BUSINESS: Declining interest rates

Interest rates still high

William Nyakatura, the corporate advisor at African Alliance Uganda Limited told The Independent that any reduction in commercial lending is a good factor of cutting business costs and should be welcomed.  But, he said, current interest rates are still high.

The recent 8th World Bank’s Economic Update for Uganda focusing on financial inclusion echoed Nyakatura’s view. It says the high cost of credit is a major constraint for Uganda’s economic growth and is making many people shy away from loan products.

It says the overall domestic credit to GDP ratio in Uganda has stood at the average level of 13% of GDP over the past decade, far lower than the figures recorded by regional neighbors. It further says Uganda ranks in 120th place out of 138 countries in affordability of financial services.

Expounding on that view, Christina Malmberg Calvo, the World Bank country manager for Uganda said increasing access to low cost and safe financial products for firms will spur business investments and economic growth. She also said that financial products targeted at the informal sector, rural households and women will create jobs and build resilience against shocks.

Data from BoU indicates that year-on-year growth rate for private sector credit declined to -1.6% by September 2016.

There were reports during the first quarter of FY 2016/17, that a number of firms were under financial distress and required a government bail-out to a value of around US$ 386 million.

Analysts attributed these hardships partly to the high cost of financing from commercial banks and partly to the high level of government arrears, with the total value of these arrears standing at around US$ 446 million. Additional contributing factors to complaints from the corporate sector were the congested, costly public services that have rendered the business environment uncompetitive.

Across the different sectors, loans to building and construction, trade, manufacturing, and the personal and household sectors continue to account for the bulk of private sector credit, comprising more than 70% of the total stock.

But Segwaya of Barclays said that interest rates may be seen as high but that is the reflection of what is happening in the entire economy which he said needs to focus on increasing production and productivity and exports for revenue purposes.

Fabian Kasi, the managing director at Centenary Bank and Chairperson of all bankers in Uganda told The Independent that it is a shared view that the banking industry should ease credit to the private sector so as to revamp the economy, spur investments and growth, create jobs and employment and stimulate demand in the economy.

He said the current lending rates may not be as low as everybody would have liked them to be, but the most important thing is that they are consistently reducing.

“As operational costs and default risks ease, we should be seeing the interest rates reduce thereby continuously improving private sector credit,” he said.

He said banks were being more cautious on who to lend given that close to Shs1 trillion was recorded as Non-performing Loans for the industry in 2016. He said NPLs are as a result of poor governance, planning, diversion of credit, management inadequacies which in most cases affect their ability to repay their loans.

He said banks are managing this challenge by closely following up with their (borrowers) operations, advising them on how to manage the credit and operations thereby building their capacities to manage better so as to grow.

Banks have also been faulted for targeting government as their main borrower which is crowding out the private sector.

But Kasi said banks are private enterprises which must do profitable business if they are to be sustainable. He added that naturally they would be happy to lend to government, but of course it does not offer enough demand.

“In any case the private sector lending is critical for economic development which is necessary for the growth of banks,” he said.