Cost of credit in financial sector remains a challenge

By Patrick Kagenda

51- year old Louis Kasekende was recently re-appointed as the Deputy Governor of Uganda’s central bank. The Independent`s Patrick Kagenda talked to him about his vision for the banking sector.

Well come back. What new things are you bringing to Bank of Uganda?

I have over the past three and a half years been working as the chief economist of a premier development bank. A bank whose mission is to fight poverty, assist African countries in development and design projects for a wide range of countries. We are talking about low income countries, middle income countries and the fragile states. My experience at the African Development Bank (ADB) has been a learning one dealing with a wide range of development issues, challenges in low income countries, challenges in fragile states, and challenges in middle income countries.

Around 2008, the financial world faced a meltdown. We had initially thought that transmission of the crisis to Africa would be weak but later on we realised that the secondary effects were transmitted to Africa through different channels that included trade, remittances, capital account transactions whether you are talking about investments or short term flows.

That gave me an opportunity of working with others in different institutions in designing a response by the ADB. It also gave me the opportunity of monitoring development and how different countries were affected by the crisis. Working for a development bank, you are focusing more on medium to long term development issues.

Coming back to the central bank of Uganda, I am going to be focused on price and financial sector stability. One could easily say that these two are not really pertinent. But the ultimate objective of any monetary policy is actually growth and poverty reduction.

How do you view the Ugandan banking sector after the global financial meltdown?

I left almost three and a half years ago, and at that time we had just privatised UCB (Stanbic Bank). One issue was always the competition and efficiency within the banking sector. Issues of products within the banking sector, issues of debts, issues of outreach, is this banking sector reaching the bottom of the pyramid or is it just catering for the top of the pyramid . Coming back and looking at the banking sector, I still need to look at more statistics about the banking sector; I still need to read several reports about the development in the financial sector.

We were very worried about concentration three years ago but to me this is no longer a worry. The other issue was effective oversight over the financial sector. Looking at the way Uganda went through this period of the global financial meltdown and the way banks have been affected especially in the developed countries, one has to be proud of the effectiveness of supervision of this banking sector. It has gone a long way in insulating the domestic financial sector from the transmission of the crisis to the banking sector. There were definitely challenges. One challenge was always the cost of credit and the operating margins of the banking system.

We had always thought that with competition and increased efficiency, these margins would come down. That remains the point of concern that interest rates have remained very high, lending rates have stubbornly remained within double digit range at levels of about 19-24. The operating margins have remained very high. The issue of outreach, yes we have made progress with the licensing of micro finance institutions but I do not think we have yet dealt with the issue of reaching the bottom of the pyramid. That remains the challenge. There was always the issue of companies or the productive sector being able to source medium to long term credit from the banking system, there has been progress but that again remains a major challenge.

What does it feel like coming from international banking standards to national standards?

I was working for two different institutions. In ADB I was working for a development bank, now I have come back to central bank. I had a stint at the World Bank for two years but my experience; my skills are more into central banking. It’s just like coming back home; coming into an area I have worked in for almost 15 years. It’s an area that I understand very well more than the development banking.

There has been criticism about the absence of an overseer to the central bank. How do you think the activities of the BoU should be regulated in view of its constitutionally guaranteed autonomy?

The central bank operates under delegated authority which is enshrined in the constitution. It gives it independence in the choice of instruments. But the central bank under that delegated authority is accountable. It has a board that it reports to, the management reports to the board. We are also accountable to government. We are accountable to the people. I do not think we should go ahead and design another overseer. This is an institution that is accountable, the audited accounts of the bank are sent to parliament. So parliament provides that role.

What should financial institutions do to cope especially in the aftermath of the global financial meltdown?

There are lessons from the global financial meltdown. I am not saying that the system here is weak, but what we have learnt from the global financial crisis is that there should not be a segment of the financial system that is not regulated. So we should always look at especially emerging institutions that they should be within a regulatory environment. The second point is the whole issue of innovations and products within the market. As they are introduced, the regulators must be comfortable that there will be effective regulation of the operations of the institution that are introducing those products.

Late last year in Nigeria, its central bank had to intervene to salvage five banks. If a scenario like that occurred to the Ugandan financial sector, would the central bank have the capacity to do the same?

There is one thing that we have learnt from the global financial meltdown. That is that there can come a time when the balance sheet of the central bank cannot on its own support an intervention within the financial sector. It has to be at some point backed up by the fiscal authority. If we got into a situation where the financial system is threatened and the ability of the central bank cannot by itself salvage the system, the fiscal authorities will have to come in. There should not be worry. The fiscal authority would always backup the central bank in those circumstances. The central bank of Nigeria had that financial muscle and was able to intervene without the assistance of the fiscal authority.