Uganda: Banks Meet Over High Interest Rates On Loans

Uganda: Banks Meet Over High Interest Rates On Loans

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.

Background

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.

Economy hit

Uganda, like all the other economies- big and small, is facing difficult […]

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