As lending rates continue to rise, traders mobilise strategic allies and Mutebile is urged to talk
John Kasimoni, 57, a general merchandise wholesaler in Kampala’s Kikuubo Market, obtained a three-year loan of Shs 100 million from Global Trust Bank in June last year to recapitalise his business.
At the interest rate of 25 percent, he was supposed to pay monthly instalments of Shs 3,975,983 (about Shs 4 million) per month for three years.
But on November 1, 2011, Kasimoni received a letter from Global Trust Bank, informing him that the bank had increased its prime lending rate to 28.5 percent, and his monthly instalments had automatically grown to Shs 4,500,000 (4.5 million), effective immediately. This meant an increase of Shs 530,000 in his monthly instalments.
“I didn’t know there was such a condition in the loan contract or I wouldn’t have taken it,” Kasimoni said.
“I went to the bank’s head office and they told me to wait until February when Bank of Uganda was expected to reduce its lending rate. That is when they would reduce mine.”
“I don’t think I will manage to service the loan at this rate. Even my business is slowing down in terms of profit savings because of this loan,” Kasimoni said.
Kasimoni is worried he will fail to pay and lose his residential building in Mengo, a Kampala suburb, which he staked as security to the bank.
It is no wonder that when the traders’ association KACITA called its members to protest the rising cost of loans, Kasimoni was one of the first to answer that call.
The traders are demanding that extra money they have paid to commercial banks on old loans as a result of increasing interest rates, be refunded, or they withdraw all their deposits from banks starting January 11.
To force government to listen, KACITA Chairman Everest Kayondo has called a demonstration of all traders.
“We are set to shut down our shops in and outside Kampala starting January 12 for three days until banks pay back our money,” Kayondo said at a traders’ meeting in Kampala on January 6.
“If all of us withdraw our savings from banks they will have no money left to do business and will be forced to respond positively. They can’t operate without our money. I am sure of that,” Kayondo told a traders’ meeting.
This would be the second traders’ strike since July last year, when KACITA shut down trading in and outside Kampala in protest of intense exchange rate fluctuation that spiked the cost of imports.
New allies
However, traders are not alone this time. They have found allies – among economists, the public, and Parliament.
On January 5, Members of Parliament and KACITA held a joint press conference at Parliament and announced that starting January 12 they would mobilise traders across the country to shut down shops, until the central bank reduced interest rates to at least 17 percent.
The joining of forces preceded the expected appearance of Central Bank Governor, Emmanuel Tumusiime Mutebile and other officials from the ministries of Trade and Finance before the Parliamentary Committee on the National Economy to explain the matter.
It is not hard to predict how that meeting would go. At the Central Bank’s monthly press briefing on January 3, Mutebile told reporters that he had “no legal powers” to control the interest rates commercial banks charged.
“It is their right to determine how much to charge and all conditions are stipulated in the loan contract,” the Governor said. “The borrower has to know the type of loan they are taking which could either be variable or fixed. If they are not contented then they should look for a cheaper bank.”
Mutebile’s position on rising interest rates should not be surprising. At the same meeting he announced that the Central Bank Rate (CBR) would be held at 23 percent, a signal to commercial banks that interest rates would not be reducing.
Indeed as interest rates are now driven by the bank’s inflation targeting policy, perhaps KACITA’s outrage should be more rightly directed to Mutebile, not commercial banks.
When BOU introduced the new policy, headline inflation stood at 18.7 percent. It had risen to 30.4 percent in October, before it started falling again in November to 29 percent and 27 percent in December, with increased food harvests. The bank has steadily raised its lending rate from 13 percent in July to 23 percent to-date, in a bid to curb inflation.
“I must maintain tight monetary policy to bring down inflation to its medium term target of 5 percent,” Mutebile said on January 3, a position he has repeatedly affirmed since July, even as his doubters grow.
Mutebile argued that the recent appreciation of the shilling (from as low as Shs 2,800 late last year to Shs 2,300 this week) and the slight drop in inflation, showed that the new policy was effective.
The resulting increase in lending rates - from a weighted average of 21.7 percent in July 2012 to 25.4 percent in November the same year – especially on personal loans, he said, was a small price to pay for long-term economic stability.
Mis-targeting inflation?
But detractors disagree.
Prof. Augustus Nuwagaba, an economist and lecturer at Makerere University said the governor’s claim that he could no longer control commercial bank interest rates was “a clear sign that the kitchen is getting too hot for him and he and his team can no longer hold the economy.”
“If banks are exploiting borrowers, and the governor says he has no legal means to intervene that is very dangerous. He and his team should retire and pave way for those who can,” Nuwagaba said.
Nuwagaba said by hiding behind the CBR, the central bank had closed its ears to the plight of the business community who are losing assets to banks because they have failed to pay back loans.
“I have always argued that inflation targeting is not appropriate to control inflation in our economy, because our main problem is wasteful spending by government, not excess money in the business community,” Nuwagaba told The Independent.
He argued that the current targeting of business is wrong and further undermined confidence in the economy.
Nuwagaba said the central bank was falsely claiming credit for its monetary policy for the shilling’s appreciation towards the end of 2011 and the start of 2012 when in fact this was due to the dollars poured into the economy by visitors from abroad at the year’s end.
“That is why the shilling is starting to depreciate again. Holiday makers are going back,” he said.
The economist threw his support behind the traders’ planned strike against high interest rates saying they could not continue running businesses on losses as government just looks on.
“I am behind the traders. This is the language our government understands,” Nuwagaba said of the strike. “Have you heard us in Makerere writing letters to the president or to other authority regarding our problems? We just go on strike.”
Another economist, who asked to remain anonymous, said some commercial banks were being unfair to borrowers by setting base lending rates too high. He argued that not all banks borrow from the central bank, so the CBR should not automatically influence all lending rates.
“Commercial bank lending rates should reflect the cost of money and not necessarily the CBR. Those that don’t borrow from the central bank are just profit-chasers who don’t care about the economy,” the economist told The Independent.
He urged government to find a way to intervene and prevent a return of 2011’s protests, which paralysed economic activity and may cause long-term damage if repeated.
Samuel Sejjaaka, associate professor, and deputy principal of Makerere Business School said he had no problem with the CBR, but that the central bank had failed in one key aspect of its management – coordinating fiscal and monetary policy.
“The two go together. You cannot mop-up cash from the public when there is reckless spending by government,” Sejjaaka said.
However, unlike Nuwagaba, Sejjaaka did not support the traders’ strike. Instead he advised dialogue. “I don’t think they can achieve anything with a strike,” he said, “They will just hurt the economy further.”
Bankers, as expected, argued against the strike. The managing director of Housing Finance Bank, Nicholas Okwir, said while he understood that high interest rates hurt, traders would still gain more from talking to their bankers and the central bank, than going on strike.
Okwir advised traders to seek changes in their loan contracts and agree on more affordable terms of payment.
“We have talked with many of our customers with similar concerns,” said Okwir, whose bank was due to review its lending rates for January. “It should be the responsibility of the individual who borrows to approach their bank instead of joining protestors, who never played a part in signing the loan contract.”
Win-win
Jackie Namara, the head of marketing at Stanbic Bank, said they were watching the market before revising the bank’s base lending rate which stood at 29.5 percent.
Namara also urged dialogue, not only for traders, but the central bank as well. She said there was no reason for traders to demonstrate against high interest rates when the doors of banks were open for negotiation.
“We as a bank need traders because they are our customers. They too need our financial backing to boost their businesses,” she said. “We can work out a win-win solution without a strike.”
However, Namara advised the central bank to liaise more with other key trade and industry bodies like Uganda Investment Authority, Ministry of Finance, Private Sector Foundation Uganda, Uganda Manufacturers Association, to find the appropriate means to assist traders and manufacturers facing difficulties in acquiring and servicing their loans.
“This is a tough situation which needs combined efforts to help traders get out without losing their businesses,” Namara said
Subscribe to this comment's feed
