By Mulengera Reporters
Mid-last year, the Finance Ministry directed National Planning Authority (NPA) to carry out an impact assessment; evaluating the performance of government-owned Uganda Development Bank (UDB), while advising on key reforms that must be undertaken for the Bank to more meaningfully contribute to the realization of the country’s long-term development aspirations as articulated under the Vision 2040 and the NDP4 (2025-2026).
In their report, the NPA researchers made recommendations guiding on many things including the need to further capitalise UDB. It’s these capitalisation funds, provided by the GoU, that the Bank uses to catalyze the deepening of private sector participation through availing affordable long-term financing. This funding must be targeted to business projects and undertakings whose objectives and priorities are aligned to the Vision 2040 and NDP4.
The newly published report asserts that without adequately capitalizing UDB, the GoU’s desire to achieve sustainable growth while closing the country’s long-term financing gap, won’t be realized. The report shows that absence of adequate capitalization explains why UDB can’t disburse money to even a half of the approved loan applications or investment projects belonging to the private sector.
That, for instance during the year 2024, the Bank’s approved investment pipeline stood at Shs1.5trn (in otherwards loan applications worth Shs1.5trn were assessed/evaluated and found to be viable and approved) but only Shs389bn was actually disbursed, largely due to liquidity constraints afflicting UDB. There are always other low absorption-causing factors but in UDB’s case, as of that year, actual disbursements were hampered by liquidity-related constraints more than anything else.
The report says: “This widening demand-supply gap highlights the urgency for additional government capitalisation to expand loanable resources and meet growing private sector demand for long-term finance.”
The NPA assessment report also pronounces itself on the fact that even additional liquidity sources, such as the $10m (Shs38bn) facility from Islamic Development Bank, haven’t been able to significantly improve the actual loans disbursement rate at UDB. The funds’ absorption rate regarding this IDB funding continues to be at 29%. This is happening amid the ever-growing unmet private sector demand for long-term financing.
Whereas the NPA report rebukes the UDB management for such low absorption rate (of just 29% yet Shs38bn is available), it’s clear that no other source can substitute for the need to increase core capitalisation by the GoU.
To enhance business competitiveness while deepening private sector participation in the actualization of Uganda’s long-term development agenda, including enlarging the GDP from the current $50bn to the desired $500bn by 2040, the report recommends need for the UDB lending rate or interest rate to be lowered from today’s 12% to between 8% and 10%.
But the report authors hasten to add that for that interest rate reduction to be viably and sustainably achieved, core capitalization of the Bank by the GoU must be prioritized. Increased capitalization is the ‘financial buffer’ UDB requires for its continuity, the report stresses. It’s also only through increased capitalization that reduction in UDB’s reliance on concessional debt from external sources can be achieved, as is being desired by the GoU, which 100% owns UDB.
As a minimum, the NPA report recommends that within a period of five years, the GoU prioritizes and capitalizes UDB with an additional Shs2.175trn which can come or be availed in a phased manner. “This strategic investment will enable UDB to expand its loan portfolio, sustainably reduce lending rates from 12% to 8%, strengthen its revolving fund and increase domestic funding mobilization.” As all that happens, the UDB management too must become prudent by more efficiently utilizing other available liquidity facilities such as the Shs38bn from IDB.
The report concludes that it will only be through “increased capitalization that UDB will be positioned to operate as a financially self-sustaining development bank within five years.” That being able to offer “the lowest lending rates in the country for high-impact investments” will enhance UDB’s capacity to positively contribute to the realization of Uganda’s long-term development aspirations enshrined under the Vision 2040 and NDP4.
On staffing capabilities, the NPA report also regrets the fact that less than 40% of the about 150 staffers UDB currently has have the requisite long-term development finance expertise and the skills set that is required for the Bank to effectively deliver its core mandate. Over 60% of employees are specialized in fields like commercial banking, accounting and finance-and not development finance which their employer (UDB) is mandated to deliver upon, the same being its core mandate.
There is need to “achieve a balanced skills mix through targeted recruitment and specialized training [to] enhance the Bank’s ability to combine financial sustainability with transformative impact.” It’s for this reason that the ongoing staff training collaboration between UDB and the Association of African Development Finance Institutions (AADFI) is commended in the report. But it’s made clear in the next subsequent part of the report that such improvised arrangements can’t substitute the need to have staff enroll for “formal courses in development finance, project structuring and concessional lending,” which are the exact skill sets which are required “to build deeper institutional capacity” for the Bank. (For comments on this story, get back to us on 0705579994 [WhatsApp line], 0779411734 & 041 4674611 or email us at mulengeranews@gmail.com).
