30 March 2016

Time to address turmoil in the banking sector



Earnings season for financial year 2015/2016 is due at the end of the next quarter. Financial services and information and communications technology were hailed at one time as the natural replacement for agriculture and industry where growth has largely lagged behind. This straight face extended to phantom earnings published out of the tourism sector to the tune of $1 billion when most hotels barely register 20 per cent annual occupancy.
However, a country’s banking sector is not a joking matter. The collapse of UCB in the 1990s on the back of a botched sale to Westmont Holdings wreaked havoc to communities, some of which permanently fell off the economic grid.
In the mid-2010s, another quiet transformation is taking place in the economy. There are more banks in the country as our 37 million population may dictate. However, Uganda’s economy remains a paltry $14 billion in size, middling and unstable. The growth of the private sector has been arrested by the rapid growth in the size of government. Government is expanding at a faster rate than the private sector.
The nature of this relationship – when government grows faster – requires more taxes to feed the big brother. Personal income taxes since 2012 have clocked in at 40 per cent plus a 10 per cent surcharge on incomes over Shs120 million per annum. Employers on top of this have to provide for another 10 per cent cap payable to the National Social Security Fund.
In 2014, government – after maxing out direct taxes – turned to indirect taxes with great effect. It adopted excise duties on fees levied by commercial banks on services rendered to customers. Excise duties normally associated with manufacturing creeped into the service sector with a 10 per cent surcharge on each fee banks levy. Banks (lazy on loans and growing fat on fees were already vulnerable) simply deduct these fees from each transaction. This effect, especially on fees which affect the lower income customers, has been devastating. Overdraft fees, holding charges, minimum balance charges all attract an excise duty.
The story of non-performing loans is growing steadily. From 2014 to 2015, one of the largest loans ever in Uganda in the aviation sub-sector failed with a 100 per cent write-off. Not a single plane ever hit the skies. It nearly matched the raid on the liquidation account at the Registrar of Companies 10 years before to fund another bird in the sky that never took off.
One of the major banks seemed to weather the storm by spawning an unsustainable real estate business. For each loan that fails, its affiliate steps in to remodel premises, sprucing them up for rent. But this curve will soon start to invert under pressure from a shrinking business sector.
Pressure on mobilisation of funds is likely to expose banks in the near term to new tax levies on customer deposits. The delay in oil revenue will put more pressure on government to meet its obligations. In 2015/2016, government has limped from quarter to quarter, shuffling its obligations while struggling to meet huge interest payments on Shs900 billion in current annual borrowing requirements or 15 per cent of the Budget. Eurozone guidelines recommend just 3 per cent annual deficits, 6 per cent is deemed irresponsible so 15 per cent is simply drunk.






After the census report was silent on both unemployment, concentrating on outdated labels (religion and tribe for instance), government may be forced to do something about unemployment. But just like the banks now limping, it may not be able to do much – the huge deficit has sucked up domestic resources for investment and employment.






Mr Ssemogerere is an Attorney-at-Law and an Advocate. kssemoge@gmail.com






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