High interest rates not to blame for loan defaults - Central Bank

A bank teller attends to a customer. Banks attribute the rising loan defaults to high interest rates. FILE PHOTO

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Key factors. The Central Bank deputy governor says the loan defaults were as a result of diverting funds, coupled with delayed payment by government.

Kampala. The Deputy Governor of Bank of Uganda (BoU), Mr Louis Kasekende, has said the rising number of loan defaults in the banking sector cannot be blamed on the high interest rates but on businesses diverting borrowed money.
Non-performing loans as a percentage of total loans has shot up from 4 per cent in June last year to 7 per cent in June this year. Commercial bank lending rates are at an average of 23 per cent.
“A recent review by Bank of Uganda to ascertain the reasons for the non-performance of large credit facilities in commercial banks indicated that only a paltry 0.3 per cent of non-performing loans as at March could be attributed to high-interest rates,” Mr Kasekende said at the launch of the Orient Bank Business Club, a financial literacy programme.
He said the current level of interest rates is not at their historical average over the last few years, an assertion contrary to what economists and banks have pointed out to be responsible for the rise in loan defaults. “Diversion of funds away from the intended purpose of the loan was a major contributor to the non-performing loans, only surpassed by delayed payment by the government (domestic arrears) and cost overruns/ insufficient cash flows,” Mr Kasekende said.
“The above reasons and poor management accounted for about 65 per cent of the large non-performing loans in our banking industry,” he added.
Recently, as Stanbic Bank released its half-year results for this year, their non-performing loans have increased by Shs7 billion to Shs37b.
“This was expected with the lag effect of the high interest rate environment and elevated exchange rate in 2015,” a presentation made by the bank read.

No to capping interest rates
Mr Kasekende also played down the possibility of BoU proposing any legislation to cap lending rates like Kenya did last week. In the 1960s, there were fixed interest rates by the central banks for different loans and saving products. “Our assessment then is that it did not serve us well. If you look at the financial system of the 1980s, it actually contracted. We moved away from fixed interest rates to market-determined interest rates and our experience with these rates has been very good since 1993,” he said. “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 added.