Banks need to devise inclusive development goals in their growth paths – expert

In July, Stanbic Bank Uganda reported a significant rise in net income for the first half of 2023.Stanbic Bank Uganda Holdings Limited (SUHL) reported record earnings of UGX 200 billion for H1 2023, marking a 23.5% increase from UGX 162 billion in the same period last year.

According to the largest bank in the country, the impressive results were driven by a strategy of diversified and robust revenue growth, cost discipline, and effective risk management. All this was amidst a tough operating environment in Uganda during the first half of 2023, characterized by several challenges, most notably high inflationary pressures. The double-digit inflation reading of 10.4% in the first month of the year set the tone for economic conditions.

The Central Bank’s response to these pressures included maintaining the Central Bank Rate (CBR) at 10% to address inflation. While this strategy contributed to a gradual reduction in inflation to 4.9% in June, it also led to increased interest rates, impacting borrowing appetites in both consumer and commercial segments.

The Outlook Africa caught up with Simon Lwanga (SL), an economist and social commentator to speak into how banks continue to register profits in challenging economic times.  

1. Question: It’s often reported that banks and financial institutions in Uganda are posting significant profits in billions. However, the broader economic picture portrays Uganda as having a struggling economy. How do you reconcile these seemingly conflicting narratives?

SL: It’s crucial to recognize that the profitability of banks and financial institutions does not necessarily reflect the overall health of the entire economy. Banks generate profits primarily through their lending and investment activities, which may not directly correlate with the performance of other sectors of the economy. Additionally, the financial sector can thrive even in challenging economic conditions by managing risks effectively and targeting specific market segments. Hence, while banks may be profitable, the broader economy may still face challenges like unemployment, income inequality, and structural issues that contribute to the perception of an ailing economy.

• Question: Uganda’s banking sector continues to expand with new entrants and branches across the country. Does this growth translate into tangible benefits for the broader population, or does it exacerbate economic disparities?

SL: The expansion of the banking sector in Uganda is a double-edged sword. On the one hand, it increases access to financial services for a larger portion of the population, enabling savings, investments, and access to credit. However, it’s essential to acknowledge that the benefits of this expansion are not evenly distributed. While urban areas may experience improved access to financial services, rural and marginalized communities might not enjoy the same advantages. This growth can indeed exacerbate economic disparities, particularly if measures are not taken to promote financial inclusion and ensure that banking services reach underserved populations.

• Question: Critics argue that the profitability of banks in Uganda is partly due to high-interest rates and fees charged to consumers. How does this impact the overall economic well-being of Ugandans, particularly those with limited financial means?

SL: High-interest rates and fees in the banking sector can have adverse effects on consumers, especially those with limited financial means. While they contribute to the profitability of financial institutions, they also increase the cost of borrowing and accessing financial services for individuals and businesses. This can hinder economic growth by discouraging investment and entrepreneurship, ultimately affecting the well-being of Ugandans. Balancing the profitability of banks with the need for affordable financial services is a critical challenge that policymakers must address to ensure that the financial sector contributes positively to the economy.

• Question: Uganda’s economy faces various challenges, including high levels of unemployment and poverty. How can the banking and financial sector play a more significant role in addressing these socio-economic issues?

SL: The banking and financial sector can indeed play a more substantial role in addressing Uganda’s socio-economic challenges. They can do so by developing innovative financial products that cater to the needs of small and medium-sized enterprises (SMEs), promoting financial literacy and inclusion, and supporting initiatives that create jobs and reduce poverty. Additionally, financial institutions can work closely with government agencies to implement policies that stimulate economic growth, such as providing credit facilities to sectors with high job creation potential, like agriculture and manufacturing.

• Question: Some argue that the profitability of banks is driven by lending to the government through treasury bills and bonds. How does this practice impact the real economy and the private sector’s access to credit?

SL: Lending to the government through treasury bills and bonds is a common practice among banks and financial institutions in Uganda. While it provides a relatively safe avenue for banks to invest their funds, it can have implications for the private sector’s access to credit. When banks allocate a significant portion of their funds to government securities, it can limit the resources available for lending to businesses and individuals. This may result in higher interest rates for private sector borrowers and potentially stifle economic growth. Striking the right balance between government borrowing and supporting private sector credit access is essential for a healthy financial sector and overall economic development.