The pricing of low loans is to encourage potential borrowers with urgent cash needs to approach the bank for relief, Racheal Nabisubi writes.
Interest rates are one of the most crucial things to watch out for whenever you want to borrow some money especially from a bank.
However, very few people take time to understand what the interest rate is take for instance when applying for a loan.
An interest rate is either the cost of borrowing money or the reward for saving it which is calculated as a percentage of the amount borrowed or saved.
This means that banks borrow money from you in form of deposits, and interest is what they pay you for the use of the money deposited.
However, banks charge borrowers a slightly higher interest rate than they pay depositors.
Although interest rates are very competitive, they vary from one bank to another. A bank will charge higher interest rates if it thinks there is a lower chance the debt will get repaid.
Cutting interest rates
Recently, it has been a trend by commercial banks to cut interest rates. Whereas financial analysts refer to it as a ‘targeted campaign’, the big question is: Why the sudden move and appetite by almost all banks to reduce their lending rate during this time?
For instance, Stanbic bank Uganda, promised its customers that they will be in position to get loans from the bank at 15.9 per cent for at least three months until May to finance their various business activities among which are health establishments, education.
Pricing of low loansMr Jackson Emanzi, head of lending products, Stanbic bank noted that the pricing of low loans is to encourage potential borrowers with urgent cash needs to approach the bank for relief.“These loans are a crucial financial service that can help boost businesses and enhance the speedy recovery of the economy,” Mr Emanzi said.Dr Adam Mugume, the executive director research, Bank of Uganda (BoU) notes that there are several factors under play that are leading to the appetite by banks to lend.“First, demand for credit is gradually picking up. For instance, value of new loan applications was Shs994 billion in June 2020 and it has edged to average of about Shs1.4 trillion per month in the last five months,” Dr Mugume says.Second, yields on government securities, which are risk free rates, have come done. For example, the yield on the 364-day T-bill has come done from […]