Loans taken for land purchase are the hardest hit with the burden of high interest rates despite decline in interest rates in the recent past, Bank of Uganda (BoU) monetary policy report for January 2014 has revealed.
The director financial stability department BoU, Dr Charles Abuka, said this is mainly because of the risk profile of the loans and them locked in for a long time (about 25 years) unlike commercial loans which are payable within short period of time.
The monetary policy report shows rates for Land purchase remained the highest at 27 per cent. For the last one year, interest rates have declined by 5 per cent following the reduction in the Central Bank Rate from 23 per cent in the fourth quarter of 2011 to 11.5 per cent now.
Why reduced rates
The development, according to the Central Bank, is meant to cause a reduction in commercial lending rates and subsequent support for high economic growth since Uganda’s macroeconomic indicators are now relatively stable.
Computed statistics indicate that building (construction and real estate) is in second place in form of high interest rates attracting 24.7 per cent, agriculture (crops, livestock, poultry and fisheries 24.5 per cent, trade 23.1 per cent, other personal and house loans 23.1 per cent, electricity and water 23.0 per cent, community and other social services 22.9 per cent, transport and communication 22.6 per cent.
Personal and house loans attract 22.3 per cent, residential mortgage 20.7 per cent, commercial mortgage 19.9 per cent, business services 18.6 per cent, mining and quarrying 18.5 per cent.
The report also reveals that lending rates rose for agriculture, mining & quarrying, manufacturing, land purchase, other mortgage, community & social services and other personal & household loans.
The Central Bank explains that annual growth in Private Sector Credit (PCS), though positive has been declining since February 2013 because of a rapid decline in annual growth of the foreign loans over the same period.
Improved business and consumer confidence
In an interview with the Daily Monitor, the managing director of Alpha Capital, Mr Stephen Kaboyo, said while commercial banks have been slow to respond to the rate cuts, there are signs that both business and consumer confidence are improving, boding well for a further pick up in lending that may increase credit flow and extend a good growth run.
On the currency front, Mr Kaboyo said the depreciation pressures are beginning to show up largely driven by sentiment with respect to geo-political issues.
“This could be aggravated by corporate demand as markets return to normal business after the holiday season,” he said.
The executive director of research Bank of Uganda, Dr Adam Mugume says due to the existing high level non-performing loans, banks are not lending so much to the private sector.