Policy Perspectives On Strengthening Uganda’s Non-Performing Loans Strategy (NPLs)

“Banks operate in a strictly regulated environment and every borrower, whether an insider or the man from the street, must meet their financial obligations to their bank. The reasons for this are not hard to find; first, banks operate withcustomers’ funds which must be available on call; second, non-performing loans interfere negatively with the macro- economic stability of the country; third, to allow borrowers to go into perpetual default in loan repayments is to hand them a rope for financial suicide. Overall, it is never in the public interest to allow non-performing loans.” Linnet Ndolo, J (Jacob Kelly Omondi Onyango v National Bank of Kenya [2017] eKLR)

This policy brief seeks to address some of the salient principles necessary for reform of Uganda’s NPLstrategy with a view of improving the viability and resilience of the banking sector. A number of banks in Uganda are currently experiencing a big portfolio of NPLs, and it is generally accepted that highNPLs negatively impact on banks’ profitability thus negatively impacting bank lending to the economy. Capital constraints faced by banks with high NPL ratios may also lead to bank failures, which may cause financial instability and erosion of public confidence in the banking sector. According to the Bank of Uganda2 Annual Supervision of Report of 2015, an analysis of default bythe banks’ three largest borrowers and an increase in NPLs by 200 percent revealed large potential losses to the banking sector. The report revealed that if each bank’s three largest borrowers were to default, with a loan loss of 100 percent, 17 banks in Uganda would become under-capitalized with an aggregate capital shortfall of Ush. 595.4 billion.3