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Banks approve bigger chunk of loans to manufacturing sector in May

Kampala, Uganda | THE INDEPENDENT | Commercial banks approved more money in May compared to April with manufacturers receiving the biggest chunk of the loans than any other the sector, the Ministry of Finance has said in the performance of the economy report for June 2020.

According to the report, commercial banks approved 589 billion Shillings loans in May compared to 491 billion Shillings approved in April. Of this, manufacturers were given 177 billion Shillings (30 percent) in May, an improvement from 102 billion received in April, where the sector was still the lead receiver of loans.

Paul Lakuma, a research fellow at the Economic Policy Research Centre (EPRC), said banks are naturally attracted to manufacturers because of the low-risk profile. He said, “given that their goods have value-added, they attract a high price and are less volatile.” This slims chances to default.

The May approvals the report indicates, show the country emerging from a dip in loans released but just pales in comparison with the 1.5 trillion approved in March when coronavirus was not yet a big issue in Uganda.

April and May are when the country was in total lockdown to stem the spread of coronavirus. And as businesses and factories shut their doors, those seeking loans dropped while banks reduced on approvals. Building, mortgage, construction and real estate sector received the second-highest amount in May, taking 131 billion shillings up from 42 billion released in April.

The agriculture sector which has been said to be critical in the post-COVID recovery saw loans approved to it dip to the lowest level in more than a year. The sector managed to receive just 44 billion Shillings in May compared to 70 billion Shillings in April. This is an indicator that bankers are still skeptical of the fortunes of the sector going forward.

Demand and prices for agriculture products crashed when the lockdown was instituted. Entities like hotels, restaurants closure plus disruptions in transport affected the sector. Farmers are still struggling to dispose off surplus harvests.

Trade where most wholesale and retail sales fall received 82 billion shillings in May, a 77 percent fall from what the sector received. Traders, among them those working from downtown Kampala arcades have endured the longest lockdown. The government says it is inspecting the arcades to see if it is safe to open them up for business.

Last week, Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said he was not impressed with banks for refusing to reduce lending charges now averaging 19 percent, keeping many people away from seeking loans for business. Mutebile warned the central bank may be forced to impose limits on interest rates they can charge on loans.

Mutebile said: “The Bank of Uganda may in consultation with the minister, by statutory instrument, prescribe – the maximum and minimum rates of interest and other charges which in the transaction of their business financial institutions may pay off deposit or other liability and impose credit extended in any form.”

When more people and businesses seek and get credit, it boosts economic activity, investment, and employment.

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