Interest Rates Unlikely to Drop - Financial Experts

1478 Views Kampala, Uganda

In short
Interest rates charged by banks on lending to the private sector are averaging about 27 percent, despite changes in the central banks benchmark rate, also known as the Central Bank Rate CBR.

Financial experts warn that interest rates charged by banks are unlikely to drop due to structural bottlenecks both on the monetary and fiscal sides.

Interest rates charged by banks on lending to the private sector are averaging about 27 percent, despite changes in the central bank's benchmark rate, also known as the Central Bank Rate (CBR).

The CBR is Bank of Uganda's signal on inflationary trends. Its increase sends a signal for private lending to slow down and vise versa. Usually when the CBR rises, banks immediately increase their lending rates, but take long or not at all to reduce rates when the CBR reduces, like in the present case.

The Bank of Uganda has twice reduced the CBR from 16 percent to 15 percent then the current 14 percent, but commercial banks have not followed suit as is expected.

Speaking in an interview with Uganda Radio Network, development economist Dr Fred Muhumuza says there are many factors that drive inflation high, like drought, which could keep interest rates up even if the CBR has reduced.
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Dr Muhumuza adds that government borrowing from the domestic market also drives interest rates up because banks find government bonds and bills more attractive since they are risk-free than lending to the private sector.
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In the last financial year, government borrowed 1.4 trillion Shillings domestically. In this financial year, the government pledged to reduce its domestic borrowing by more than half.

In Uganda's financial system, most clients operate savings and current accounts which banks rarely use for lending because the clients could need their money anytime. The good alternative is fixed deposits but they are few, with National Social Security Fund (NSSF) being the biggest fixed depositor.

Since sources of borrowing for banks are few and not deep enough, banks tend to rely on each other for borrowing either for overnight or for a week - to lend. The inter-bank lending rate is about 12 percent, meaning a bank cannot lend below that after factoring all the costs and risks.

Neither can the banks also lend to the private sector lower than the CBR, currently at 14 percent, and the government papers, currently at 17 percent.

Robert Kirunda, a business lawyer, says banks are untruthful about their real costs claiming that they have huge costs and risks to deal with.
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Although it is within its mandate to cap interest rates if need be, the Governor of Bank of Uganda, Emmanuel Tumusiime-Mutebile, has consistently said they won't, preferring them to be determined by market forces.

Dr Muhumuza says capping interest rates is not the best solution. He argues that the best option is for the private sector, particularly the small and medium enterprises, to borrow when they really need and ensure they strike good agreements with the banks.

Dr Muhumuza says another good option is for businesses to explore other financing channels like partnerships, mergers and equity funding.


About the author

David Rupiny
In his own words, David Rupiny says, "I am literally a self-trained journalist with over 12 years of experience. Add the formative, student days then I can trace my journalism roots to 1988 when as a fresher in Ordinary Level I used to report for The Giraffe News at St Aloysius College Nyapea in northern Uganda.

In addition to URN for which I have worked for five years now, I have had stints at Radio Paidha, Radio Pacis, Nile FM and KFM. I have also contributed stories for The Crusader, The New Vision and The Monitor. I have also been a contributor for international news organisations like the BBC and Institute for War and Peace Reporting. I am also a local stringer for Radio Netherlands Worldwide.

I am also a media entrepreneur. I founded The West Niler newspaper and now runs Rainbow Media Corporation (Rainbow Radio 88.2 FM in Nebbi). My areas of interest are conflict and peacebuilding, business, climate change, health and children and young people, among others."