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While Bank of Uganda has reduced the CBR, commercial Banks have stubbornly refused to lower interest rates. Should citizens rise-up?

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By Moses Kaketo

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December last year, the Bank of Uganda lowered the Central Bank Rate (CBR) to 12 percent. It was hoped that the commercial banks would respond and lower interest rates- a big No!

Only a few banks including, Bank of India have responded and lowered the interest rate to 21 percent. Besides the high interest rates, the other banks charges, including ledger charges and other hidden costs also remain high.

Does this mean that the commercial banks won’t respond to BoU directive? And that they will continue to maintain high interest rates? Otherwise the intention of reducing the CBR to 12 percent was for banks to lower the lending rate.

Since April 2016, the CBR has been reduced by 4.0 PPs but the Weighted Average Lending rate (WALR) for shilling denominated loans declined by only 2.4 PPs

The Bank of Uganda acknowledges that interest rates in Uganda remain high as noted in her recent December State of the Economy report:

‘‘Notwithstanding the marginal reductions, lending rates remain stubbornly high and generally sticky downwards, responding only slowly to reductions in the CBR’’ the report reads in part.

The worst part is no Ugandan Commercial bank is talking about increasing interest on customer deposits. Interest on customer deposits vary between 3 percent and 10 percent, depending on the bank account. Never mind, customer deposits continue to heavily support bank survival and profitability.

‘‘Bank funding conditions remain stable, with deposits contributing 81.5 percent of the total funding of the banking sector as at end June 2016.’’ BoU noted in its December 2016 State of Economy report.

The report adds: Banks’ annual after-tax profits during the first half of 2016 are estimated at Ugx. 214.2 billion, slightly below Ugx. 269.8 billion realized during the corresponding period of 2015.

So, if the banks are not responding to BoU actions, does it mean that the regulator should act like Kenya Central bank did to fix the CBR?

Should Ugandans put pressure on government to force banks to reduce interest rates, now that the regulator is failing to do her job?

The Banks blame the high interest rates on provisioning for bad debts and the high cost of doing business. They may have a point, but how comes even with ‘high’ NPL, banks continue to post huge profits?

Analysts say, much as we are talking about liberalization, liberalization does not mean giving up. If you find someone is squeezing the population, the government must come in to fix the problem.

Already government is taking about buying back Bujagali Dam because the charges for power are very high. Why can’t government do the same and intervene in the high bank rates. Government can perhaps set up her own bank if the banks are not responding to BoU directives on CBR.

One of the major causes of business failures in Uganda is the high bank interest rates. No business can borrow at an of average of 22 percent and stay in business in a highly competitive market with players who have access to cheap capital.

Ordinarily, if the CBR is at 12 percent, banks would be charging 16 percent.

As the saying goes, when you squeeze the nose, it will bring blood- blood this is case may be that bad.

Banks continue to post huge profits, while businesses are collapsing.

Reports indicate Stanbic Bank posted Ugx 200bn profit last financial year. But how many businesses have collapsed because of high Interest rates?

That said, Bank of Uganda notes that overall, the banking system remains sound, with bank liquidity and capital buffers remaining well above the minimum requirement. The banking sector as a whole is adequately capitalized to withstand shocks

 

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