The Deputy Governor of Bank of Uganda Dr Louis Kasekende has said that the average lending rates in the country are high because of the high transaction costs and the risks involved when commercial are dealing with enterprises in the informal sector, the largest segment when compared to the formal sector.
“…Because of the high transaction costs and credit risks involved, it is only commercially viable for banks to serve this segment of the credit market if they charge high interest rates,” he said Wednesday in Kampala at the launch of Standard Chartered Bank’s Social Impact Assessment Report.
He said firms in the informal sector apply for small loans which are very costly per unit value but that it is also costly to evaluate their loan applications and monitor their borrowing.
Banks in Uganda which have a large retail clientele of small scale borrowers incur much higher operating costs and must, therefore, charge higher lending rates than banks which focus on a relatively small base of large and medium scale corporate borrowers, he emphasised.
The informal small and micro enterprises, he said, pose “very different challenges for the banks”. He said revenues for enterprises in this category are volatile and that their long term probability of survival is low. “Most do not keep proper financial records. There is often no separation of business expenses and the personal expenses of the owner. Banks face severe informational problems in evaluating the creditworthiness of these enterprises,” he said.
On the other hand, he said, the medium and large scale formal sector enterprises in Uganda have access to bank credit and that many of them can borrow funds at interest rates which are well below average for all borrowers and that in some cases even below the posted prime lending rates of banks. The current average lending rate is tagged at just over 20 per cent.
“Many of these borrowers can also access offshore finance. The reasons why these borrowers can access credit relatively cheaply are straightforward to understand; these enterprises have established track records of profitability, are well managed and run according to strict commercial principles, they prepare detailed financial accounts and they can often provide guarantees from affiliates abroad,” he said, adding that credit risk for this segment is low and that the transactions cost incurred by the bank per unit of loan value is also low.
He said that reducing intermediation costs will benefit from government’s continuous efforts in improving the business environment such as investment in infrastructure and efficacy of commercial justice system. “Most importantly for banks, he said, lowering costs will probably require employing information technology to replace traditional banking methods of delivering loans and other financial products and for assessing loan applications.
Kasekende commended Standard Chartered Bank for investing in digital technology with the aim of enabling 80 per cent of its customers to transact business online without visiting branches. The Bank recently launched its first digital-only retail bank in Ivory Coast and will assess this to launch in other countries.
The independent socio-economic impact assessment of Standard Chartered Bank’s operations in East Africa, addresses the contribution of the bank to the economy and to social welfare.
It highlights the contribution which Standard Chartered Bank’s operations, especially lending to the private sector. It stresses it contribution to GDP and employment in Kenya, Tanzania and Uganda in 2016.
In Uganda, the Bank extended domestic credit to the private sector, through both onshore and offshore financing, of just over $900m in 2016, which amounts to about 3.6 per cent of GDP.
The report estimates that Bank’s lending supported value addition of 3.5 per cent of GDP and almost half a million jobs. The report says Bank’s operations in Uganda have their largest impact on the agricultural sector, which accounts for 46 per cent of all of the jobs supported.
