Mutebile Warns Banks on Foreign Currency Loans

Uganda’s commercial banks have been urged to strengthen their credit management to mitigate credit risks amid increased non-performing loans.

“Banks must be careful in evaluating the capacity of the prospective borrower to continue servicing a loan in the event of plausible shocks to revenue streams or debt servicing costs, drug ” said Governor Emmanuel Tumusiime-Mutebile.

This would consequently boost the banking sector’s performance and resilience.

Nonperforming loans (NPLs) rose from 3.8 percent of the total loans of commercial banks in September 2015 to 7.7 percent in September 2016.

Speaking at the Annual Dinner of the Uganda Institute of Banking and Financial Services this past Friday, seek Mutebile acknowledged that one crucial area which needs to be addressed is that of currency mismatches.

“Foreign currency loans account for 43 percent of total bank loans, but the majority of borrowers operate businesses in the non traded goods sectors of the economy,” said Mutebile.

“Even if borrowers of foreign currency loans which operate in non traded sectors price their output in dollars, as many owners of commercial property do, they are still vulnerable to shifts in the real exchange rate, because their customers do not earn dollars.”

Non-traded goods include electricity, water supply, all public services, hotel accommodation, real estate, construction and local transportation.


Mutebile said exchange rate depreciation raises the real value of dollar denominated loan repayments but it does not enhance the capacity of non traded goods businesses to earn more income.

“Banks should restrict foreign exchange lending to companies which sell their output on the global market rather than the domestic economy, such as exporters,” he cautioned.

There have been problems in the commercial real estate sector, where heavy investment in recent years has led to oversupply in the market with the result that occupancy rates have fallen and many owners have not been able to generate sufficient income to service their loans.

Mounting government arrears to suppliers and contractors has also contributed to NPLs while borrowers with business in South Sudan have suffered losses because of the acute political and economic problems in that country.

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