Market forces to determine interest rates, govt insists

Prime Minister Ruhakana Rugunda

What you need to know:

Market factor. The Prime Minister maintains that government will not have a hand in the interest rates, despite pleas by the private sector.

Kampala. The government has downplayed the possibility of regulating commercial bank interest rates, insisting that market forces will continue to be the major drivers of the rate.
On Wednesday, Kenyan president Uhuru Kenyatta assented to a Bill that caps interest rates to 4 per cent above the Central Bank Rate (CBR) set by the Central Bank of Kenya.
In Uganda, several private sector players have urged the government to intervene in the interest rates environment.
Speaking on the sidelines of the 7th CEO Summit at the Kampala Serena Hotel, Mr Ruhakana Rugunda, the Prime Minister, told Daily Monitor that there will be no regulation on interest rates.
“The government has decided that market forces should take course in determining interest rates instead of the direct hand of the government. Of course, the government through the Central Bank is watching the situation, but we insist that the market should take charge,” he said.
The current level of interest rates is at an average of 22 per cent whereas the CBR set by Bank of Uganda (BoU) in August is 14 per cent. That means there is a margin of 8 percentage points. Recently, estimates have indicated that due to high-interest rates, the level of loan defaults has peaked at almost 8 per cent (an estimated Shs900b) of total loans as of June.
In a recent interview with Daily Monitor, Mr Emmanuel Tumusiime-Mutebile, the BoU Governor, said an upper threshold on lending rates would be counterproductive because banks will not lend to customers if they cannot expect to cover the costs of doing so and still make a profit. “Hence capping interest rates will mean that the banks will not lend to the less creditworthy borrowers or those who require more costly evaluation and monitoring”.
The government intervention, however, is not going to come directly, with delegates at the summit being told that the era of state control in the country is over.
“Uganda’s economy should be driven by the private sector and the government will only work as a facilitator. There are people who want the government to intervene but we cannot go back to that. There are also people who want us to cap interest rates but we shall not,” Mr David Bahati, the State Minister of Finance for Planning told delegates.
In signing the Bill, president Kenyatta said: “Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.”
Already, several people have warned not to go the Kenyan way because it may be counterproductive.
“Uganda should not follow the Kenyan approach on capping interest rates because it will lead many to be further excluded from accessing financing from commercial banks,” Dr Ngozi Okonjo-Iweala, former Nigerian finance minister, said.