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Niche banks under watch — Central Bank

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The Central Bank has said it is keeping a close eye on nichebased financial institutions that have been making losses for the last three years. Niche banks are financial institutions that cater for the needs of a certain demographic. Without naming a specific bank, the Central Bank executive director in charge of supervision, Twinemanzi Tumubweine, said the banks risk being undercapitalised.

“The banking sector is concentrated… there are thoseproviding niche products. While some have been making losses for the last threeyears, the Central Bank has ensured that they do not present a threat to thesector,” Tumubweine said.

 He added: “Today,they are resilient, but tomorrow they may receive an external shock, such as adoubling or a tripling in the exchange rate — many banks with foreign loansoften find themselves in losses.”

Tumubweine was speaking during the release of the Monetary Policy Statement for December at the bank’s headquarters in Kampala. The Central Bank maintained its lending rate to financial institutions at 10%, which it said, was relative to that in October.

 There is fear among a section of the public that the ongoing probe into the Central Bank by the Parliament over the liquidation of seven commercial banks, could trigger a corporate governance crisis. Tumubweine said Parliament is carrying out its mandate and the public should wait for the report.

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By the end of September, Tumubweine said the banking sector had demonstrated a significant resilience, registering a 7% increment in assets.

“We have had a significant improvement in non-performingloans. The industry average was about 5.6%. As at the end of September, thisfigure had dropped to about 4.4% and we expect this to continue. Total industryassets increased to sh28 trillion, from sh26.5 trillion, in nine months,” hesaid.

 Economic outlook

Central Bank governor Emmanuel Tumusiime-Mutebile said core inflation figures remained subdued during the period under review. “The near-term (three to six months) inflation forecast are lower, compared to the October forecast round, largely due to a less depreciated exchange rate.

Core and headline inflation are forecast to peak at 6% to 6.5% and 5.1% in the second half of next year, from the previous forecast of 1% and 0.7% points, respectively,” Mutebile said.

 He added: “The mediumterm fiscal framework indicates that public investment should remain at a highlevel, and have positive spillover effects on private sector investment andspending.”

This means that it would be unlikely for commercial banks to adjust lending rates upwards. An increase or decrease in the central bank rate signals to commercial banks to either ease or hold steady lending rates. The Central Bank said the domestic economic activity is projected to remain on a steady expansion path in the 2018/2019 financial year, and over the coming years, keeping output slightly above potential.

“The Bank of Uganda’s Composite Index of Economic Activityindicates stronger economic performance in the first 10 months of this year,with an annual growth rate of 7% to 8%. This is an indication that economicgrowth in the 2018/19 financial year could be higher than the previousprojections of 6%,” Mutebile said.

However, there are risks to economic growth momentum — slow execution of public investment projects, unpredictable weather conditions, which could affect agricultural productivity and the slowdown in the global growth and financial certainty. Recently, while releasing the Regional Economic Outlook by the Internal Monetary Fund in Kampala, Clara Mira, its resident representative, said inflation projection in the next 12 months is likely to increase, which will largely be driven by the depreciation of the local unit.

“Inflationary pressures are starting to pick up, reaching 3%in October, triggered by the shilling depreciation due to global commodityprices,” she said.