Economic decisions driven by right motives can flounder if implemented at the wrong time. That is what some pundits fear could befall Uganda's first Credit Reference Bureau (CRB) that comes into operation on December 3 with the hope of lowering lending costs and risk and pushing interest rates down.
Established under the Financial Institutions Act 2004, the CRB will disseminate credit information among participating financial institutions.
"When the CRB starts operating interest rates will certainly come down," said Mr Anthony Opio, director non-banking services at Bank of Uganda, "œthe culture of non-payment will be totally eliminated. This has been one reason interest rates have been high."
But the CRB comes at a time when, despite assurances from the IMF Uganda monitoring group that banking soundness indicators appear healthy, BoU continues to battle rising core inflation rate that was at 14.5 percent and food inflation at 27.2 percent in October. High inflation makes the cost of money high and local bankers are not hopeful that interest rates could drop now.
"Interest rates are determined by the financial market and depending on whether inflation is high or low," Mr Peter Opio, a banking manager at Crane Bank said.
Mr Pamkaj, a banking manager at Orient Bank was more skeptical. "Interest rates are based on individual banks," he said.
The CRB also comes into operation when the ratio of non-performing loans is at 3.5% the lowest in the region. Yet interest rates in Uganda have remained the highest in the region at between 22-25 percent compared to 13-15 percent in Kenya.
BoU's other hope is that with many banks opening shop, interest rates will drop because of increased competition for the estimated 500,000 borrowers on the Ugandan market.
Opio said, as a result of the CRB coming with the financial card system that will carry every borrower's credit history, discipline will return to the financial sector in the country. "Loan sharks will be no more as every one with a clean credit history will walk into a banking hall and within the next 24 hours access a loan," he said, "however for those who have a culture of multiple borrowing and loitering from one bank to another because of defaulting on loan repayment, things will no longer be the same." Opio said financial cards of bank customers on the CRB will contain ones bio data and, when swiped through a card reader, will reveal where one took a loan and when he serviced or defaulted on it.
The CRB will come with a deposit protection fund for Micro deposit institutions (MDI) as each MDI will display to what extent a client's account is protected. The Financial Institutions Act 2003 that covers micro- finance deposit taking institutions under section 46 of the act requires MDIs to report non performing loans or credit accommodations classified as doubtful or loss to the CRB. All 21 commercial banks and 4 micro deposit taking institutions will be linked to each other through a Central Depository Database there by making it very easy to access a loan applicant's bio data and credit history. Uganda's CRB performance is hoped to be a success considering the small banked population of 1.6 million account holders countrywide.