Minister of Finance, Matia Kasaija and the Deputy Governor of the Central Bank, Dr Louis Kasekende have expressed divergent views on how the current high cost of credit in Uganda should be dealt with.
The issue regarding the unaffordable interest rates has for long been central to the debate on Uganda’s economic environment, many arguing that the high cost of credit is increasingly making it difficult for businesses to acquire finance for growth.
With some of the commercial banks lending rates currently averaging at 20%, experts say that the bulk of the start-ups as well as Small and Medium Enterprises (SMEs) already struggling with insufficient capital and limited assets can not service loans.
For the last 11 months, Central Bank has consecutively eased its signaling lending rate (CBR) to a record 9% with hope that the commercial banks will follow suit in lowering their interest rates. The CBR has declined by eight percentage points since April 2016. However, the desirable impact is yet to be felt.
On Wednesday, while attending the launch of the report on Standard Chartered Bank’s socioeconomic impact in East Africa, Minister Kasaija made a call to commercial banks to bring down their rates which he said are not conducive.
“I am under intense pressure from the business community on this issue of interest rates. Borrowing money at 20% to go and do business in our environment today that they [business] will make money, is a challenge,” Kasaija said at the launch event held at Sheraton Kampala Hotel.
In as much as he admitted that part of the problem could be government’s persistent borrowing from the private sector which puts the smaller entities at a disadvantage, the Minister insisted that something urgently needs be down to reduce the cost of credit.
He said that the President had taken a cautious move to privatize the Uganda Commercial Bank in anticipation that private banks would lower their rates, this never yielded.
But in response to the concerns raised by the Minister, Bank of Uganda’s Deputy Governor, Dr Louis Kasekende chose to defend the commercial banks and blame the large informal business sector in Uganda, a big portion of which is ineligible to borrow credit.
Kasekende argued that the vast of the small businesses and micro enterprises have failed at keeping records of their financial records which commercial banks often base on to assess their ability to service loans.
“Also, their governance structures can rarely be assessed. You don’t know who is the head and banks face information asymmetrical problems,” he said.
He observed that for the cost of credit to come down, government must address the high operational costs that banks grapple with. Short of this, he says, banks risk to run profitless businesses or even close.
“Yes, lending rates can be lowered. But it will only be possible on a sustainable basis if the cost of serving customers is lowered”.
In the long term, he says government should improve the business environment, invest in infrastructure as well as improve the efficacy of the commercial justice system.
On the part of banks, Dr Kasekende spoke of the need to employ digital technologies for assessing loan requests and other innovations that will reduce physical delivery of loan products.
