24 May 2009

Uganda: Bank Lending Rates Still High

Kampala — The commercial banks' lending rates published by the central bank indicate that Stanbic Bank is now the cheapest bank to borrow money from at just 15% per annum, followed by Cairo International Bank at 16%.

Equity and Standard Chartered banks have the highest lending rate at 24%, followed by Crane Bank (22%) and Bank of Africa (21%).

The other banks with relatively high rates include Barclays Bank (19.8%), Orient Bank (20%) and Citibank (20%).

An interest rate is the price a borrower pays for the use of money they do not own. For instance, a small company might borrow from a bank to kick-start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower.

Interest rates are normally expressed as a percentage rate over the period of one year.

The prime lending rate on the other hand is a term applied to a reference in interest rate used by banks.

Juma Walusimbi, the Bank of Uganda's (BOU) director of communications, explained over the weekend that the move to publish prime lending rates was intended to "put pressure on the banks to respond to the reduction on interest rates that the central bank announced recently.

The BOU slashed its bank rate by 3.4% from 19.3% to 15.8%in March, forcing a number of banks to subsequently reduce their interest rates.

But a lot more commercial banks have stuck to unusually high and exploitative rates that go up to 28% in some instances.

"We welcome the recent action by a number of commercial banks to lower their prime lending rates in response to the governor's persistent call to them.

"Low interest rates contribute to lower cost of doing business and lower prices," said Walusimbi.

Stanbic, the largest commercial bank in Uganda, cut its lending rate on May 1 by 3.5% points, the same points reduction by the central bank. But the average commercial bank prime lending rate remains at 20%.

Commercial banks swiftly increase the cost of lending when the BOU revises its costs upwards.

However, they have been blamed for being reluctant to lower their lending rates more than two months after the central bank reduced its bank rate.

Economists hoped that commercial banks would reduce their lending rates by similar margins.

However, several banks have delayed the borrowers' party to adjust interest rates, attributing it to "market fundamentals."

This means the cost of financing investment still remains high.

The bank rate is the cost margin at which BOU charges commercial banks for borrowing from its treasury when they need money to meet their obligations.

When the BOU lowered its lending rate, it aimed to improve the lending conditions by increasing the volume of cash in circulation.

But Walusimbi disclosed that despite the reduction, some banks had gone the opposite direction (increased their rates).

"The governor pointed out this issue of increased rates in our monthly meeting with banks," said Walusimbi.

The lifting of the moratorium in 2005 sparked a flurry of new banks coming into the market.

More than six banks have been licensed in the past year alone, bringing the number of banks regulated by the central bank to 21.

It was also envisaged that the entry of more banks would spark off stiff competition in the industry and push interest rates down and offer better services to the borrowing community.

Instead, the banks have not responded and have stuck to high interest rates.

Uganda's rates are the highest in East Africa according to official information.

Walusimbi announced at the central bank's monthly economic and financial indicators forum that the lending rates would now be regularly published so that the public is aware of which institutions offer the best service.

"We urge the public to use whatever muscle they have to negotiate the best rates," said Walusimbi.

Competition for customers and space in urban areas heightened, this year, as new commercial banks opened shop, while old ones expanded to new locations across the country but this is yet to benefit the ordinary borrower.

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