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Bob Twinomugisha

Role of UDB in Socio-economic Development of Uganda over the Last 60 Years

The Bank’s total assets increased by 60,110% from Shs199.3 billion in 2013 to 1.2 trillion in 2021. The Bank’s growth is attributed to good governance, astute leadership, and strict adherence to compliance.
posted onNovember 7, 2022

Uganda Development Bank (UDB) was established in 1972 by a presidential decree purposely to finance technically feasible, economically viable, and socially desirable projects.

Between 1973 and 1985, UDB financed 691 projects worth US$170 million with major investments in the industry, livestock, fish processing, tea, coffee, cotton, sugar, and cement sectors among others.

The civil unrest that the country experienced between 1982 and 1994, adversely affected the Bank’s performance creating a slowdown in project implementation and project supervision resulting in a distressed investment portfolio.

By 1996, the Bank suffered huge accumulated losses, and servicing external credit was a burden to the Government of Uganda. The Bank also experienced high rates of non-performing loans (NPLs) linked to poor collections at the time.

In 1997, the Government of Uganda, implemented deliberate efforts to revamp UDB operations. The GOU placed UDB under restructuring (till 2000), purposely to turn round the Bank (into an efficient, self-sustaining institution, well-capitalized & with adequate reserves).

New lending was frozen at the time. In May 2001, Uganda Development Bank Limited (UDBL) was incorporated for autonomy and the Bank’s Turnaround process commenced.

The Bank’s mandate was redefined to profitably promote and finance viable economic development projects in Uganda. The investment portfolio was restructured. The profitable projects were retained while the non-performing assets (NPAs) were moved to Non-Performing Assets Recovery Trusts (NPART).

From 2013 to date, there has been a renewed growth trajectory year-on-year across the entire institutional portfolio (capital, lines of credit & investment of reflows, asset base, profitability, human, and technology among others).

The Bank’s total assets increased by 60,110% from Shs199.3 billion in 2013 to 1.2 trillion in 2021. The Bank’s growth is attributed to good governance, astute leadership, and strict adherence to compliance.

Uganda Development Bank is the country’s Development Finance Institution mandated with the social and economic development of Uganda.

The Bank provides financial and non-financial services to Small and Medium Enterprises (SMEs) and largescale enterprises in key growth sectors including agriculture, industry, tourism, infrastructure, human capital development, and other cross-cutting areas such as Climate Change, SMEs, Women, and Youth among others purposely, to reduce poverty levels, build sustainable food system and industrialize Uganda, as we strive to improve the livelihood of Ugandans.

The financial products offered by the Bank include term loans, asset finance, private equity, trade and working capital, project finance, and farmer group financing.

In 2021, the Bank introduced non-financial products i.e, Business Accelerator for Successful Entrepreneurship (BASE) and project preparation services.

Through BASE, the Bank provides advisory services to clients pertaining to management best practices, good governance, record keeping, and financial management among others. This is done, by way of training and technical support, to develop and implement the required processes in the businesses.

The objective is to have professionally run businesses and enterprises which as a result reduces the risk of default on financed projects.

UDB also provides project preparation services to fill the gap of inadequate stock of bankable projects that are required to propel development, including public projects. The Bank supports moving identified projects from concept design, pre-feasibility studies, feasibility studies, financial structuring, and to commercial operations.

Fundamentally, UDB has played a key role in addressing the key failures and distortions in the credit market through the provision of cheaper loans for medium to long-term projects.

Currently, the Bank provides concessional loans, with 10-12 percent interest rates per annum.

Secondly, UDB continues to play a counter-cyclical stabilization role by scaling up lending operations when other financial institutions experience temporary difficulties in providing credit to the private sector.

For instance, the Bank increased its disbursements to key growth sectors during the Covid-19 pandemic period of up to Ush. 589 billion (Aug 2020-Dec 2021).

Thirdly, it plays a risk absorption role for the state during economic downturns. This has been done by revamping collapsing industries and supporting the sectors in dire need for credit during a crisis (crisis resolution vehicle).

During the pandemic, the Bank supported the hardest-hit sectors such as tourism and education. In 2020 and 2022, UDB in partnership with European Union, allocated funds in form of grants attached to a loan to enable the tourism sector to revive through the hardship of the Covid-19 pandemic.

The Bank also offered a moratorium to the education sector, refinanced development projects from other financial institutions, and increased support for the manufacturing sector in the drive to promote import substitution and export-oriented production during the Covid-19 crisis, about Ush163 billion was disbursed between August 2020 and December 2021.

Over the last 5 decades, UDB has been striving to maximize social welfare more as opposed to profit maximization, charging low-interest rates, low appraisal fees, offering patient capital, and adequate grace period. The Bank has been driving economic structural transformation through industrialization, agricultural productivity, and infrastructure development and contributing to the transition of enterprises from the informal to the formal sector.

The manufacturing and agriculture sectors account for over 75 percent of the Banks’ portfolio, signaling increased investment toward economic transformation. UDB has significantly contributed to inclusive growth and rural development by providing specialized products to sectors such as special programs to benefit SMEs, Women, and Youth.

Import substitution and export promotion

The Bank promotes foreign trade through interventions like export enhancement and import substitution. Of recent, the Bank launched an import replacement/substitution and export-oriented program. This initiative supplemented the trade and working capital solutions, which the Bank has been offering over the last 5 decades.

Additionally, the Bank continues to promote the development of entrepreneurs. It facilitates entrepreneurship development by providing training to entrepreneurs to develop leadership and business management skills.

To this effect, UDB established Business Accelerator Program for Successful Entrepreneurship (BASE). The Bank also co-finances with the private sector, mainly in development projects that need a relatively large capital. UDB has an equity unit that can invest up to 25%, into identified projects that require equity to unlock their potential.

Development Banks (DBs) have historically been established for economic and social reasons.

Typically, they are set up to address the cost and hence scarcity of financing, and other market failures that may limit investment and consequently, slow growth. Development Banks have also been established in countries to complement the credit that existing financial intermediaries provide, and to promote specific market niches such as green financing.

In fact, Development Banks have been identified as fundamental institutions to support the Sustainable Development Goals (SDGs) agenda, to modernize and expand existing infrastructure in developing and developed economies, which all work to lift millions of people out of poverty.

The UN estimates that $5 trillion to $7 trillion per year between 2015 and 2030, is needed to achieve a set of SDGs globally, with the estimates being $3.3 trillion to $4.5 trillion per year in developing countries, mainly for basic infrastructure, food security, climate change mitigation and adaptation, health and education.

Worldwide, several economies have achieved high growth rates and faster social-economic transformation by undertaking key development projects whose success has been facilitated by a relatively lower cost of capital. These economies have exploited the advantages that development banks have, over other forms of banking Institutions in relation to access to development capital and keeping the cost of capital low.

For instance, development banks have played and continue to play a crucial role in the rapid Industrialization of Asian and European Countries i.e., the growth of Japan and China as global economic powers is partly due to the role of national development banks in providing unrestricted credit to finance large infrastructure projects.

At the onset of the pandemic in 2020, the Government implemented a raft of measures to support the resilience and a faster recovery of the country’s economy. As part of these measures, the government committed to capitalizing UDB with Shs1 trillion. UDB continues to accelerate socio-economic development through sustainable financial interventions in priority sectors in line with the National Development Plan (NDPIII) and Vision 2040.

Bob Twinomugisha is a senior economist, Macroeconomics and Trade with the Uganda Development Bank Ltd

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