Keith Jefferis, the Senior Advisor to the Botswana Ministry of Finance and Economic Development, says operational costs in Uganda account for 60% of the expenses of banks compared 40% in other countries, and this contributes to the high lending rates in Uganda.
The private sector players have called on the government to start guaranteeing loans to the private sector, as experts call for cross-border single licensing of banks, as a way of helping reduce interest rates.
In a brainstorming session seeking ways that may help reduce the interest rates that commercial banks charge when lending out to the private sector, they have also urged the government to reduce its borrowing from the local financial sector so as to stop state competition with private borrowers.
The average interest rates in Uganda range between 17% and 22% depending on a bank, but even at a single bank, the rates will vary depending on the status of the borrower. At an average 19.5% per annum, credit in Uganda is among the highest in the region, with Tanzanian banks charging an average 13.6%, Kenya 14%, and Rwanda 17%.
Surprisingly, Uganda has the lowest ratio of bad loans compared to the total loans, or the non-performing assets ratio, according to figures at Stanbic Bank East Africa.
Keith Jefferis, the Senior Advisor to the Botswana Ministry of Finance and Economic Development, says while the government has a duty to play to see the cost of operations reduce for banks in Uganda, the commercial banks themselves must work on their systems, including embracing automation.
He says operational costs in Uganda account for 60% of the expenses of banks compared 40% in other countries, and this contributes to the high lending rates in Uganda.
Dr Jeffris says competition contributes a lot to lowering of the cost of loans, but Uganda’s sector is dominated by few major banks, while the majority are too small to pose significant competition.
The total assets of the 25 licensed bank in Uganda are worth about 35 trillion shillings, but about 22 trillion shillings worth of the assets are held by only 5 banks. Jeffris proposes that creation of medium-size banks, consolidation of small banks and allowing banks to operate across borders in the EAC freely as is the case in Europe, will create the desired competition.
//“Cue in: Large dominant banks….
Cross-border banking competition.”//The persistent borrowing by the government from the local market has always been blamed for the high interest rates. […]