By Mulengera Reporters
A voluminous report by National Planning Authority (NPA) has assessed the strong and weak points associated with the operations of Uganda Development Bank (UDB).
The report was preceded by an inquiry assessment that was directed by the Finance Ministry whose officials desired to know what must change for the long-term development finance-providing UDB to be able to play a more impactful role as Uganda rolled out its National Development Plan (NDP) 4. This NDP 4 is for five years; counting from July 2025 to July 2030.
Ideally, UDB, which is GoU-owned and funded, is charged with providing private sector businesses with affordable long-term financing with longer repayment periods and low interest rates.
The idea is to fund strategic business projects which are strategic for Uganda’s socio-economic transformation agenda, and the achievement of the 10-fold growth strategy (enlarging the country’s GDP to $500bn), yet the commercial banks can’t viably fund them because they seldom have such patient capital.
In their report, the NPA researchers demonstrate how UDB’s billions can be lent out at an even much lower interest of 8%, compared to the current 12%. Gratefully, this is something the Finance Ministry and the Bank’s clients/the borrowers have been advocating for.
The NPA report shows that this is achievable once UDB’s “credit risk premium assumption” is lowered from the current 5% where its capped, to 3%. That the high credit risk premium assumption accounts for 42% of the 12% interest that UDB charges today.
The report shows that its possible for UDB to viably lend at 8-10% because the money it lends out isn’t obtained at a very high cost. More than 70% of it is sourced or derived from capitalisation provided by the GoU. With the cost of funds being as low as this, the NPA concludes its possible for UDB to lend at 8% and still remain viable.
That lowering the interest rate from 12% to 8% will enable UDB to more meaningfully play its mandated role of being a catalyst for Uganda’s socio-economic transformation by leveraging high-impact sectors such as the ATMS (Agriculture, Tourism, Manufacturing & Services), which commercial banks are always reluctant to finance or invest in.
The lowered interest rate will also improve loan repayment, besides making UDB funding more inclusive and accessible to more private sector players including SMEs, women and youth-owned business enterprises.
The NPA report calls upon the UDB management to realize that, being one of Development Finance Mechanisms which receive interest-free funding from the GoU, the Bank is expected to have high risk appetite while making lending decisions.
The report also reflects on the fact that UDB also relies on government-backed borrowing for all the additional monies it uses to lend to the private sector. The GoU does all this because there is need for UDB to drive and spearhead inclusive growth by funding projects in sectors often underserved by commercial banks, which by their nature tend to be risk-averse. The report argues that, on the contrary, UDB ought to be well-possessed with risk appetite.
The report also highlights the fact that the SMEs and women/youth-owned businesses, which UDB considers to be typically high risk and hard to recover monies from, constitute only 5% of the Bank’s total loan portfolio. That the Bank should leverage “targeted de-risking instruments” to preserve/ring-fence access to long-term financing for special programmes.
That once such de-risking instruments are effectively deployed, the report notes, reducing the interest rate from 12 to 8% “will only have a marginal impact on UDB’s overall risk exposure.” This is so because “higher risk segments account for a small share of the portfolio.”
The report also shows that the moment the Bank’s capital and borrowing terms-related constraints are addressed, there is no way mere lowering of the interest rate from 12% to 8% will complicate compliance with UDB’s own debt servicing obligations.
The NPA report proposes that the lowering of interest rate from 12% to 8% be accompanied with increased advocacy for increased capitalisation by government, strengthened credit risk management and increased leveraging of de-risking instruments such as the African Guarantee Fund, which the Bank is already leveraging to enable otherwise would-be excluded SMEs and women/youth-owned business enterprises qualify for access to the long-term financing packages which UDB specializes in.
Adhering to the NPA proposal of reducing the interest rate from 12% to 8% will not only be consistent with government policy of making access to long-term finance more inclusive but will also have the effect of making UDB the “the most affordable development finance institution” on the African continent.
The report also condemns UDB’s imposition of fixed upfront loan appraisal fees of 1% of the total loan value as being prohibitive. That requiring an already liquidity-constrained business seeking a loan of Shs3bn to first pay Shs30m (which is non-refundable) and upfront, before eligibility assessment can begin, can only be counterproductive.
The report shows that the same only makes access to long-term development finance more expensive and costly. This can deter especially women/youth-owned SMEs from accessing development finance which they require to go into high-impact projects.
“This [1% loan appraisal fees] risks excluding viable borrowers and reducing inclusivity with some applicants turning to private money lenders to raise the appraisal fee,” the NPA report observes likening the situation to having to dig one hole to fill another. The report calls on UDB to consider waving this fee for some category of borrowers and to also consider a flexible rate depending on borrower category.
In comparison, other GoU-enabled development finance mechanisms (DFMs) charge much less for loan appraisal fees (whose primary purpose is to enable the Bank meet loan processing expenses).
It’s just 0.5% for Agricultural Credit Fund under BoU and in the case of Uganda Development Corporation (UDC), the same is charged only on successful borrowers.
UDB’s 1% is considered to be extortionist by some key stakeholders because every loan applicant has to pay it regardless of whether his loan application succeeds or not. For better sustainability, the NPA report calls on UDB to emulate this same arrangement.
The NPA report also contests the 5% late payment fee which UDB imposes in a blanket manner. The report proposes that the genuinely constrained borrowers and fraudulent/intentional defaulters should be distinguished and treated differently. Those who fraudulently default should be subjected to the 5% as those (unintentional defaulters), who are genuinely constrained are either made to pay less penalties or supported through loan restructuring.
The report authors challenge UDB to emulate and benchmark on its peer DFMs like Microfinance Support Centre and Post Bank/ACF which respectively charge 1% and 0.42% as late repayment fees.
The report condemns the imposition of 5% by UDB on especially genuine/unintentional defaulters because, in effect, the same raises the cost of borrowing from Uganda’s only development bank to 17%. This must be avoided because it has the effect of “constraining business recovery and continuity.”
