Uganda’s banking lending rate is not out of line-BOU official

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According to the Global Entrepreneurship Monitor (GEM)2014 data, Uganda had an early-stage entrepreneurial activity rate (the proportion of the population aged 18-64 years who either are a nascent entrepreneur or owner-manager of a new business) of 36 percent compared to the Sub-Saharan African average of about 28 percent.

Yet, the attrition rate is also relatively very high with a failure of businesses estimated at a rate of 26 percent relative to the average of about 16 percent for sub-Saharan Africa.

So, what accounts for this high failure rate? According to the same report, engaging in unprofitable business accounted for more than one in every three instances of business discontinuation, and this can result from a wide range of factors such as continued informality of businesses, misconception of a business idea to management challenges and problems of getting and managing finances.

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This failure rate means that very few small firms ever grow into bigger firms to attain economies of scale and contribute to formal employment creation. This is compounded by low growth expectations of Ugandan entrepreneurs with the GEM data estimating that only ten percent of the early stage enterprises expected to employ at least 5 employees within the subsequent five years

The second issue relates to some perceptions being peddled around by some commentators to the effect that the recent increase in non-performing loans of the banking industry from 4 percent in June 2015 to over 7 percent in June 2016 was mainly a result of high interest rates.

The truth could not be far from this. While lending rates by commercial banks have increased since 2015, the current average lending rate of about 23 percent, on shilling denominated loans, is not out of line with their historical average over the last few years.

In addition, a recent review by Bank of Uganda to ascertain the reasons for the non-performance of large credit facilities in commercial banks indicated that only a paltry 0.3 percent of non-performing loans as at March 2016 could be attributed to high interest rates.

Diversion of funds away from the intended purpose of the loan was a major contributor to the non-performing loans, only surpassed by delayed payment by government (domestic arrears) and cost overruns/ insufficient cash flows.

The above three reasons inclusive of diversion of loaned funds and poor management accounted for about sixty five (65) percent of the large Non-Performing loans in our banking industry

The feedback Bank Of Uganda received from the public during the Golden Jubilee commemoration activities that involved town-hall meetings, radio talk-shows and public exhibitions reveals there is a lack of transparency on charges and interest rates by financial institutions, complaints about customer care by these institutions, and lack of information about financial products and services.

Financial literacy

I believe all the above three issues can be dealt with by increasing financial education and stronger consumer protection coupled with developing the entrepreneurship and management competencies of individuals and the SMEs.

Uganda needs to pick a leaf from several of the Asian countries that you may refer to as “manufacturing and enterprise hubs” by enhancing its entrepreneurial education and training in order to realize higher labor and enterprise competitiveness within the global economy.

The latest estimates by the Global Entrepreneurship Monitor, measuring the extent to which training in creating or managing SMEs is incorporated in higher education such as vocational, college or business school, rated Uganda with a score of 3 compared to 5 for India and China, 5.2 for Malaysia, 5.9 for Indonesia, and the highest score of 6.3 for the Philippines.

Orient Bank is joining is working with Makerere University Business School (MUBS) in financial literacy drive dubbed Orient Bank’s Financial Literacy Programme – The Orient Bank Business Academy

This initiative has the potential to augment the capacity of the participating small and medium enterprises (SMEs) to prepare bankable projects, improve records management and ultimately enhance their access to finance.

11 percent of bank loan applications rejected

Small sized enterprises in Uganda have about 11 percent of their bank loan applications rejected compared to only 4.6 percent for the medium sized counterparts, according to the World Bank’s Enterprise Survey data for 2013.

Therefore the focus of Orient Bank’s financial literacy drive on micro and small enterprises is both valid and essential.

If this financial literacy and entrepreneurial Programme is implemented as designed, it entails some form of apprenticeship model that is needed by many of our nascent enterprises to sustainably graduate to a higher scale and be able to access relatively cheaper finance through the capital markets.

Editor’s note: a slightly edited version of speech by Deputy Governor, Bank Of Uganda Dr. Louis Kasekende at the Launch of the Orient Bank’s Financial Literacy Programme – The Orient Bank Business Academy

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