Stiff competition in Uganda’s banking industry has forced commercial banks to cut their prime lending rates (PLR) in a bid to attract borrowers back to the banking halls which were hitherto aloof to most of the borrowers due to higher interest rates charged on loans.
The latest banks to announce the cutting of prime lending rates (PLR) are the Bank of India (BOI) and Standard Chartered Bank. BOI has cut its PLR to 18 percent per annum effective March 22 even though the bank says PLR in dollars will remain unchanged, which means importers will continue borrowing at that rate.
On the other hand, Standard Chartered has tabled 19.3 percent for shilling loans per annum effective March 15, 2017. The changes in interest rates come at the time when corporate companies are releasing their end year financial statements.
According to analysts, more banks will cut their PLRs but it is not clear whether Stanbic Bank, one of the biggest in the country by capitalization will further reduce its PRL as it has been charging shilling loans at 18 percent per annum.
Early February the Bank of Uganda (BoU) reduced the Central Bank Rate (CBR) by 50 basis points to 9.0 percent, this was according to a Monetary Policy Statement for February 2018 issued to the press in Kampala by Professor Emmanuel Tumusiime-Mutebile, the Governor Bank of Uganda.
“Given the objective of keeping inflation close to the target and the estimated spare capacity in the economy, a cautious easing of monetary policy is warranted to further boost private sector credit growth and to strengthen the economic growth momentum,” Prof. Mutebile said at the time.
The reduction of the CBR is supposed to entice commercial banks cut their PLRs so that more credit flows to the private sector for investments. Currently the average commercial bank interest rate is above 20 percent and is seen by analysts as too expensive for borrowers. Banks say non performing loans (NPLs) are part of the reasons for higher interest rates in Uganda.
But Prof. Mutebile in the February monetary statement said NPLs as a percentage of gross loans have declined from a peak of 10.5 percent in December 2016 to 5.6 percent in December 2017, which he added should support credit extension.
According to Prof. Mutebile, the growth of private sector credit in Uganda remains below historic levels and that the cost of credit remains relatively high for micro and small loans while the cost to corporates have declined.
However, Prof. Mutebile said there are indications of a revival in private investment activity; as reflected by the recovery of Foreign Direct Investment, which grew by 18.5 percent in 2017 compared to a decline of 30.5 percent in 2016. He added that shilling credit extended by 10.8 percent in December 2017 compared to 7.9 percent in December 2016.
He said that although public investment programmes could substantially raise output and be self-financing in the long run, “transitional challenges of funding these investments can be formidable and may crowd out private sector borrowing, thus delaying the growth benefits of public investment.
Commercial banks in Uganda have been accused of lending to government which gives them assurance to pay back through offering treasury bills and bonds. They also target salaried employees in corporate companies and the civil service, leaving out majority of the population engaged in agriculture and the general informal sector.