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Anti-Homosexuality Act Threatens Loan Repayment in Uganda

anti homosexuality act threatens loan repayment in uganda
anti homosexuality act threatens loan repayment in uganda
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Tuesday, October 10, 2023 – Bank of Uganda Warns of Rising Default Risks Amid NGO Funding Woes

Bank of Uganda has reported that banks are concerned that the recent enactment of the Anti-Homosexuality Act may lead to job losses, potentially resulting in a higher number of non-performing loans.

According to the Bank Lending Survey Report for the Fourth Quarter of 2022/23, Bank of Uganda expects an increase in default rates, particularly on household loans. This anticipation is rooted in the expected negative repercussions of the Anti-Homosexuality Act on funding for non-governmental organizations (NGOs).

The report highlights that the outlook for loan default rates is biased towards an increase due to possible job losses stemming from reduced funding to NGOs by international organizations. In part, the Bank of Uganda survey report states, “The default rate … is expected to increase … attributed to the recent Parliamentary legislation, which may lead to suspension of funding from international organizations for some NGOs in turn increasing the level of non-performing loans due to job losses.”

The report also identifies other factors contributing to the potential increase in non-performing loans. These include delayed payments to contractors by the government, adverse impacts from the Russia-Ukraine conflict, which have slowed economic recovery, and a gradual rebound from the effects of Covid-19.

Although the report does not explicitly specify the Parliamentary legislation in question, the recently enacted Anti-Homosexuality Act has elicited strong responses from international funders and lenders. The World Bank has already suspended new lending to Uganda, and others are considering similar actions. The Bank of Uganda’s report suggests that these actions might lead to job losses, consequently raising loan defaults, especially in the realm of household credit.

In May, President Museveni signed the Anti-Homosexuality Bill into law, provoking international criticism. The government maintains that the law only criminalizes the promotion and recruitment of young people into homosexuality.

The Bank of Uganda report also reveals that banks have reported an expected increase in defaults on household loans, with a net basis increase of 26.2 percent compared to the 11.6 percent recorded in previous survey results. Overall default rates for both enterprises and households are at 21.7 percent, with a net increase in default anticipated for firm size and long-term loans, while the default rate for short-term loans is expected to decrease on a net basis.

Furthermore, the report notes that banks intend to tighten terms and conditions for lending to riskier customers while relaxing terms for prime borrowers. The Bank of Uganda survey indicates, “Banks expect to tighten their price terms and conditions for average and riskier loans, while easing for prime borrowers.” Tightening for average and risky loans is attributed to high funding costs, high interest rates to compensate for risk, and delayed payments from contractors. Easing terms for prime borrowers is motivated by the need to retain customers and remain competitive in the market.

In terms of loan pricing, the report indicates that most banks anticipate maintaining non-price terms and conditions, with a bias towards tightening. However, the size of the loan and maturity are expected to ease on a net basis due to liquidity challenges, diversion of contract proceeds, and performance failures, which will result in collateral requirements being tightened.