Wednesday February 8 2017

Loan repayment culture in Uganda is weak - Mutebile

Bank of Uganda Governor Tumusiime Mutebile

Bank of Uganda Governor Tumusiime Mutebile 

By Mark Keith Muhumuza

Kampala. In the six months to September 2016, Ugandan commercial banks experienced some of the highest levels of loan defaults that were upwards of about Shs800 billion.
This was initially thought to be due to high-interest rates, but it would later be revealed that there were several factors responsible for this like diversion of money, low demand and speculation especially in the property market.
While speaking at the launch of the Eighth Uganda Economic Update report by the World Bank, Mr Emmanuel Tumusiime-Mutebile, the Bank of Uganda (BoU) Governor, said commercial banks have to deal with people who do not want to repay their loans.
“In addition, attitudes towards borrowing are poor throughout society; loans meant to fund business expenses are sometimes diverted for personal expenses or speculative purposes and the culture of loan repayment is weak,” he said.

Access to credit
The report released in Kampala by the World Bank yesterday, also revealed that high cost and limited access to credit had become a constraint to Uganda’s economy, turning away potential borrowers in the private sector.
Mr Mutebile said that it will not be until good practices are adopted by businesses, that the benefits of lower interest rates will be beneficial to the economy.
“Until a much stronger private business sector can develop in Uganda, characterised by good, modern business management, and a clear separation of business and personal interests on the part of business owners; it will be very difficult for banks and other financial institutions to further raise the level of intermediation in Uganda,” he added.
The takeover of Crane Bank in October 2016 in part revealed how some bad practices had contributed to its woes.
Crane Bank was lending to entities that it did not have safety mechanisms to follow-up on repayments.

Low demand
Dr Fed Muhumuza, an economist and research specialist at Financial Sector Deepening Uganda (Fsdu), said Uganda’s problem was that there was subdued demand in the economy for companies that borrowed money to generate enough income in order to meet debt obligations.
“A business which could easily meet its debt obligations five to ten years ago is unable to do that and by default, it would look like that interest rate has gone up in relative terms and yet they are where they have been. In an economy where there is very low aggregate demand, every business is going to have a risk,” he said.
He added that Uganda’s economy needed to immediately jump start the economy in the short term if the economic situation is to turnaround.
The Eighth Uganda Economic Update report goes to note that as a result of the high cost and limited access, was “preventing the efficient allocation and reallocation of resources and thereby reducing the potential to increase productivity across all sectors of the economy.”