Mutebile threatens banks over persistently high lending rates, vows to set ceilings

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Early this week, Bank of Uganda issued a circular to commercial banks warning them of the persistently high lending rates.

The Central bank also indicated that if nothing is done, it could invoke section 39 of BOU act that gives the Central Bank powers in consultation with the Minister of Finance to set ceilings on lending rates.
The Central Bank is allowed under Section 39 (1) (d) of the Bank of Uganda Act (2000) to “prescribe–the maximum or minimum rates of interest and other charges, which in the transaction of their business financial institutions may pay on any type of deposit or other liability and impose on credit extended in any form.”



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In the letter dated 7th July addressed to all Commercial Bank executives and the Uganda Banker’s Association, Prof. Emmanuel Tumusiime Mutebile, noted with concern that while the central bank has reduced Central Bank lending rate to 7%, commercial banks has not reduced lending rates.
According to the Governor, the weighted average lending interest rate on shilling denominated loans instead increased to 18.8 percent in May 2020, from 17.7 percent in April 2020.
‘ ‘It is disheartening to see that commercial banks have not reduced interest rates in tandem with the reduction in CBR despite several discussions with Uganda Banker’s Association’’ Mutebile said
Experts speaks out

According to Stephen Kaboyo, the Alpha Capital Markets boss, the central bank seems to been running out of patience

‘‘And the this sort of response is what I would call a reality check responding to the current economic play as a result of Covi-19 effects.’’



He adds: It has been a lot soul searching and inventory taking for Bank of Uganda On the subject of high lending rates. In normal times, one would not have expected such a hawkish tone from the Central bank given its strong free market credentials, but in the current times, the monetary authority is saying they have done everything possible in their rulebook and the signals are ineffective.

For quite some time, the bank of all banks has been using the moral pursuasion approach to convince commercial banks to respond to the accommodative monetary policy stance, but this has fallen on deaf ears.

Kaboyo, a financial expert says ‘‘this clearly the spread has been very large and the 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. This does not only have an economic implication but also puts the Central Bank’s credibility on the line.’’



What is behind high lending rates?

Uganda embraced free market policies and from a theoretical point of view, this was expected to enhance competition and efficiency in the financial sector.

Financial experts argue that the results have been somewhat mixed and going by international comparison, the cost of credit in Uganda remains the highest in the region.

Commercial banks have attributed the high lending rates to high costs of doing business which has created inefficiencies in the process of financial intermediation.



How are banks expected to respond?

‘‘In my view it is not going to be business unusual.’’ Kaboyo said

He explains that banks will have to take a closer look at the changing market conditions in these uncertain times and managing balance sheets is going to complicated.

‘ ‘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.’’

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