‘Capping interest rates discourages credit growth’

Uganda Shilling notes. Some experts say government should address the ingredients that cause high interest rates first. FILE Photo

What you need to know:

  • Mr Wilbrod Humphrey Owor is the new executive director of Uganda Bankers Association, a role he took on in mid-August this year. Mr Owor brings experience from United Bank for Africa –where he previously worked as the chief executive officer, Barclays and Dfcu banks. Prosper Magazine’s Dorothy Nakaweesi talked to him about the industry’s growth and challenges. Below are excerpts:
  • Once government collects less tax than it can fund its budget, it is forced to borrow domestically or externally. When it borrows domestically through the treasury bonds, it takes money from banks and offers the interest rate. .

Tell us about Uganda Bankers Association?
It brings together 25 licensed commercial banks plus Uganda Development Bank. It promotes harmony and best practices among its members. We discuss industry issues, interact with ministry of Finance on policy and parliamentarians and this engagement is run through the secretariat, to negotiate and contribute to debates to cope with industry trends.

What is your view on the industry in terms of growth?
We have come a long way. The industry is now regulated since we have stepped up capital requirements. Risk monitoring is much higher and the industry is very strong. When we talk about the number of players –this depends on how you look at it, we have 25 players.
But the key thing we need to do is to spread our presence in the remote places which need more coverage. The business itself –credit and lending is central to the banking business. We are working with the Credit Reference Bureau (CRB) to improve the quality of credit information. We are not yet where we want to be but there are still sources of information that are not captured. For example if you borrow money from a money lender this is not captured.
The other key issue is that while we want to increase our presence instead we are moving away from physical brick and mortar branches because they are expensive to run. We will be embracing technologies and handheld devices so that we can reach many more people. There is a lot to do to improve the industry; the level of financial literacy is low and appreciation of financial matters. We intend to increase awareness through radios, specific group and social media to allow people appreciate the dynamics of the industry.

Many people downtown fear going to banking halls because they think these are places for the rich and literate. What is UBA doing to see that this changes?
We have witnessed that and discussed it with our members. One is putting non-English front office staff who speaks local dialects so that the customers understand. This will make them save with our members instead of the informal ways which are risky. However, sensitisation is key if this is to be achieved.
Secondly we are rolling out agency banking where customers do not need to visit a banking hall but can access basic services from these agencies which are like mobile money kiosks. This will attract the unbanked population.

There is a growing fear on the state of the economy in Uganda. How has this impacted the banking industry?
Business levels have dropped judging from the level of activity on business accounts. The economy is not doing well and this has implications like payments not coming in time; imports may not come in time, projects are slower and this has led to loan defaults as projects are stuck.
This is not a good state and it is a concern to banks. But the important issue is what are the specific causes and how can they be addressed? Our advice to the banks is that if certain clients are facing challenges to pay back the loans, they should sit with them and come to a common ground. The businesses have to look for alternatives, then banks have to review the relationships with their clients, government should be mindful of how it is investing in large infrastructure projects that will have a multiplier effect on local content.

Embracing technology comes with challenges such as increased fraud. How is the industry addressing this?
The risk of fraud is constant in the financial sector. While there are inbuilt security systems or measures, we have to be on the alert and cope with trends. As an industry, there are international security standards we adopt like authentication of transactions and cross-checking. But the biggest part of the security goes to the customers’ safety of their codes and lately there is documented fraud done by the importers. With all these measures in place, we also train our staff in handling this. We also report to the Financial Intelligent Authority when we get fraud alerts. We also collaborate with the security agencies. Still on security, banks have embraced a system called Euro Money Visa on card technology which uses PIN codes.

What is your opinion on capping interest rates in Uganda like Kenya did?
We previously indicated our position. We believe that interest rates should gradually come down in an environment where the cost of credit is high and does not favour business and economic growth. Generally, the cost of credit should gradually come down. However, capping is not the best way to address this challenge because there are other factors that cause high interest rates. Interest rate is just a tip of the iceberg; it is the ingredients that cause the interest rates to go high that should be addressed. Critical among these causes that we need to address to bring the interest rates down, is the savings level of an economy and the tax to GDP ratio.

Once government collects less tax than it can fund its budget, it is forced to borrow domestically or externally. When it borrows domestically through the treasury bonds, it takes money from banks and offers the interest rate. The price at which government borrows this money is the bench mark at which we will start indicating interest rates and this can be a big driver. That aside, banks are reviewing their operations to cut the interest rates. These are important dynamics to look at much as some are long-term. Once these are addressed, the interest rates will come down. This is a discussion we shall continue engaging in as stakeholders because we also want the economy to grow.

Banking sector
Mr Wilbrod Humphrey Owor, executive director, Uganda Bankers Association
On capping interest rates. Interest control regime would stifle free market forces, discourage credit growth, constrain sector appetite and encourage black credit market at very high cost and terms.