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Financial Institution Risk Assessment in Uganda Highlights Challenges Amid Improving Conditions
A comprehensive report on financial stability risk assessment has been released, providing an in-depth analysis of the complex landscape of risks and opportunities facing Uganda’s financial institutions. While systemic risks have eased due to improved macroeconomic conditions and strong buffers, challenges remain, particularly in credit growth, liquidity, and market risks.
Key Risks to Financial Stability Identified
Systemic Risks
Systemic risks have moderated further, attributed to improved macroeconomic conditions and robust capital and liquidity buffers held by Systemically Important Financial Institutions (SIFIs).
- Macro risks have eased, with lower inflation and relative stability in the foreign exchange market.
- However, challenges persist as economic growth recovery is yet to be fully reflected in credit extension and asset quality within banking institutions.
Liquidity and Funding Conditions
Liquidity and funding conditions have improved, supported by: + The loosening of tight monetary policy + Increased customer deposits + Reduction in wholesale funding costs
- Concerns arise regarding the concentration of deposits within some banking institutions.
Credit Growth
Credit growth is on a recovery trajectory, with a decrease in the non-performing loans-to-gross loans ratio attributed to: + Prudent write-offs + Lending growth
- However, banks grappling with legacy loans affected by COVID-19 continue to report elevated non-performing loan levels.
Capital Buffers
Aggregate capital buffers remain robust, with most banking institutions complying with minimum regulatory capital requirements. However, profitability and solvency may be impacted by: + Non-performing loans + Operational risk incidents
Market Risks
Market risks have been mitigated by: + Stability in foreign exchange rates and interest rates + Sustained moderate growth in real estate property prices
- This reduces the banking sector’s credit risk exposure.
Outlook and Policy Implications
The Bank of Uganda has pledged its commitment to closely monitoring Systemically Important Financial Institutions (SIFIs) and ensuring compliance with prudential limits. While the overall risk outlook appears stable, vigilance is warranted, particularly concerning the ongoing recovery process and potential vulnerabilities within the banking sector.
- The report underscores the importance of maintaining a balanced approach to risk management, regulatory oversight, and policy interventions to sustain financial stability, monetary policy, and support Uganda’s socio-economic transformation agenda.
- The Financial Stability Risk Assessment Report serves as a crucial tool for policymakers, regulators, and market participants in navigating the evolving landscape of financial risks and opportunities in Uganda.