The presented Financial Stability Risk Assessment Report navigates a complex landscape of evolving risks and opportunities. While systemic risks have eased due to improved macroeconomic conditions and strong buffers, challenges remain. This analysis dives into key risk categories like credit, liquidity, and market risks, highlighting areas like uneven credit growth, concentrated deposits, and lingering impact of COVID-19 loans.
Despite robust capital buffers, concerns about profitability and solvency linger. The report concludes with the Bank of Uganda’s commitment to close monitoring and emphasizes the need for a balanced approach to manage risks and achieve lasting financial stability, ultimately supporting Uganda’s socio-economic transformation.
Summary of Key Risks to Financial Stability
The report outlined the current risk landscape, providing insights into various risk categories and their projected directions. Notably, 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 have improved, supported by the loosening of tight monetary policy, increased customer deposits, and a reduction in wholesale funding costs. Despite this positive trend, concerns arise regarding the concentration of deposits within some banking institutions.
Credit growth is on a recovery trajectory, with a decrease in the non-performing loans-to-gross loans ratio attributed to prudent write-offs and lending growth. Nevertheless, banks grappling with legacy loans affected by COVID-19 continue to report elevated non-performing loan levels.
The report indicates that 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 and operational risk incidents.
Market risks have been mitigated by stability in foreign exchange rates and interest rates, coupled with sustained moderate growth in real estate property prices, which reduces the banking sector’s credit risk exposure.
Outlook and Policy Implications
The main speaker Dr Tumubweine Twinemanzi on behalf of Bank of Uganda, pledged the continued its commitment to monitoring Systemically Important Financial Institutions (SIFIs) closely 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 underscored 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.
