New accounting standard will make loans, insurance expensive

“Financial institutions will now need to factor in securities held as collateral on loans bearing in mind on how they will be sold to in case the client fail to pay back the loan.”

Kibbedi said there’s going to be ‘too much’ pressure on customers to repay their loans or credit as financial institutions strive to minimise any chances of default.

This new development comes at the time the country’s banking industry anticipates a slow growth in their profits for 2017 as a result of slow private sector credit uptake amidst a reduction in interest rates from an average of 24% last February to around 18.9% at the moment.

Latest data from Bank of Uganda shows that the banking industry’s net profit dropped from Shs541 billion in December 2015 to Shs302 billion in December 2016 citing reduction in private sector credit.

The industry’s Non-performing loans (NPLs) to total gross loans rose from 5.3% to 10.5% in the period between December 2015 and December 2016; this led to a slowdown in private sector credit growth and a drop in bank profitability.

However, return on assets for the industry declined from 2.6% in 2015 to 1.3% in 2016; return on equity almost declined by 100% from 16% in December 2015 to 8.3% in the same time in 2016.

However, on the positive note, the cost to income ratio reduced by 2.2% to 67.2% in December 2016.

This development also coincides with slow growth in Uganda’s insurance industry, whose penetration has remained below 1%, behind Rwanda, Tanzania and Kenya, whose insurance penetration stands at 1%, 2.3% and 3.4%, respectively.

Banks to be cautious with issuing loans

Fabian Kasi, the managing director at Centenary Bank, who also doubles as chairman of Uganda Bankers Association (UBA), said with the new financial standard, banks will be more cautious as they extend loans and other lines of credit, and that they must always be adequately capitalized.

“There may also be a tendency to give more short term loans so as to roll back the provisions sooner than later to minimize effect on capitalization of banks,” he told The Independent, adding that the prices of letters of credit guarantees performance bonds, and unutilised overdraft limits are likely to go up.

Insurance firms will also tighten their scrutiny prior to issuing policies to individuals or companies on credit, said Wilson Kaindi, Senior Manager Audit at KPMG during the insurance industry’s CEO meeting held in Kampala on Jan 25.

At the moment, Bank of Uganda is preparing commercial banks on how to absorb and conform to the new IFRS 9, said BoU Governor, Emmanuel Tumusiime Mutebile, during the Uganda Bankers Association dinner in Kampala on Jan 31, 2018.

“The BoU issued a Circular to all supervised financial institutions (SFIs) on July 12, 2017 requiring them to submit reports on their preparedness to implement IFRS 9 as well as the impact of the standard on Capital Adequacy,” he said.

The reports submitted indicated that SFIs were at varying stages of preparedness with regard to putting in place the requisite IFRS 9 Governance Frameworks, Policies, Procedures and Information System capabilities. The BoU will continue to assess the banks’ IFRS 9 implementation programs.”