The level of non-performing loans in East African banks on the decline

Jun 20, 2011

The level of non-performing loans (NPL) in East African commercial banks have drastically dropped, which signifies that the banking industry in this region is in a good shape. Banks’ asset quality is a key indicator of the quality of banks’ credit and overall risk of default (credit risk).

Unlike in the 1990s and up to early 2000s when the level of the non performing assets (non-performing loans) in East African commercial banks were at 50 per cent and above. Banks’ performance in the year 2010 was also characterised by strong credit growth to the private sector and, a sharp rise in foreign currency loans during the last half of 2010 across East African region. The Bank of Uganda Annual Supervision Report for 2010 indicates that the level of non-performing loans in Ugandan banks stood at 2.2 per cent, in Kenya the ratio of non-performing loans in Kenyan banks was 6.2 percent as of end of December 2010, in Tanzania the ratio of non-performing loans closed at 6.7 per cent as of end of December 2010, and Rwanda registered ratio at 11.3 per cent.






The Bank of Uganda states in its annual supervision report that overall, bank asset quality in Uganda has improved in the period after the global crisis and continues to be good. The level of banks’ NPLs has since declined to 2.1 percent as at December 2010 compared to 4.4 per cent in 2009. By way of comparison within the East African region Uganda banks have the lowest level of nonperforming loans compared with other countries within the East African Community.

Speaking specifically on Uganda’s banking industry, the governor Bank of Uganda Professor Emmanuel Tumsiime Mutebile explains that during 2010, Uganda’s financial sector registered strong growth, reflecting the rebound in economic growth which took place on the second half of 2010 together with heightened competition in the banking sector. “The performance of the banking industry improved, as manifested in higher asset quality and profitability. The ratio of non-performing loans to total gross loans decreased from 4.2 percent of total gross loans in December 2009 to 2.1 percent in December 2010. Commercial banks remained well capitalized,” he said.

Professor Mutebile said aggregated across the banking system, the core capital to risk weighted assets ratio was 17.4 percent as at December 2010, far above the regulatory minimum level of 8 percent. “Profitability also improved, including among the new banks whose operating costs reduced significantly. Earnings grew by 13.8 percent for the year to December 2010,” he said.

Bank profitability improved, particularly for the new banks whose operating costs were significantly reduced. For Uganda’s case in particular, Earnings and Profitability, the Bank of Uganda explained in the report that as at the end of December 010, banks’ earnings had reached Shs.268.7 billion ($134 million) compared to shs.236.1 billion($118 million) in December 2009. The rise in banks’ earnings was due to improved performance during 2010 especially in the quarter ending December 2010.


As the level of nonperforming loans in banks continues to drop, the level of credit growth in the East African Community is growing raising hopes that the financial sector in the region is picking up. It also indicates the economies in East African region are growing at higher rate than most economies in the Sub-Saharan African Continent. The financial sector is one the catalysts for high economic growth since the sector acts as conduit for expansion of private enterprises in a particular country. The International Monetary Fund puts economic growth in the East African Community states at 5.5 per cent for the year 2011 driven by recovery in the global economy leading to increased economic activities in EAC states.

The Bank of Uganda says one indicator of rapid credit growth recommended by the BCBS is the ratio of private sector credit to Gross Domestic Product (GDP. For Uganda, this ratio was 15.7 percent as at end December 2010, up from 7.9 percent in December 2005. Within the East African region, the ratio of private sector credit to GDP for Kenya as at end of September 2010 was 66 percent, Rwanda at 17.3 percent, while Tanzania was at 36.2 percent. Bank of Uganda officials in Supervision Department points out that from the above perspective, the recent growth in credit, although fairly rapid, may reflect convergence with the levels of the other EAC states.


Martin Luther Oketch, Kampala, Uganda