{"id":32528,"date":"2022-06-14T19:14:09","date_gmt":"2022-06-14T19:14:09","guid":{"rendered":"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans"},"modified":"2022-06-14T19:22:44","modified_gmt":"2022-06-14T19:22:44","slug":"higher-interest-rates-loom-as-banks-face-more-bad-loans","status":"publish","type":"post","link":"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans","title":{"rendered":"Higher interest rates loom as banks face more bad loans"},"content":{"rendered":"<p><span style=\"color: #ff6600\"><strong>Africa-Press &#8211; Uganda. <\/strong><\/span>Interest rate sensitivity of a household\u2019s debt service burden is likely to crop up in Uganda going forward in form of loan repayment in banks<\/p>\n<p>Following the rise in the Central Bank Rate (CBR) by Bank of Uganda, commercial banks will soon be raising their lending rates, a move that will hit those who are already in debt.<\/p>\n<p>The unavoidable increase in policy rate to stabilise the economy is expected to drive up lending rates in commercial banks, which could have a negative impact on the financial system.<\/p>\n<p>The greater the interest rate sensitivity &#8211; or duration &#8211; of a household\u2019s liabilities relative to that of its assets, and the shorter the maturity of these liabilities, the larger the impact on consumption. In this case, it is anticipated that loans will become expensive for households to pay, which will lead to a rise in the non-performing loans in the country. The size of household debt burdens matters too.<\/p>\n<p><b>Personal and household loans<\/b><\/p>\n<p>Personal and household loans have been one of the sectors which attract high private sector credit growth in loan provision by commercial banks. For instance, the Central Bank said the Personal and household loans registered a growth of 16.2 percent in the quarter that ended April 2022 versing 17.8 percent in the quarter to March 2022. While loans to the manufacturing sector reduced to 10.6 percent in April compared to 11.5 percent in the quarter to March 2022.<\/p>\n<p>During the same period, lending rates on shilling loans decreased to 18.84 percent in April 2022 from 19.35 percent in March 2022.<\/p>\n<p>In the quarter to April 2022, shilling lending rates declined to an average of 19.0 percent compared to 19.3 percent in the quarter to January 2022. On the other hand, foreign currency lending rates increased to 6.11 percent from 5.97 percent month on month.<\/p>\n<p>Debt allows households to smoothen shocks and invest in high-return assets such as housing or education, raising average consumption over their lifetimes. However, high household debt can make the economy more vulnerable to disruptions, potentially harming growth.<\/p>\n<p><b>Expensive loans<\/b><\/p>\n<p>The main risk concern now in the credit market is that with the increasing inflationary pressure in the economy, a development which has seen the Bank of Uganda raising the Central Bank Rate (CBR) to tame inflation amidst a slower economic growth is likely to make loans more expensive for enterprises and households.<\/p>\n<p>The way in which household indebtedness affects aggregate expenditure and this has a bearing on both macroeconomic and financial stability.<\/p>\n<p>Financial regulators are concerned that the rise in the policy rate will result in an increase in credit from banks and it will make commercial loans more expensive for households to pay back loans they have borrowed thus triggering a rise in non-performing loans in banks.<\/p>\n<p><b>Profitability<\/b><\/p>\n<p>Consequently, financial institutions can suffer balance sheet distress from both direct and indirect exposure to the household sector. From a macroeconomic stability viewpoint, monetary transmission is the key issue. A household\u2019s stock of debt affects its ability to deal with an unanticipated deterioration in its circumstances, such as lower income, lower asset prices or higher interest rates.<\/p>\n<p><b>Borrowers likely to default<\/b><\/p>\n<p>The direct exposure to credit risk associated with household debt reflects the likelihood that borrowers will default. Defaults occur when debt service costs become hard to bear because interest rates increase or incomes fall.<\/p>\n<p>On June 2 2022, the Bank of Uganda increased the policy rate from 6.5 percent to 7.5 percent, to control the rising inflation rate.<\/p>\n<p>The director Financial Stability Bank of Uganda, Robert Mbabazize said, \u201cBoU raised the CBR to 7.5 percent, on June 02, 2022. A key downside risk to financial stability is the continued pass through to domestic inflation of global shocks, and the knock-on impact on the financial performance of households and enterprises,\u201d he said.<\/p>\n<p>Adding: \u201cThe necessary increase of policy rates \u2026 may adversely affect the ability of households &amp; enterprises to repay their loans, and elevate credit risk\/higher NPLs. A Bottom up Stress Test of banks is underway, focusing on the impact of the economic risks.\u201d<\/p>\n<p>The responsiveness of aggregate expenditure to shocks depends on the level and interest rate sensitivity (duration) of household debt, as well as on the liquidity of the assets it finances.<\/p>\n<p><b>Global economy slows<\/b><\/p>\n<p>Global economic conditions have been disrupted by the ongoing global supply chain disruptions, and rising commodity prices. Global growth is projected to slow from 6.1 percent in 2021 to 3.6 percent in 2022, 0.8 percent lower than projected in January (IMF, Apr-2022).<\/p>\n<p>Persistent inflationary pressures have led to quicker monetary policy action and may result in tighter funding conditions. Global inflation is expected to rise by 2.5 percent in 2022 (OECD, 2022). Domestic economic recovery remained soft over the quarter ended March 2022 as indicated by the latest high- frequency indicators of economic activity.<\/p>\n<p>In the June monetary policy statement, the deputy governor Bank of Uganda, Dr Micheal Atingi-Ego said, \u201cEconomic growth is now projected in the range of 4.5-5.0 percent in 2022. However, lower than 5.5-6.0 percent is projected in April 2022, driven by surging energy and non-energy commodity prices, deteriorating domestic inflation, which will squeeze aggregate demand, tighter monetary conditions, and weakening external demand.\u201d<\/p>\n<p>Dr Atingi-Ego explained that the risks to the growth outlook are tilted to the downside. A weaker-than-expected global growth, further escalation of geopolitical conflicts, persistent global supply chain disruptions, heightened global economic uncertainty; higher inflation which is dampening global and domestic consumer confidence and prolonged weak growth in private sector credit.<\/p>\n<p><b>Macroeconomic risks<\/b><\/p>\n<p>Mr Robert Mbabazize, the director financial stability at the Bank of Uganda, said examples of systemic risks or shocks that may impact the stability of the financial sector include: Macroeconomic risks for example surging real estate prices, slow economic growth, health shocks such as Covid-19.<\/p>\n<p>Shocks arise from the financial system, for example, rapid credit growth over time. Failure of a major financial institution or payment system.<\/p>\n<p>\u201cBut NPLs are likely to rise in the near term. Annually, loans grew by 6.3 percent in the year ended March 2022, to Shs18.5 trillion, slower than the 13.2 percent in March 2021,\u201d he said.<\/p>\n<p>The World Bank\u2019s latest Global Economic Prospects report notes that if inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn along with financial crises in some emerging markets and developing economies.<\/p>\n<p><strong>For More News And Analysis About <a href=\"https:\/\/www.africa-press.net\/uganda\">Uganda<\/a> Follow <a href=\"https:\/\/www.africa-press.net\/\">Africa-Press<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Africa-Press &#8211; Uganda. Interest rate sensitivity of a household\u2019s debt service burden is likely to crop up in Uganda going forward in form of loan repayment in banks Following the rise in the Central Bank Rate (CBR) by Bank of Uganda, commercial banks will soon be raising their lending rates, a move that will hit [&hellip;]<\/p>\n","protected":false},"author":84,"featured_media":32527,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,5,8],"tags":[233,240,234],"class_list":["post-32528","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-all-news","category-economy","category-homepage-english","tag-africa-press","tag-africa-press-uganda","tag-uganda"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.1 (Yoast SEO v27.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Higher interest rates loom as banks face more bad loans - Uganda<\/title>\n<meta name=\"description\" content=\"Interest rate sensitivity of a household\u2019s debt service burden is likely to crop up in Uganda going forward in form of l ...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Higher interest rates loom as banks face more bad loans\" \/>\n<meta property=\"og:description\" content=\"Interest rate sensitivity of a household\u2019s debt service burden is likely to crop up in Uganda going forward in form of l ...\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\" \/>\n<meta property=\"og:site_name\" content=\"Uganda\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/AfricaPressTunisiaa\" \/>\n<meta property=\"article:published_time\" content=\"2022-06-14T19:14:09+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-06-14T19:22:44+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/static.africa-press.net\/uganda\/sites\/34\/2022\/06\/postQueueImg_4-62a8dfece9ccb.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1556\" \/>\n\t<meta property=\"og:image:height\" content=\"1037\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"cfeditoren\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"cfeditoren\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\"},\"author\":{\"name\":\"cfeditoren\",\"@id\":\"https:\/\/www.africa-press.net\/uganda\/#\/schema\/person\/068c7ab4e9634ae78ec5d54ec46598bb\"},\"headline\":\"Higher interest rates loom as banks face more bad loans\",\"datePublished\":\"2022-06-14T19:14:09+00:00\",\"dateModified\":\"2022-06-14T19:22:44+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\"},\"wordCount\":1053,\"commentCount\":0,\"image\":{\"@id\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans#primaryimage\"},\"thumbnailUrl\":\"https:\/\/static.africa-press.net\/uganda\/sites\/34\/2022\/06\/postQueueImg_4-62a8dfece9ccb.jpg\",\"keywords\":[\"Africa Press\",\"Africa Press-Uganda\",\"uganda\"],\"articleSection\":[\"all news\",\"economy\",\"homepage-english\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\",\"url\":\"https:\/\/www.africa-press.net\/uganda\/all-news\/higher-interest-rates-loom-as-banks-face-more-bad-loans\",\"name\":\"Higher interest rates loom as banks face more bad loans - 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