If monetary policy signals enforced by the Bank of Uganda are not being felt within the market, that means financial inclusion initiatives are not yet successful, the former governor of the Central Bank of Kenya has said.
Prof Njuguna Ndungu, who was the keynote speaker at the first inaugural annual banker's conference held at Serena hotel, said once a central bank and financial institutions succeed in financial inclusion, it would translate into more Ugandans playing a role in the financial market.
"If financial inclusion is succeeding, monetary policy signals should be felt in the market more easily," he told bankers.
"Most of the time, they [commercial banks] remain small because they are not attracting a lot of deposits to give them power to intermediate."
Ndungu noted that the failure by commercial banks to finance small and medium enterprises (SMEs) and the agriculture sector are some of the signals that show that a lot more work needs to be done.
"SMEs are very important to this economy but they are not given financing. But once you succeed in financial inclusion, you [commercial banks] may not have to [give] directives on which sector to lend," he said.
BOU has implemented some regulatory reforms recently, which are aimed at extending banking services to the unbanked. For example, the amendments to the Financial Institutions Act 2004, which were passed early last year, paved way for agency banking, Islamic banking, bancassurance (insurance companies using banks to sell their products) and the new requirement for commercial banks to hold more capital, which will offer greater protection for account holders.
Most important to the banks is the agency banking regulations which have been gazetted by the central bank. Agency banking seeks to narrow the gap in access to financial services by enabling financial institutions to sell their products through agents such as fuel stations and mobile money operators.
One of the challenges facing banks is that they incur substantial costs in doing business. Part of the reasons as to why interest rates in Uganda are high is because banks have to factor in their operational costs while calculating the interest rate on loans.
On average, nearly 11 percentage points of the interest rate charged on all loans and securities is needed to simply cover commercial banks' operating costs, according to experts from BOU research department.
LOWER INTEREST RATES
Bankers say agency banking will go a long way in reducing operational costs and thus improve private sector lending across the financial sector. Private sector credit has remained sluggish, growing at a rate of 6.5 per cent on average in the three months to April 2017, down from the more than 10 per cent levels two years ago, according to Bank of Uganda.
BOU says private sector credit growth was projected to hit eight per cent by June 2017 from a peak of 17 per cent as of March 2017.
Ndungu said there is need to make borrowing cheaper in the economy, pointing out that the emerging FinTech solutions are key in making that happen. In his speech, Emmanuel Tumusiime-Mutebile, BOU governor, said private sector credit has stagnated in the last six years.
"Since 2011, credit growth has slowed down and over the last two years there has been virtually no growth in real terms. Loans approved by banks have grown much more slowly," Mutebile said.
INTEREST RATE CAPPING
Ndungu also delved in the sensitive topic of interest rate capping, which was a hot discussion for much of 2016. Then, the private sector in Uganda, weighed down by loans they were struggling to service, pushed for interest rate capping just as Kenya had done. But Ndungu said Kenya has paid the price for that policy shift.
For instance, Ndungu said, credit growth declined to 2.1 per cent from 17 per cent at the end of 2015, after the central bank tightened regulations and introduced an interest rate cap.
"We are achieving the negative of interest rate capping. Monetary policy is now meaningless," Ndungu said.
In that regard, both Mutebile and the Finance minister Matia Kasaija played down the possibility of having interest rate capped in Uganda. Kasaija said money is a commodity and capping it would rob banks the opportunity of pricing their products against risks.
The Civil Society Budget Advocacy Group argues that the cost of doing business in Uganda will remain high and noncompetitive in the region if the decision to determine interest rates is left to commercial banks.