Banks Coin Cheap Credit for Exporters as Pandemic-era Loan Arrears Bite

Manufacturing for export is poised to become cheaper following the implementation of the 1 trillion-Shilling fund; the Regional Export Facility by the local banking industry for manufacturers.

The financial institutions under their umbrella body, Uganda Bankers’ Association (UBA) say that the facility is aimed at boosting Ugandan entrepreneurs involved in the production of goods meant for export to the East African Community countries. It will also support exporters to regenerate and grow export volumes to the regional markets.

Goods manufactured in Uganda for export to the region include construction products like cement, steel bars, iron sheets, and paint, among others. Fast-moving consumer goods include scholastic materials, personal care products like cosmetics, textiles, foam products etc.

According to UBA, the initiative had been developed as a special industry intervention to support economic recovery given the post-COVID-19 effects that saw global, regional and local markets locked down for at least 2-years, leading to loss of markets and attendant cash flows.

UBA Chairperson, Sarah Arapta, added that “Uganda has a strong manufacturing and trading hub capable of serving the regional markets which if well leveraged could be a key engine of growth.” 

Compared to the regional market, Uganda’s manufacturing sector also has a huge agro-processing component including many food and agricultural products like grain or cereals, vegetables, oil products animal and poultry products, both alcoholic and non-alcoholic drinks and others suitable for regional export.

Arapta, however, says that apart from financing, exports face many challenges, including security across borders, disharmonized trade and tax policies and other infrastructure issues.

According to the terms of the facility, there are no limits to how much one can borrow, while small borrowers like those in need of fewer than 10 million Shillings are encouraged to organize under groups.  The credit can be repaid in up to five years depending on the agreement with the participating financial institution.

Wilbrod Owor, the Executive Director, of the Uganda Bankers Association says that at a 12 per cent per annum interest, or 6 per cent for a dollar-denominated loan, there should be no need for the business community to go for money lenders. He says, however, that many people are attracted by the wording of the contracts by the moneylenders who state their interest rates per month, instead of per year.

Owor says that this is the first phase of the facility involving tackling the indebtedness of the business community. He says following the outbreak of COVID-19, the banking industry did what it could especially restructure loan facilities held by customers, but that this became too much to bear after more than two years.

The second phase, he says, will involve various ways of easing the burden of loan arrears, in conjunction with international lenders like the World Bank and Afreximbank.

The facility available effective November 1, 2022, will be accessed through participating financial institutions, which include Commercial Banks, Licensed Credit Institutions and Micro-Finance Deposit-taking institutions regulated by the Bank of Uganda.

The borrowers should have evidence of orders/buyers/off-takers and receivables coming into Uganda from regional sales with their loan accounts with their respective bankers technically performing. The participating financial institutions are responsible for assessing potential borrowers in line with their credit policies, processes, and the facility’s guidelines.

Another major aim of the facility is to overcome the challenge of risk that commercial banks present as one of the reasons for cautious lending to Uganda’s investors.

However, Dr Twinemanzi Tumubweine, the Executive Director of Supervision at the Bank of Uganda says that if a manufacturer wants to install new equipment, for example, the lender can reduce the risk by paying the money directly to the equipment supplier instead of handing over cash to the borrower.

The Uganda Manufacturers Association welcomed the facility but says there needs to be reform in the government and private sector trade promotion agencies like banks. Gilbert Kibekityo from UMA Policy Department said there are many other challenges faced by manufacturers regarding red tape and others which make their business expensive and slow, even when they have access to credit.

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