Controlling interest rates dangerous act - Mutebile

Kampala.

Borrowers will have to contend with high interest rates, at least until commercial banks are able to reduce their operating costs, with the government not intervening.

There have been calls that Bank of Uganda (BoU) and ministry of Finance legislate and cap interest rate to a certain percentage, like Kenya.

However, Mr Emmanuel Tumusiime-Mutebile, the BoU Governor, has downplayed the possibility saying it would exclude small businesses from accessing financing.

“As the SME sector is crucial for the future growth of the economy and the creation of employment, capping lending rates would constitute a dangerous act of economic self-harm,” he said in a speech at the 1st Annual Bankers Conference yesterday at the Kampala Serena Hotel.

Last year, the Kenyan government passed a law that caps interest rates, leaving them with a 4 per cent margin of the Central Bank Rate (CBR).

Currently, there is a wide spread between the CBR and the lending rates in commercial banks.
The CBR is at 10 per cent, whereas lending rates are averaging 21 per cent. This is a spread of about 10 per cent.

Mr Mutebile says that in the past, there were price controls and the results were poor.

He said: “We already have the salutary experience of the 1970s and 1980s to teach us how damaging the control of interest rates can be. In that period, the banking sector shrank dramatically because many types of banking business, including lending to the private sector, were not financially viable. Uganda cannot afford to repeat the mistakes of the past; mistakes, which proved so ruinous to our economy.”

Since 2011, a combination of factors has led to the shrinking credit uptake by the private sector, in part, leading to the slowing economic growth.

High lending rates have been attributed to be the cause of lower credit uptake. In this, Mr Mutebile pointed out the only way banks will have lower lending rates is by commercial banks reducing operating costs.
Banks in Uganda spend an average of 11 per cent of their income earning assets on operating costs which Mr Mutebile says “is very high by international standards.”

The option for reducing operating costs will be technology. At least that is what most bankers agreed to during the one-day conference.

While giving a keynote address at the conference, Prof Njuguna Ndung’u, the former Central Bank of Kenya Governor, said what the banking sector needed was not more regulation but rather better regulation.

“Interest debates by our politicians make bankers look like villains. Such talk distorts the truth. Capping interest, for example, robes banks of the opportunity to price their products against risk,” he said.

In Kenya, the implication of capping interest rates is yet to be measured apart from reduced bank profitability and limited lending to Small and Medium Enterprises.