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Standard Chartered’s interest rate gamble

By Ivan Rugambwa & Julius Businge


Second largest commercial bank shakes up loan market with 13 percent cut in interest rate

If, as is often said, timing is money; then Standard Chartered Bank could be minting quite a bit of it if its recent sharp interest cut pays off.

Just days after the Finance minister Maria Kiwanuka announced in the budget that domestic currency lending had stagnated as a result of high lending rates and other factors, Standard Chartered Bank on June 11 slashed its interest rate on salary loans by about 13% to 17.5 percent.

The new campaign rate is lower than the bank’s official minimum/base lending rate currently at 19.5 per cent, according to the bank’s Chief Executive Officer, Herman Kasekende.

The StanChart move appears to be in a different direction to the trend predicted in the central bank’s latest Monetary Policy Report of April. Bank of Uganda (BoU) reported that commercial banks had said they were keeping their prime lending rates stable. It based on that to predict in its April report that “lending rates are unlikely to change in the near term”.

The question now is whether Standard Chartered’s unexpected move could become a trend of lending rate cuts by commercial banks in a tight but mixed market of high undercut by high costs of deposit mobilisation and high non-performing loans.

Commercial banks excess reserves increased to Shs 74 billion in March, from Shs 68 billion in February but non-performing loans stood at 4.7 per cent in March, a slight rise from 3.4 % in March 2012, according the central bank’s latest Monetary Policy Report published in April.

The same report noted from July 2012 to February 2013, the loan to deposit ratio for all deposit-taking institutions supervised by the Bank of Uganda has averaged 78 per cent.

“Given that the permitted maximum ratio is 80 per cent, banks will soon be unable to lend unless they expand their deposit base,” the BoU report noted.

Standard Chartered is the second largest commercial bank in Uganda, with an estimated asset base of US$964.6 million (Shs 2.5 trillion). Expansion of the deposit base appears to be the main attraction for it and other banks that are likely to follow its lead in cutting interest rates.

Already, Equity Bank has also announced a cut in its base lending rate to 19.5% from 22.5%. Like StanChart, its target is the salary loan segment which has a relatively low default rate but is relatively small. Equity keeps its interest rate for salary loans at 1.5% above the base lending rate depending on the customer’s rate of risk.

Market watchers are more interested in the behavior of banks like Crane Bank, Centenary, and Housing Finance that are heavily invested in local currency lending to businesses, agriculture, and Small and Medium-sized Enterprises.

Stephen Kaboyo, the managing director at Alpha Capital Partners, a forex trading and financial consultancy firm, says Standard Chartered’ s rate cut gives it a competitive edge.

“The Standard Chartered Bank product targeting salaried workers is a good way of attracting people in formal employment to acquire loans at lower rates,” he told The Independent. “One would expect other commercial banks to follow by designing other products which are competitively priced.”

The bank to watch is Centenary Bank where the Managing Director, Fabian Kasi, says it is watching the progress in the lending market.

Kasi said although the high inflationary pressures which caused a hike in interest rates for banks of up to 30% in 2011 reduced the appetite for the loans, including salary loans, he remains hopeful.

“Our expectation is that with reduced rates, demand for loans will increase,” he said.

Centenary’s prime lending rate is at 21%, 10 percentage points above the central bank rate.  At Crane Bank, there are no plans to adjust the rate on salary loans at the moment, according to the manager in charge of credit. The manager said the current interest rate for salary loans is 25%, while the bank’s prime lending rate is 24%.

Housing Finance’s Head of Retail, Christopher Kabagambe, said they will continue to vary their interest rate based on their assessment of risk.

He said already their flexible system allows certain clients to get rates as low as 16 per cent. Their prime lending rate is 21.5 per cent.

It appears for now that most commercial banks are reluctant to reduce their lending rates despite the central bank’s continued cutting of its policy interest rate-the central bank rate from the high of 23% early this year to 11% in June.

But StanChart’s Kasekende remains unfazed. He says the banks is ready to continue cutting rates as longer as economic indicators continues to be favourable.

“The rate can go up or down depending on the conditions,” says Grace Muliisa, the head of Consumer Banking at the bank.

The central bank says it is concerned that despite the gradual fall in the cost of borrowing in local currency throughout 2012 and 2013 to date, Uganda’s interest rates remain high compared to both the global economy and the East African Community.

It says even in February, when weighted average lending rates fell, shilling denominated lending rates actually increased by 0.1 percentage points over the month.


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