What you need to know:
Reason. The decision has been informed by unfavourable market conditions triggered by the weakening Shilling
The weakening Shilling that hit a record low for the third consecutive day on Wednesday is forcing commercial banks to review their lending rates.
Standard Chartered Bank notified customers in February 2015, that the lending rate would change from 20 per cent to 21.5 per cent.
Dfcu also sent out a notice to customers on Wednesday announcing an increment in the lending rate from 21 per cent to 22 per cent effective April 1, 2015.
GT Bank also announced an increment of lending rates from 21.5 per cent to 22.5 per cent.
Notably, these increments are only for loans in Uganda Shillings, a denomination most Ugandans borrow money.
Stanbic Bank had in early March 2015 announced a review of all its bank charges to fit into the prevailing economic conditions. “Such changes are always informed by the prevailing market conditions,” Mr Herbert Zaake, the corporate affairs director, Standard Chartered Bank told Daily Monitor.
The Uganda Shilling has been on free-fall since the start of 2015. It has so far shed at least 7 per cent of its value, hitting a record 3,000 on Tuesday.
The depreciating Shilling also comes at a time government is paying higher interest on its domestic debt.
“Our lending rates are based on an aggregate of a number of factors and not only the strength of the Shilling against other currencies. At the moment, we are studying the trends, before we can take a considered view on our lending rates,” said Mr Michael Kaddu, the head corporate affairs Barclays Bank Uganda.
He, however, downplayed the possibility of a knee-jerk reaction to raise lending rates because the Shilling hit a record low. Ms Peace Adia, the head of Treasury at Orient Bank said the bank is taking a similar view.
“An increment in lending rates if it’s inevitable will eventually happen but for now we are watching the markets,” she told Daily Monitor.
In 2011, as inflation rose above the 20 per cent mark, bankers cushioned the risk by increasing lending rates.
At the time, the Shilling also hit a record high of 2900. Institutions including banks are said to be still recovering from the shocks of 2011 which included loan defaults, low profitability, banks taking over property and expensive loans.
The depreciating Shilling at the time, also led to increments in prices of imported goods, sugar and construction materials as costs of production surged.
“Ours is majorly an import based economy, we import more than we export, leading to a negative Balance of Trade. Eventually, importers will pass on the cost of doing business to the end users through price increments,” Ms Adia pointed out. She added: “This will see inflation increase and the Central Bank could raise the benchmark policy rate (Central Bank Rate) and consequently commercial bank’s lending rates will increase.”
Mr Musa Mayanja Lwanga, the research and policy analyst at the Economic Policy Research Centre told Daily Monitor lending rates will also increase as banks prefer to lend to government considering it offers better returns and is more trusted to pay back.
“When Treasury Bills and Bonds rates go up, banks will lend more to government since it is more secure. Due to resource constraints there they will raise lending rates to the private sectors. This is what is referred to as the crowding out effect of government borrowing,” he adds.
Bankers note that offshore investors who would be lending to government have opted to slowdown, especially over the election spending concerns. This has led to increased interest charged on government.
“The exit of offshore investors and the corporate demand from many multinationals and corporates has caused the Shilling to depreciate further. Yields on government debt are a major benchmark for bank’s cost of funds. If the cost of funds increases then inevitably the lending rates will increase,” Ms Peace Adia, the head of Treasury at Orient Bank said.
At the height of the surge in lending rates in 2011 and 2012, city traders went on strike for five days protesting the higher rates charged by banks. At the time, rates were as high as 35 per cent. Since then, they had fallen to an average of 22 per cent according to Bank of Uganda statistics. One of the reasons the banks gave for this increment was the high cost of money. It appears to be happening all over again.
The new lending rate GT Bank will be operating by as of April 2015. This is up from 21.5 per cent.
The new lending rate Dfcu Bank will be operating by as of April 2015. This is up from 21 per cent.
The new lending rate Standard Chartered Bank is operating by as of February 2015. This is up from 20 per cent.