domestic market just a few billions less than the money advanced to the private sector.
While releasing quarterly release for the fourth quarter in Kampala, Mr Kaggwa said following a likely short fall in domestic revenue, government had issued extra Shs736b worth of securities to cater for the shortfall.
“We had planned to borrow domestically using government securities totaling Shs956b,” he said, adding that the process had been delayed because Bank of Uganda was yet to provide details of how much it had been able to raise through extra securities that had earlier been issued.