How banks zero in on interest rates

Controversy brewing. There has been uproar in the business community over what they termed as ‘immoral’ increase in interest rates on old loans. But there is a clause in banking agreements that traders hardly see that leaves banks with room to alter interest rates. The fixed rate in particular, stipulates that the repaying rate remains the same despite high inflation while the varied rate, which most traders go for, will change according to the market conditions.

On the various facilities available in Uganda’s credit market, Mr Katongole reveals that there are two main types of credit facilities offered in our market. a- Fixed Rate Loans: Interest Rate is fixed throughout the tenor of the facility. b- Floating Rate Loans: Interest rate is based off a benchmark rate (i.e. a spread off the benchmark).
The benchmark rate might be internally determined (base lending rate) or externally (Treasury Bill or Libor). Thus, depending on the interest rate type; the interest rate on the loans would fluctuate save for those on a fixed rate irrespective of the period serviced.

Mr Katongole said as explained, the benchmark rates have been raised in response to the tight liquidity situation in the market. Libor in full means: London Inter-Bank Offered Rate. The Libor is used by the British banks and banks from other countries as well.

What borrowers should look out for
Mr Katongole says: “One of the critical issues with borrowing is ensuring that your cash flows from the investment can meet the loan repayments. Most challenges with loan servicing arise from mismatching cash flows, leading to a strain on a borrower.” “Other issues to consider include rate, tenor, basis (that is floating vis-à-vis fixed) repayment schedule,” he added.

Loans tenors the in credit market vary from person to person. Mr Katongole says loans can be as short as overnight (overdrafts) or as far out as 25years for mortgages. Overall, the high interest rates charged on various loans continue to be one of the most disturbing issues in Uganda’s credit market despite reforms that have taken place over the years in the country’s financial sector.