Do not cap interest rates, says experts

Wednesday September 14 2016
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Bank of Uganda deputy governor, Dr Louis Kasekende said the Central Bank would not fix interest rates because such rates failed to serve the country well in the 1980s. File photo

Kampala. Experts have warned that the move for a private members Bill to control interest rates in Uganda, if approved, will have adverse effects on the economy.
The Civil Society Budgetary Advocacy Group (CSBAG) has suggested a private members Bill to amend the Financial Institutions Act 2015 to include an interest rate ceiling of 5 percentage points of Central Bank Rate (CBR).
This implies that with the current 14 per cent CBR, commercial banks would not be allowed to lend at above 19 per cent.
Mr Wilbrod Owor, the executive director Uganda Bankers Association, in a statement issued to Daily Monitor on Tuesday, said: “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.”
He added that besides there is little evidence to show that the same laws have yielded growth in credit for other countries.
Currently, the interest rate stands at an average of 23 per cent.

While speaking on the sidelines at the UAP Unit Trust meeting on Tuesday, the UAP financial services general manager, Mr Simon Mwebesa, said capping interest rates will not solve the impact of high interest rates on the economy.
He said the government should instead focus on structural reforms within the economy.
“You cannot have a government borrowing at 18 per cent. What will an ordinary person borrow at? The ultimate decision should be adjusting the structure of the economy like the sources of capital, liberalising the pension sector and opening up space for more players,” Mr Mwebesa said.

He added: “If you look at BoU [Bank of Uganda] reports, foreigners are holding 20 per cent of the bonds, then NSSF and banks. You have very little or no long-term money, a lot of short-term money and yet long-term government needs that it is borrowing for. That is why interest rates are there. If this equation can be changed, we shall not need caps.”
Mr Mwebesa, however, observed that even though the cap is not necessary, the economy would work well if capping interest rates is combined with structural reforms just like in the US where caps go hand in hand with an enabling economy.
Earlier on, the Central Bank deputy governor, Mr Louis Kasekende, said the Central Bank would not fix interest rates because such rates failed to serve the country well in the 1980s.

“Any move away from market-determined interest rates would be a policy reversal and you do not just give away something that has been serving you well in terms of the financial sector,” Mr Kasekende said.
The debate around a lower interest rate regime in Uganda comes weeks after Kenyan President Uhuru Kenyatta signed the Banking Act 2015, allowing the Central Bank to regulate the interest rate at which banks can charge on loans and pay on deposits.

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