The capping of interest rates in East Africa appears to be gathering pace with Uganda’s civil society demanding that the government follows suit.
Recently, Kenyan president Uhuru Kenyatta assented to a law that caps interest rates to within the 4 percentage points rate of Central Bank Rate (CBR). With the passing of the law, some commercial banks have adjusted “painfully” their rates to 14.5 per cent.
The Civil Society Budget Advocacy Group (CSBAG) said it was time Uganda went the same route because the forces of demand and supply were not determining interest rates.
It said capping rates would reduce the cost of borrowing without hurting the net interest margin of banks and also reduce the risk of loan defaults from banks.
In Uganda, the current CBR is 14 per cent whereas lending rates are at an average of 23 per cent.
“This rate is supposed to guide the direction of lending rates that commercial banks use in the financial markets. However, we have witnessed that the rate is only effective when it indicates for the banks to increase the lending rates,” Julius Mukunda, the coordinator at CSBAG, told journalists last weekend.
“In instances where the CBR indicates to commercial banks to reduce the lending rates to borrowers, serious reasons for non-response of the commercial banks include the high cost of money and high-risk profile of borrowers despite the existence of a Credit Reference Bureau (CRB) and the National Identity Card,” he added.
The civil society suggest a private members Bill to amend the Financial Institutions Act 2015 to include an interest rate ceiling of 5 percentage points of CBR. That would mean with the current CBR of 14 per cent, commercial banks would not be allowed to lend at above 19 per cent.
Asked how the 5 per cent was arrived at, David Walakira, the budget policy specialist at CSBAG, said “there is no bank that would make losses if they lent money within that range”.
The backlash of this proposal, if it goes ahead, will be immense because the government has maintained its stand.
“Any move away from market-determined interest rates would be a policy reversal and you do not just give away something that has been serving you well in terms of the financial sector,” Louis Kasekende, the BoU deputy governor, said last week.
Source: Daily Monitor