On Mwenda’s self-destructive impulses

A SACCO credit committee composed of your neighbors and or fellow workmates will probably agree to lend to you capital to scale up your small business unlike an old friend from University who chairs the Credit Committee of a big bank but has to get approval from the regional office or Head Quarters in London.

The biggest challenge is that we do not have large pools of savings that are available for people to borrow at affordable interest rates and long-term tenure. So how should we build large pools of domestic savings and capital for investment? In addition, where should these funds be invested for socio economic transformation?

Social Housing is one such investment. Housing is indeed an anchor for social wellbeing and transformation to a middle-income economy. If you are 50 or 100 members in a SACCO or investment Club, there are chances that 50% of members probably do not own a home, but surely need one.

In 1970s and 1980s, housing was part of public services provided by government, the same way government provides security, roads, schools, electricity, health centers etc. Whereas government continues to provide social services like utilities, health and education, this has not curtailed the private sector to invest in hospitals, schools, security etc. In the same way, we may need government’s active role in developing and providing housing; especially in urban centers and new cities.

There is an opportunity for Public Private Partnerships in the residential /social housing sector in this country. Government can provide road infrastructure, utilities and even land for social housing projects. Additionally it can provide debt payment guarantees to the banks that lend to these social housing projects. Government can support the developers of these social housing projects with tax exemptions on construction materials whether sourced locally or internationally. The recent income tax amendments geared towards domestic manufacturing and import substitution could be replicated for the residential housing sector.

Mwenda further raised the issue of banks preferring to lend to government through buying of government securities (bonds and bills) instead of local businesses and SMEs. Well, one way this can be remedied is for companies or developers of residential housing to be allowed to issue corporate bonds/ debt and the interest charged on these bonds or loans is tax exempt under the income tax act.

As an example, a property developer XYX Limited issues a corporate bond of Shs10 billion to build 100 units. Those who buy the bond (for example individuals, SACCOs, banks etc.) will charge interest on the bond, which is interest income to them but interest expense to the property developer who issued the bond. If bond investors/ bond buyers know their income from the corporate bond is tax exempt, then they will channel most of their savings/resources to such investments that transform social well-being.

Currently, banks are lending (using customer deposits) to individuals and property developer at 18% and above. But the bank customers, with some savings and deposits in the banks can’t afford the properties that have been put on the market by the developers. So we have a dilemma.

What if individuals and saving groups had opportunities to lend to a property developer(through a corporate bond) at 8% or 10%, then maybe the developer could put a house on the market that most people need and can afford.

Currently, the income earned by members who invest in unit trusts/ mutual funds in Uganda is tax exempt. Whereas most Unit trust holders are earning 10 to 12 % per annum on their investments, their fund managers are investing in government bonds and securities with annual yields of 15%. As we incentivise the private sector to invest in government bonds, whose proceeds are critical for public infrastructure investment, we may also have to consider incentivising the private sector (property developers, banks, and mutual funds, SACCOs etc.) to invest in social housing projects. The approach should involve communal banking that will help to grow savings, domestic capital and socio economic transformation.

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Eng.Agaba Rugaba is a Member of the Uganda Institution of Professional Engineer(UIPE) and PPP Practitioner.

Twitter: @RugabaAgaba