Banks keep interest rates high despite inflation drop

A banker puts money in a money detector. High lending rates on loans have stagnated growth in private sector credit. PHOTO BY FAISWAL KASIRYE 

By FARIDAH KULABAKO

In Summary

Borrowers’ woes. Lending rates are still high despite a drop in the CBR to 12 per cent from 23 per cent in October 2011.

 

Players in the banking industry have attributed the high costs of borrowing to high interests banks pay on deposits and interbank borrowings.

Mr Herman Kasekende, the Standard Chartered Bank managing director, said in an interview on Tuesday, that commercial banks are paying more money today in form of interest expense on deposits – which is the major source of their funding – and interbank borrowing.

He added that when inflation skyrocketed, customers who would ordinarily not demand for interest on their deposits started asking for higher interest because of increasing costs and competition for deposits among banks.

Although the CBR – the rate at which commercial banks borrow from Bank of Uganda – has come down by 11 percentage points from 23 per cent in October 2011, commercial banks have only reduced their prime lending rates by an average of seven percentage points . This means that there is a divergence in the reduction of about four percentage points between the CBR cut and banks’ lending rates reduction pace.

Although the CBR is currently at 12 per cent on the back of falling headline inflation, commercial banks’ prime lending rates average at 22 per cent.

“Many banks entered into long term contracts with depositors and agreed to pay a certain percentage of interest on their monies and we can’t just reduce because the Central Bank Rate has come down,” Mr Herman Kasekende said.

Depending on the tenure, amount and availability of money in the bank, Standard chartered pays between 9 and 12 per cent of the fixed deposit, up from between 7-10 per cent before inflation rose.

Stanbic Bank communications manager Fred Mugisha Bantu, said the bank pays between 8.5 and 11 per cent on fixed deposits.

Players, however, said this is lower than over 20 per cent that used to be paid when inflation was still in double digits about a year ago.

However, some bank customers this newspaper talked to dismissed the claims of banks paying more on deposits, saying the rates especially on savings accounts were never changed even when inflation was in double digits.

“Interest paid is so small in that it at times goes unnoticeable. Every time I check my savings account I don’t find anything much apart from the money I deposit myself,” Ms Sylvia Nalubowa said.

Headline inflation has fallen to 3.4 per cent from the high of 30.4 per cent that was recorded in October 2011.

Housing Finance Bank managing director, Mr Nicholas Okwir, said BoU only controls the CBR but not other rates that together determine the cost of borrowing.