Uganda Bankers Association speaks against interest caps

September 14, 2016 in Business, Companies, Finance, Financial Services, Markets, Policy by Editor

Kampala September 13- Capping interest rates could be counterproductive for the Uganda economy says the Uganda Bankers Association arguing that an interest control regime could stifle free market forces, expose lenders to possible collapse, discourage credit growth and breathe even more life into black credit markets at very high cost and terms.

In a statement released Tuesday, Wilbrod Humpreys Owor the Executive Director of the Uganda Bankers Association argues that legislated interest rate regimes do not necessarily translate into lower cost of credit and
discourages players from investing further in the financial sector.

“There is little evidence to show that similar laws have led to credit growth in other countries on the contrary, incorrect pricing of risk has often lead to the collapse of banks, with millions of savers money getting burnt out and lost in the process,” Owor warns.
The statement comes on the heels of Kenyan President Uhuru Kenyatta assenting to a bill capping lending rates at 4 per cent above the Central Bank Benchmark Rate and calls by the Civil Society Budget Advocacy Group’s (CSBAG) proposal for Uganda to emulate Kenya and cap interest rates at 5 percent above the CBR.

In proposing the cap for Uganda, CSBAG argues that loan repayments would not only be easier, but Non-Performing Loans, currently trending towards 9pc for the industry, would take a downward trend. The cost of borrowing would also come down, making credit affordable to SMEs, which would expand capacity and boost overall economic growth.

Analysts however warn that much as the anticipated benefits may look attractive, it is risky to look at interest caps in isolation of other factors in the business environment. George Mulindwa, a Portfolio Manager at Stanlib says there is need to look at the risks that are apparent in the extension of credit from banks.
“Banks incur costs to monitor loans, value properties (collateral) and factor different risks before they can come up with the lending rates. For example in the current environment the CBR is at 14pc. If the cap were to be
executed, at CBR+5, the lending rates would be at 19pc. With government borrowing at 16/17pc, from the public, it would make sense for banks to lend to government since there are no attendant costs in monitorind a loan to
government and it is considered risk-free for all intents. The consequence would be a shortage in allocated capital to create loans for SMEs, with banks most likely preferring to lend to government,” Mulindwa says.

Although Mulindwa believes that the proposal by CSBAG may not be bad alltogether, if not thoroughly analysed by all stakeholders, it can end up achieving the direct opposite of what it seeks to achieve, with banks likely to find it too risky to lend to SMEs.