Government threatens to cap interest rates

Kampala. Government has warned banks to ensure that interest rates do not reach a level where they need to be capped.
Speaking at the launch of Bank of Africa mortgage financing services, Mr David Bahati, the Finance state minister for Planning, said banks should ensure that they keep interest rates within manageable rates in response to the Central Bank Rate (CBR).
Banks, he said, seem to be pushing government to consider introducing a law capping lending interest rates.

“While we understand that you need to take charge of the risk you endure, we continue to be concerned about the interest rates you charge. As the Central Bank continues to lower the prime lending rate [CRB], we do not see the response of the commercial banks,” he said.
Currently, the CBR; the rate at which the Central Bank lends to commercial banks, stands at 9 per cent compared to commercial bank interest rate of about 21 per cent.
Interest rates are still a major concern for borrowers, many of whom cite them as the biggest impediment to private sector credit.

According to Mr Bahati, high interest rates have a negative impact on business growth and the country as a whole.
“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.
Mr Bahati acknowledged that although banks have been reducing lending rates, the rate has been slow which has made interest rates unaffordable for majority borrowers.

The CBR has been reducing since October last year. Commercial bank interest rates have since reduced from an average of 23 per cent to the current 21 per cent.
However, bankers and civil society organisations argue that capping interest rates would be detrimental to the economy saying the legislation in Kenya, which Mr Bahati is talking of has failed.
Ms Rashmi Pillai, the Financial Sector Deepening Uganda director of programme, during the annual bankers’ conference said reports from interest capping in Kenya had indicated that the policy had failed with banks becoming more risk averse.

Interest rates, she said, ensure that banks protect themselves against risky customers as well as mitigating the high cost of money.
Mr Bahati also indicated that increased government borrowing has raised competition in the money markets thus pushing out private sector borrowers.
Government domestic borrowing for this financial year is close to Shs1.9 trillion, which Mr Bahati said will crowd out the private sector from borrowing.
However, according to data from Bank of Uganda, private sector credit has grown at an annual average of 10.5 per cent in the first half of 2018.

Lending to safety nets

According to an analysis of the state of the banking sector in 2017, banks took a more cautious outlook, deciding to lend to what they considered as a safety nets such as government.
In the year under review lending only grew by 1.5 per cent to Shs11.5 trillion.
Even with the decline in interest rates from an average of 22.5 per cent at the start of 2017, to 20.28 in December 2017, borrowing was still low.

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