Ugandan economy needs more than interest caps – bankers

September 20, 2016 in Business, Companies, Finance, Financial Services, Investment, Policy by Editor

Kampala September 20 – Capping interest rates will not resolve the structural bottlenecks in the economy and carrying through the proposal could see the economy pay a heavy price, speakers at a Uganda Bankers Roundtable discussion with media, said earlier today.

Comparing the proposal to camp interest rates as advanced by sections of civil society and the political establishment to “losing a pound in the quest to save a penny,” a diverse cast of financial industry players and experts said the debate should instead be about solutions to the structural bottlenecks in the economy such ways in which the cost of doing business could be reduced, something which would have a greater multiplier effect on the economy.

“Interest rates are just a bogey-bear that populists can jump onto and apportion blame; but it is not the key element to what is happening in the economy. What we need now are solutions that address the structural challenges that the economy is grappling with without hurting the financial institutions because they are the bloodstream of the economy,” one of panelists at the roundtable that was conducted under Chatham House rules said.

Advocates of interest caps argue that they would protect consumers from excessive lending rates, make loans more affordable and improve access to credit which would spur investment and economic growth. The roundtable however heard that interest caps would instead slowdown credit growth in the economy as a risk averse commercial banking industry would eliminate new and smaller businesses from their lending portfolio; trigger capital flight, increase black markets for credit, and an overall increase in the cost of borrowing resulting from the so many extra fees and commission that would be introduced.

Speakers suggested that supporting the industry’s efforts to make credit more affordable and inclusive through investing in financial literacy with the Bank of Uganda and working with insurance companies to mitigate
risk in sectors typically unattractive to banks such as agriculture, factoring social impact in appraisals would ease the cost of loans.

These could be supplemented by embracing the concept of sustainable financing and policies like the central bank’s efforts at consumer protection through price transparency, fiscal discipline, prompt settlement of supplier invoices by government and tax incentives to encourage long term savings would if applied in concert result in lower interest rates in the long run.