Bank of Uganda Governor Tumusiime-Mutebile urges banks to cut lending rates to boost businesses

The Bank of Uganda (BoU) Governor  Emmanuel Tumusiime-Mutebile has urged commercial banks and other financial institutions in the country to lower their prime lending rates to enable businesses borrow for investment so as to boost their output.

“A previous edition of the World Bank’s Economic Update on Uganda argued that the high cost and limited access to credit was a binding constraint on Uganda’s economy. This implies that if only banks and other financial institutions could lower their lending rates and expand the volume of their lending, substantial numbers of businesses in the economy would be able to borrow money for investment in order to boost their output while servicing their debt and increasing their incomes,” Tumusiime-Mutebile said.

He was on Tuesday addressing delegates at the Uganda Bankers’ Association (UBA) Annual Conference at Kampala Serena Hotel. “De-risking Financing & Investment in Agriculture to promote decent youth employment and inclusive growth”. In April 2019, lending rates averaged 19.79 percent while the latest CBR stands at 10 percent, which commercial banks can’t follow due to high cost of funds.

He continued that while he remains uncomfortable with the high lending rates which he believes that they should be reduced sustainably over time, “I dare say that access to credit is not the ultimate binding constraint on economic growth. We must think holistically about the challenges holding back the power of finance to transform our economy.”

He said proper diagnostics must reveal the problems that constrain agricultural finance before stakeholders can devise durable solutions. “We must examine the borrowing capacities of the businesses in our real sector,” he said.

Financial institutions, he said, are challenged to rethink their views of bankable projects so as to design solutions for potential borrowers at their level. “On the other hand, formal sector creditworthy businesses, which have been the main clients of commercial banks, comprise a small share of the economy. Informal business and micro-enterprises abound and their capacity to utilize credit effectively is constrained, including by inadequate business and technical skills, the high costs of inputs, and unpredictable market conditions,” he said.

The governor said some financial institutions have started tackling these problems through business incubation programs. Moreover, through automation and adoption of new technologies for delivering financial services, it is possible for banks to reduce their operating costs, and pass on the savings to borrowers through reduced lending rates, he said. “I am also optimistic that banks will exploit the potential of bancassurance to exploit synergies with insurance to design products for the riskier borrowers,” he said.

He applauded UBA for embracing the role that can be played by the financial sector in transforming people into a non-agrarian workforce and urban-dwelling populace. But he said that it will take a comprehensive approach by all sectors to bring about the transformation.

Indeed, he said, the fruits of higher labour productivity in nonagriculture sectors, and higher living standards in urban areas enjoin the government to develop the manufacturing and service sectors in order to absorb the youths who are migrating from rural areas. Research conducted by the International Growth Centre has shown that it is possible for Uganda to industrialise through prioritization of high productivity services or non-traditional “industries without smokestacks” such as agro-processing, ICT, transport and tourism, which can absorb the youths seeking jobs.

He said government must focus on boosting export-oriented manufacturing and growth of the tradable services. This will help to meet the rapidly growing urban demand for food thereby linking urban and rural growth by creating market for rural production, and even reducing the import bill. Such demand-driven agricultural development would foster innovation and advancement in production, processing, and packaging, across all the stages of the chain in catering to the demands of urban consumers of processed products including packaged foods.

Government , he said needs to join hands with finance and all sectors by facilitating urban-rural linkages, to embed local firms within the supply chains of international retailers, such as the international supermarkets in our cities and towns, and promote export readiness of local firms if we are to be the bread basket of the region. Potential areas of further investment for government and the financial sector include roads, cold storage, transport, support for farmer organisations, agricultural extension, and out grower schemes.

He said it was also necessary to address information asymmetries, for example, by matchmaking international firms and local suppliers. Only through boosting agricultural development through inclusive rural-urban links will we effectively harness the agriculture sector as a dominant source of employment.

“I applaud the UBA for rising to this challenge and call upon Government to join the bankers in the modernization of agriculture for job-creation and inclusive economic growth. On our part, the Bank of Uganda will continue to work with Government and commercial banks in promoting affordable agricultural finance through the Agricultural Credit Facility, which we encourage all eligible borrowers to take advantage of,” he said.

“Reliance on cash is a barrier to access to credit because farmers are unable to produce records of their transactions. Digitization is a key solution to improve financial access to credit by small farmers,” Mastercard Foundation Sub Saharan President, Raghav Prasad said while speaking to guests at the event.

While addressing delegates, Finance Minister Matia Kasaijja, emphasised the need for innovation and mechanisation across the agriculture value chain. He admitted that government has not done enough in supporting the sector through the all important aspect of research.

He said technology adaptation to the agricultural level, promoting good land use and increasing access to agricultural finance with specific option to women in agriculture were key to improving agriculture.

The minister said over the years, government has consistently increased the budget of agriculture. When we work on roads, electricity, water and ICT, we are supporting agriculture. The budget has increased from Shs480 billion to Shs1 trillion in this financial year.

The aspiration of Uganda bankers is that the outcomes of the conference increase private sector credit to agriculture from 12 percent to at least 20 percent over the next 4-5 years.

According to Patrick Mweheirwe, the Uganda MD who also doubles as UBA chairman, government is responding positively to investment in risk concerns that were raised at last year’s conference.

With 20 percent of nonperforming loans resulting from agriculture lending, the conversation to fund the sector must happen now if the sector which contributes 25 percent to Uganda’s GDP and employs 68 percent of the people is to become more attractive and sustainable.