Interest rate cap could hit commercial banks

Central bank’s move could reduce the industry’s profitability

| THE INDEPENDENT | Uganda’s central bank has threatened to cap interest that commercial banks can charge borrowers following the industry’s failure to lower interest rates in response to the cuts in the Central Bank Rate, according to its governor, Emmanuel Tumusiime-Mutebile.

Mutebile in a letter dated July.07 sent to all commercial banks said he was disheartened that banks have not lowered their interest rates to match the reduction in CBR cuts.

“…BoU had been pursuing an accommodative monetary policy stance since April 2016. It is however, disheartening to see that commercial banks have not reduced lending rates in tandem with the reduction in CBR despite several discussions with Uganda Bankers Association,” he said.

BoU  has cut its Central Bank Rate by 200 basis point to the lowest ever of 7% between April and June this year  to resuscitate economy that is now battered with the impact of coronavirus pandemic.

However, the weighted average lending rate on loans rose from 17.7% in April to 18.8% in May, at a time when economic activity in the country was facing an unprecedented decline due lower demand, lower capital inflows, reduced productivity and mass unemployment.

For that, Mutebile said BoU is considering invoking a law that allows it to determine maximum and minimum rates that financial institutions may impose on credit extended in any form.

This comes a few days since the Uganda Bankers’ Association Executive Director, Wilbrod Owor, told the National Economy Committee of Parliament that commercial banks have restructured loans to a tune of Shs 2.02 trillion as a result of the effects of the COVID-19 lockdown on businesses.

Kenya is the first country in the east African region to cap lending rates for commercial banks in 2016, but the decision was rescinded last year on the basis that it was stalling lending to businesses.

This is the second time that the Uganda government is threatening to cap lending rates in two years. In 2018, Finance minister, David Bahati, said interest rates were still a major concern for borrowers, stifling private sector growth.

“I had started drafting a Bill to cap interest rates the way Kenya did… I abandoned that idea, but it appears you [banks] want to force government to do just that,” he said.

Bahati, then, acknowledged that although banks had been reducing lending rates, the rate has been slow making loans unaffordable for majority borrowers.

This new move means that in the event that Mutebile makes good of his threat, then, it would significantly hit commercial banks profitability.

Prof. Wasswa Balunywa, an economist and lecturer at the Nakawa-based Makerere University Business School in May this year said that though he was against Kenya’s move to regulate interest rates, it is time that the government reign in interest rates.

“This is not a normal situation. Interest rates for business should be 10%. Government should now request organizations to forward their re-opening plans and requests for money,” he said.

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