Why banks won’t hurry to cut interest rates

Industry executives to respond to Mutebile’s call upon carefully evaluating their commitments with clients

Kampala, Uganda | JULIUS BUSINGE | Commercial Bank top executives plan to respond to the central bank’s call to lower interest rates upon carefully analyzing their current loans and sector developments.

The Bank of Uganda Governor, Emmanuel Tumusiime Mutebile, announced a reduction in the central bank rate (CBR) from 10% in August to 9% in October, citing a reduction in inflation.

The CBR is an indicative rate that signals the direction of commercial bank interest rates. Usually, the higher the CBR, the higher the interest rates in the market and vice versa.  The latest CBR reduction was the first in the past four months.

The new development implies that commercial banks have to follow suit and cut minimum lending rates which are currently averaging at 20.2% in the quarter to August 2019 compared to 19.7% in quarter to May 2019.

Bankers talk

However, executives in the banking said they will first study the market environment prior to making any necessary changes in interest rates.

Annet Nakawunde Mulindwa, the managing director at Finance Trust Bank said they already have commitments with lenders which is a key determinant of the cost of lending.

“…we have to think through it and do some calculations and see,” she said, “If the CBR is reducing today, you do not expect us to respond the following day.”

But she added: “It may not be an immediate response but we always work towards making sure that we reduce our cost of lending.”

Nakawunde said they are continuing to monitor the capacity of their borrowers when it comes to loan repayments before extending new lines of credit.

William Sekabembe, the chief of business and executive director at dfcu bank said they expected the entire industry to start reviewing the pricing across board.

Sekabembe said the latest announcement is a good sign for reducing the cost of credit and spurring growth of private sector credit and the economy in general.

He said they are cautiously looking at variables including cost of operation, cost of capital, impairment costs, capacity to source for cheap liabilities and more as they set new interest rates for customers.

He added that customers with good credit records have a chance to even access credit that is below their prime/lowest lending rate which was 20% by press time.

Similarly, Anthony Kituuka, the executive director at Equity Bank said that they will positively respond to BoU’s announcement.

But this will be upon carefully assessing their different obligations and deposit arrangements they have with their customers.

“Our intention is to price competitively and spur economic growth,” Kituuka told The Independent.

Data from BoU shows that the average year-on-year growth in private sector credit stood at 13.9% for the quarter to August 2019 relative to 14.8% for the quarter to May 2019.