Henry Zakumumpa
30 July 2008
opinion
Kampala — Earlier this year, a scheme was announced to enable public servants to own laptop computers. Unless one paid cash upfront, the catch was a bank loan with a 20% interest rate.
A quick calculation shows that payments one would make on the interest alone would be more than the cost on the laptop.
Many Ugandans are chocking under the weight of high loan interest rates and despite the pleas of authorities, including President Yoweri Museveni, banks still charge high interest rates. Little surprise then that virtually all banks in the country turned handsome profits last year on the back of a lucrative lending regime.
The Bank of Uganda seems reluctant to intervene directly and lower rates and hopes licensing more banks will bring the rates down because the money markets were liberalised.
Interest rates in the US are set by the Federal Reserve System and the interest rates in Japan, Australia and the UK are set by their central banks. In Kenya and South Africa, the central banks fix interest rates.
High interest rates discourage consumer spending, investment spending, increase the cost of mortgages for home owners, the outlook for jobs and perhaps more critically, inflation. The bank interest rates in Uganda range between 20-35%. In the microfinance industry, the rates are higher. There have also been adverts of those who charge interest rates per week. A recent study showed that the majority of new small businesses in the country do not make it beyond the first-year mark.
If the borrowing rates were much lower, the economy would get a big boost. When lending rates are low, they encourage borrowing, hence investment and in turn, creation of jobs. When rates are high, the price of goods and services becomes high, leading to inflation. If the rates were significantly reduced, they would impact positively on commerce and economic growth.
In neighbouring Kenya, Parliament in 2000 passed a Bill to regulate interest rates. Under the Bill, commercial banks cannot set their rates more than three percent higher than the rate fixed by the central bank. Interest rates in Kenya vary between 12-16%, while in Rwanda, they are between 16% and 18%.
Therefore, limited intervention in setting interest rates by Bank of Uganda is advisable.
The writer comments on development issues from Makerere University
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