High lending rates discouraging private sector-led growth - Kasaija

Kampala.

Uganda has defined a vision for middle income status with a per capita income of $1,039 (Shs3.7m). Given that Uganda is pursuing a private sector led strategy, the sector is pivotal to the realisation of this vision.

In order to achieve this vision, Financ minister Matia Kasaija said “…the availability and access to credit is therefore a pre-condition for the private sector to play its cardinal role in this process.”
Commercial banks hold about 80 per cent of the total assets in the financial system. Equity markets are poorly developed and only large firms can reliably raise funds from the equity markets. And as such most firms seeking finance and investment from the domestic market have to rely on the banking system.

According to National Social Security Fund managing director Richard Byarugaba, the three markets combined can only provide Shs25 trillion credit.

“The financial market in Uganda is only Shs25 trillion. The three market segments in this country - the short term market which provides overdrafts, trade finance and lasts between 0-3 years. This market only has two sources of funding – current accounts and savings and is only worth Shs15 trillion. The other market is the medium term market which normally lasts between 3 to 8 years.

“The biggest funder in the bracket is Uganda Development Bank which has less than Shs500 billion. The long term market which only has the pension schemes and Insurance companies. This market only funds the capital markets and is worth only Shs9 trillion,” Mr Byarugaba explained.

The challenge, he said, is domestic borrowing by government which borrows from all the three markets including the commercial banks.
The lack of enough credit sources in the country causes significant challenges in the financial banking sector faced by the business community today.

Mr Gideon Badagawa, the Private Sector Foundation of Uganda executive director, said the constrained access to the credit is one of the major inhibitors for competiveness of the private enterprise.
Regionally, Uganda ranks highest in terms of cost of borrowing at 24 per cent compared to the key trading partner, Kenya which stands at 14 per cent.

“This situation has for the last six months worsened the capacity of our enterprises to compete in the market place with extremely low cost producers from other countries. It has become increasingly more difficult for Ugandan firms to compete locally and internationally in East African Community, Common Market for Eastern and Southern Africa, and other markets,” he said.

However, Mr Kasaija said since April 2016, the Central Bank reduced its Central Bank Rate by 5 percentage points which attracted commercial banks to reduce their rates by an average of 2.5 per cent.

In line with the attempt to have cheap rates, Mr Kasaija said they established what they call an Agricultural credit facility at Bank of Uganda in partnership with some private banking institution basically targeting the agricultural sector.

He said the approval of Islamic banking was one of such measures aimed at reducing the cost of lending.

The minister also reiterated government plans to recapitalise the Uganda Development Bank to be able to provide long term financing for long term projects.

About PSFU
PSFU is Uganda’s apex body that brings together business associations, corporate bodies and the major public sector agencies that support private sector growth.

PSFU has been mandated by its members to work with government in pursuit of a competitive business environment.