Mutebile upbeat about banking prospects as NPL’s narrow but urges attention to reputational risk

July 28, 2018 in Business, Financial Services, Policy by Editor

July 28, 2018 – Uganda’s financial sector has largely turned the back on the negative run it has endured since 2015 but managers of financial institutions need to cultivate a more proactive management of reputational risk, central bank Governor Emmanuel Tumusiime Mutebile said in remarks during a Uganda Bankers Association informal dinner last night.

Prof Mutebile said data to the end of June 2018 showed positive numbers for fifth consecutive quarter with the ratio of non-performing loans to total loans down from 5.3 percent at end March 2018 to 4.4 percent at the close of June 2018.The industry has also seen some reduction in the cost to income ratio, while after tax return on assets rose marginally.

“We have now observed five consecutive quarters of improving financial performance among banks, driven primarily by stronger loan quality. As such, we can say that the rise of non-performing loans that hit the banking sector in 2016 has abated,” Mutebile said adding that the  industry now has strong capital and liquidity buffers, that provide a solid platform for growth of financial intermediation for the rest of the year.

He observed that for the first time since 2015, credit to the private sector had trended in double digits starting Q2, 2018.

Despite the progress, the industry now needs to pay closer attention to reputation risk by redoubling efforts to build public confidence in the financial sector he said. He observed that despite a solid base, dfcu Bank had been a victim of attacks on its reputation in recent weeks.

“dfcu Bank has recently been subjected to a series of false allegations in the social media and online publications, concerning changes in its ownership structure, governance, and liquidity position. These false allegations sought to malign the bank. Fortunately, they have failed. dfcu Bank’s operations have progressed normally and the bank remains in a strong liquidity position.

“Nevertheless, this most regrettable episode demonstrates the need to build resilience to reputational risk by widening and deepening the moats (defences) for protecting public confidence in the banking system, especially in the current age where falsehoods spread rapidly through digital channels,” he said.

Mutebile said the boards and managers of financial institutions need to prioritize reputational risk management, by developing proactive communications strategies with effective crisis control measures as well as the capacity to thwart fake news.

“And because prevention is better than cure, I urge all members of UBA to maintain strict adherence to the Code of Good Practice, particularly by avoiding negative references to competitors while marketing specific banking services and products. We are all aware of the reputational damage suffered by several major financial institutions in the industrial economies as a result of misconduct by their staff, such as in the LIBOR fixing and the miss-selling of mortgages scandals in Europe and the United States.”

He concluded by stressing that the worst was over for local lenders given, the rebound in economic growth, low and stable inflation regime as well as improved across the board performance in the sector.

“I therefore believe that we have reason for optimism about the future of our banking industry; especially if we remain vigilant and resilient against the emerging risks,” Mutebile concluded.