The chief executives of commercial banks have meet this morning to chart a way forward on the Bank of Uganda (BoU) directive to lower interest rates before government caps the interest rate that financial institutions can charge borrowers.
After the banks failed to reduce loan rates in response to reduced Central Bank Rate (CBR) in the face of a deadly pandemic that has left the economy on its knees, on July 7, the Governor Emmanuel Tumusiime-Mutebile penned a strong letter to CEOs to cut interest rates and threatened to invoke Section 39 (1) of BoU Act, 2000 which mandates the bank to prescribe- the minimum or maximum interest rates.
The average lending rate rose from 17.7 per cent in April to 18.8 per cent even after the Central Bank reduced the CBR to limit the impact of novel coronavirus on the economy.
In April, BoU reduced CBR from 9 per cent to 8 per cent before it was again cut to 7 per cent in June.
In easing the monetary policy, the Governor and his team hoped to reduce the cost of credit, to levels that are consistent with the current monetary policy stance but this didn’t happen.
In a letter copied to executive director Uganda Bankers Association (UBA), Mr Mutebile said: “The financial sector is vital in transmitting the monetary policy stimulus to the affected businesses and households in order to hasten economic recovery. Moreover, a faster recovery of the economy reduces the likelihood of distress in the financial sector. I, therefore, expect a faster reaction to the CBR reductions by the commercial banks.”
Expressing disappointment with the commercial banks, Mr Mutebile wrote: “Moreover, as you can recall, BoU had been pursuing an accommodative monetary policy stance since April 2016. It is, however, disheartening to see commercial banks have not reduced lending interest rates in tandem with reduction despite several discussions with Uganda Banker’s Association (UBA). ”
“The weighted average lending interest rate on shilling denominated loans increased to 18.8 per cent in May 2020 from 17.7 per cent in April 2020 recovery.” Mr Mutebile further explained that he decided to write to banks CEOs on account of the downward stickiness in lending interest rates despite the Bank of Uganda’s accommodative monetary policy and more so considering the recent reductions in the Central Bank Rate (CBR) to record low of 7 per cent.
Uganda, like all the other economies- big and small, is facing difficult economic times as the Covid-19 pandemic continues to wreak havoc on human life and economic activities leading to recession in the global economy and the sharp contraction in Uganda.
Mr Mutebile also told the various commercial banks CEOs that the domestic economic activity is facing “unprecedented decline” due to the Covid-19 pandemic. He added that businesses and households have continued to suffer the brunt of the pandemic arising from lower demand, lower capital inflows, reduced productivity, unemployment and loss of incomes due to lockdowns and travel restrictions.
“Resumption pre-pandemic levels of economic activity will be gradual, partly due to dampened external demand amidst the deterioration in global economic sentiment,” Mr Mutebile’s letter, reads in part.
The Governor explained that to alleviate the economic setback, the Central Bank took swift and novel actions.
In particular, the Bank eased monetary policy and continues to take other far-reaching steps to provide liquidity to the banking system in order to ensure adequate access to affordable credit by households and businesses.
CEOs speak out
The chief executive officer of Stanbic Uganda, Ms Anne Juuko told Daily Monitor that they are always responsive to Bank of Uganda Monetary Policy actions regarding the Central Bank Rate (CBR).
“We are fully aligned with the Central Bank monetary policy guidelines, when the Central Bank reduces the policy rate, we also reduce our lending. We are required to play a role in supporting the business activities (economic activities) by lending to the private sector.”
“Our prime rate is at 16 per cent as you can see from the graph that I have shared with you, we have been and we are consistently responding to the Central Bank Rate (CBR),” she added.
Ms Juuko said the topic of interest rate is in the banks’ chief executive agenda.
“After the meeting tomorrow (July 10) as an industry we will pronounce ourselves on interest rates,” she said.
The head communications and corporate affairs at UBA, Ms Patricia Amito, said: “We have received the communication from the Central Bank and the matter is on agenda at tomorrow’s CEO monthly meeting after which Executive Director will a comment on the same.”
The managing director of KCB, Mr Edgar Byamah told Daily Monitor that banks will gradually reduce the lending rate in response to the Bank of Uganda CBR and also depending on the economic conditions.
Mr Byamah explained that they have been reducing their rates and they will endeavour to respond to BoU policy direction on interest rates.
“For corporates, our rate is at 18 per cent and the prime rate is at 22 per cent. I would like to commend BoU for policy guidance on loan restructuring and another guideline it has offered to banks during this difficult time that has been caused by Covid-19 pandemic,” Mr Byamah said.
He added: “There are other factors outside the central bank monetary many times they forget, the problem of debt recovery and asset risk.”
In the face of public deficits, the government is confronted with the choice between external and domestic borrowing.
The government’s recourse to domestic (excluding the central bank) financing reduces the supply of loanable funds to the private sector by the commercial banks, which are commonly referred to as crowding out the private sector.
Traders welcome move
The chairman of Kampala City Traders Association, Mr Everest Kayondo, and business community particularly the Small and Medium Enterprises welcomed the Governor’s intervention.
They said the interests are still high because of high government borrowing domestically.
They have also accused commercial banks of being insensitive to the cries of borrowers.
“Our interests in the commercial banks are not determined by the rate at which the government is borrowing using the treasury bills and treasury bonds from the market because we are competing with the government (interest rates) which have remained high so even when BoU reduces CBR, the rates in commercial banks remains high,” Mr Kayondo said.
Mr Kayondo also complained about the risk charges the commercial banks administer on their prime rates.
As a result of Covid-19 impact, Uganda and the global financial system remains in a period of significant uncertainty despite policy actions by the central banks.
The director research at Economic Policy Research Centre (EPRC), Dr Ibrahim Kasirye, said: “Probably the current loans that the commercial banks have given out are not performing well, so the banks may be conscious about that such that they don’t end up having bad debts.”
Dr Kasirye explained that when the loans are not performing well, then the margins between the Central Bank Rate and the lending rate is likely to remain high.
“The wider the margin the higher the interest rate, which could be attributed to other factors that may not be allowing banks to respond as fast as the Central Bank and the borrowers would like to see them reducing the lending rate following a reduction in Central Bank Rate.”
Dr Kasirye explained that there are other factors beyond the BoU monetary policy action.
“The current operating environment for the business community, there are still restrictions, the lockdown has not been fully lifted, people have limited hours of working while some businesses are still closed. This has risk aspect on the bank loans.”