Commercial lending rates to keep falling - bankers
Customers transact business in one of the banks in Kampala. Banks are expected to keep reducing lending rates although at a slow pace. Photo by Eronie Kamukama
What you need to know:
- Rates in the fixed income segment (Treasury bond and bills) have also trended downwards during the period under review.
- “Yields on Treasury bills declined by about 1 percentage point in line with the change in the CBR between January 2017 and March 2017; yields on the 2-year and 15-year Treasury bond, however, remained relatively stable,” says Bank of Uganda.
Kampala. Although the pace at which commercial lending rates are falling is slower than public expectation, Uganda Bankers Association (UBA) is optimistic that rates will continue declining because they are responding to monetary policy directions of the Central Bank.
Interest rate is basically the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
Lower interest rates make it cheap for the general public to borrow. This encourages spending and investment and it leads to higher aggregate demand in the economy and the result is higher economic growth.
In an interview with Daily Monitor on Wednesday, the chairperson of UBA, who is also the managing director of Centenary Bank, Mr Fabian Kasi, said: “We are optimistic that lending rates will come down further. Banks have been reducing their rates since November last year. There are some banks whose prime lending rate at the moment is at 18 and 19 per cent.”
Bank of Uganda (BoU) has sustained reduction in its policy rate since April last year but the pace at which the commercial banks have been lowering their lending rate has been so slow.
Mr Kasi said there is always a lag in interest rate changes in the market and that is the reason why the commercial lending rates have not declined so fast but there is still room for banks to keep reducing their rates. “Although I cannot predict at what level the lending rates will be in June this year and beyond, commercial banks will continue reducing the lending rates,” he said.
Slow paced reduction
Statistics by BoU relating to the current monetary policy shows that lending rates have only reduced by 1.2 per cent over the last one year, which indicates that there has been generally a slow pace compared to reduction in the Central Bank Rate (CBR).
However, broadly, BoU said in its monetary policy report that interest rates declined further in the quarter ending March 2017 in line with the eased monetary policy stance.
“The rate of decline in lending rates remains low recorded at 1.2 percentage points reduction since March 2016 compared to 5.5 percentage points cut in the CBR whereas time deposit rates have declined by 4.7 percentage points since February 2016 to 11.4 per cent,” said the Central Bank. In the foreign currency denominated loans, the rate also declined during the last one year.
“Rates on foreign currency loans and time deposits also declined by 1.8 percentage points and 1.4 percentage points to 8.3 per cent and 3.0 per cent respectively,” said the Central Bank’s current monetary policy.
BoU remains optimistic that lending interest rates are expected to decline going forward on account of advice by commercial banks that they would lower prime lending rates would take effect in March 2017.
