The warning was contained in a letter by the Governor of Bank of Uganda (BOU), Prof. Emmanuel Tumusiime Mutebile on Tuesday, to all chief executive officers of commercial banks, and copied to the Uganda Bankers Association.
In the letter, which the MbararaCity News has seen, Mutebile said he was disheartened that lending rates were not reducing, despite a raft of reductions to the benchmark Central Bank Rate (CBR) since 2016.
The CBR was slashed by 200 basis points to 7%, the lowest ever, between April and June, to counter the effects of the coronavirus on the economy. However, the weighted average industry lending rates rose to 18.8% in May, from 17.7% in April, against BOU’s signal for a reduction.
The CBR is the benchmark rate at which financial institutions borrow from the central bank. When a bank is facing liquidity (cash) challenges, they borrow money from the central bank or from other banks, using the CBR as the benchmark rate.
The lockdown has adversely affected borrowers’ ability to meet their loan obligations with several commercial banks.
Mutebile’s
warning
“Since BOU has aggressively eased monetary policy with an objective of
reducing the cost of credit, lending interest rates should be reduced to levels
that are consistent with the current monetary policy stance,” Mutebile
said.
“In view of commercial banks’ reluctance to heed this call, BOU may take
redress to section 39 (1) (d) of the Bank of Uganda Act (2000).”
The law allows for BOU, in consultation with the finance minister, to determine
maximum and minimum rates that financial institutions may impose on loans.
The sector regulator said the “downward stickiness in lending rates,
despite BOU’s accommodative monetary policy” stance could leave more
businesses and households suffering from the effects of the COVID-19 pandemic.
“A faster recovery of the economy reduces the likelihood of distress in
the financial sector. I, therefore, expect a faster reaction to the CBR
reduction by commercial banks,” he said.
BOU cut
the central bank rate (CBR) by 200 basis points to 7%, in June, aiming to
cushion the economy and encourage lending to households and businesses battered
by the effects of the lockdown.
Lending rates on shilling loans averaged 24.7% in the three months to April
2016 and have been nearly unchanged for most banks in 2020. Central bank data
indicates that in January, Centenary Bank’s best (prime) rate was 21%, Cairo
International Bank 23%, Equity Bank Uganda Limited 22%, Standard Chartered
19.3%, Stanbic Bank Uganda Limited 17.5%, Housing Finance 21%, dfcu 21%, and
Absa 19.75%.
If the central fixed interest rate, old loan holders would need to refinance
their loans to enjoy revised interest rates, payment schedules and other terms.
The latest Stanbic Purchase Managers Index (PMI) report indicated that economic
activity has contracted due to the coronavirus.
The survey showed that companies reported difficulties in paying staff in June
and this led to job cuts and a reduction in salaries across the board.
Commercial banks react
Anthony Kituuka, the executive director of Equity Bank Uganda Limited, said
they would look at their prime lending rate, with a view of lowering it in line
with the governor’s letter.
Anne Juuko, the Stanbic Bank Uganda’s chief executive officer, said Stanbic has
cut its prime lending to 16% from 16.5% to support the economy. She pointed out
that at industry level, approximately 14%, or sh2.02 trillion, of the total
banking loan portfolio of sh14.7 trillion in April has been restructured.
“Over 1,300 loans have been restructured and the majority is within the
SME (Small and Medium Enterprise) sector,” she said, adding that Stanbic
Bank has lowered its lending rates in line with the CBR.
“Our spend for the half year is 150%, over and above our budget, to ensure
we provided the much-needed support to communities and the Government,”
Juuko said.
Wilbrod Owor, the executive director at the Uganda Bankers’ Association, said:
“We received the letter from BOU and we have a meeting today with the
members. We shall share our approaches and the way forward. There is no such
thing like putting a cap on interest rates.
Financial experts weigh
in
Experts have warned of distortions in economic activity, should BOU go ahead to
cap interest that commercial banks can charge borrowers.
Nicolas Malaki, an analyst at Chartered Financial, said banks are acting
rationally in spite of the central bank measures, because the perceived risk is
now higher, meaning the reward should be as well.
He pointed out that banks still have viable options to invest excess deposits,
like Government bonds and bills.
“When they put a cap at say 15% and government treasuries are paying
between 11% and 15%, then banks will pile for the treasuries. Caps will achieve
short term objectives but disastrous in the longer term,” he warned.
However, Stephen Kaboyo, the CEO of Alpha Capital Partners, said the central
bank seems to have run out of patience and that this response is a reality
check.
He said the central bank has been using the moral persuasion approach to
convince commercial banks to respond to the accommodative monetary policy
stance, but this has fallen on deaf ears.
He said
the CBR policy rate has had little effect on commercial banks’ liquidity
management and pricing, which essentially means that there has been a weak
monetary policy transmission.
Kaboyo pointed out that banks will have to take a closer look at the changing
market conditions in these uncertain times and that managing balance sheets is
going to be complicated.
He said they will have no choice, but to reset their revenue outlooks, change
their financial assumptions, tweak their business models and review and
restructure their operations, in light of the current market environment.
Doreen Mugisha, a clients and markets development manager at audit firm
PricewaterhouseCoopers, noted in a blog post that the causes of the high
interest rates in Uganda should be addressed.
“The legislation may fix the interest rate to make it affordable, but it
will deny many borrowers access to credit. What borrowers want is both
affordable and accessible credit,” she said.
Factors of lending rates
In their Working Paper, published in June last year, titled: What Explains High
Lending Interest Rates in Uganda?, researchers Adam Mugume and Doreen Katangaza
Rubatsimbira from Bank of Uganda, stated that: “The factors that determine
the level of commercial bank lending rates are important concerns to
policymakers, the banking industry and the public at large.
From a policy perspective, lower lending rates are desirable, as they tend to
have a positive influence on new and existing investments, thus contributing to
growth and development.”
“There is little doubt that lending interest rates have been a sensitive
and recurring policy issue, one which requires an objective examination of all
contributing factors.
The macroeconomic environment has improved markedly and the financial sector
has undergone extensive reforms. Whilst there has been a reduction in average
commercial bank lending rates, in response to a reduction in inflation and the
relatively low monetary policy rate (CBR), they remain prohibitively high and
restrict many private sector borrowers from accessing the credit markets.”
“The high lending rates are mainly on account of high overhead costs.
Thus, reducing the high lending interest rates will require a reduction in
operating costs of the banks.
The degree to which banks will be able to operate on a lower spread brings the
issue of operating efficiency to the fore. As experience has shown, the process
of consolidation and rationalisation is not instantaneous and involves heavy
initial costs.
Nonetheless, some features of modern consumer banking, which contribute to
lower operating costs are increasingly enjoyed in Uganda today.”
“Broadly, a stable macroeconomic environment, banking business growth,
promotion of financial literacy, bank penetration through agent banking, and
the overall financial sector development will cause lending interest rates to
decline, though gradually
