To cap or not to cap interest rates?

Experts say Bank of Uganda should exercise its regulatory powers to check the high overhead costs incurred by the commercial banks that in turn transfer the burden to the borrower.

What you need to know:

  • Ugandan financial sector players think capping interest rates is counterproductive while the civil society and pockets of the business community are pushing for Uganda to go the Kenya way.
  • Experts’ views on whether Uganda needs a lower interest rate regime where interest rates are capped.

James Obuku imports goods from China for retail purposes. At the height of the depreciation of the Shilling, Obuku took out a loan at an interest rate of 28 per cent which kept on fluctuating because it was not a fixed rate loan. As such, he paid through the nose.
If Obuku attempts to borrow again today, he says he will be given credit at an interest rate of 25 per cent which is still high. With the current (Central bank rate) CBR at 14 per cent, this implies that the commercial banks will be getting a profit of 11 per cent. According to Bank of Uganda (BoU) statistics, the interest rates charged by commercial banks have averaged at 21.3 per cent since the start of the millennium and about 21.7 per cent since July 2011.


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