High bank interest rates push EA companies to informal funding

A Bank of Uganda information officer attends to visitors at her stand during a Banking and Insurance Expo in Kampala. Companies in Uganda are increasingly using internally generated funds to finance projects and expansion plans because of the high cost of credit. Photo/File  Nation Media Group

By JOINT REPORT The EastAfrican

In Summary

• The high cost of borrowing is also expected to see the companies tap into sources of funds with lower interest rates, like Rights Issues.
• UIA said high interest rates, commercial banking bureaucracy, and cumbersome paperwork that delays processing of credit and other financial services make acquisition of credit difficult.

Companies in Uganda are increasingly using internally generated funds to finance projects and expansion plans because of the high cost of credit, a survey by the Uganda Investment Authority (UIA) has shown.

The high cost of borrowing is also expected to see the companies tap into sources of funds with lower interest rates, like Rights Issues. A Rights Issue involves the sale of shares to existing shareholders in proportion to their shareholding.

The Uganda Bureau of Statistics released the survey, which analysed data collected from domestic and foreign licenced projects in the country over the 20 year period to 2010. The survey showed that 70.6 per cent of respondents relied on internal cash for growth.

Only 37.1 per cent of respondents said they relied on local commercial banks, and 27.4 per cent said they used funds provided by family and friends.

Other sources of funds include the sale of shares, foreign banks, investment funds, moneylenders and other informal sources and leasing arrangements.

“Most firms finance their investment needs through retained earnings and internal funds. In addition, the findings reveal that a major bottleneck to investment financing is the high interest rates,” notes the survey.

UIA said high interest rates, commercial banking bureaucracy, and cumbersome paperwork that delays processing of credit and other financial services make acquisition of credit difficult.

READ: High interest costs hit Uganda’s debt burden

High interest was cited as a major impediment by 85.9 per cent of the respondents, 64.1 per cent cited bank paperwork and bureaucracy, while 62.8 per cent and 56 per cent cited the collateral requirements of banks and inadequate credit from their sources. 

Data from the Bank of Uganda shows that average lending rates had dropped to 23.47 per cent at the end of June this year, from 27.02 per cent in June 2012, a period of time when the Central Bank Rate (CBR) dropped to 11 per cent from 20 per cent.

Banks, which make money by taking deposits on the low interest and lending at high rates, were paying an average of 3.06 per cent on savings and 1.59 per cent on demand deposits last month, a minimal change from the 3.27 per cent and 1.32 per cent respectively they were paying in June 2012.

AR Kalan, managing director at Crane Bank Ltd said that the main reason why banks charge high interest rates is the huge expensive deposits provided by the National Social Security Fund.

“NSSF locked in high deposit rates of around 20 per cent during the period of very low liquidity in 2011, and most of these deposits are for three years. It has proved difficult for many banks to reduce lending rates in line with declines in the CBR till such deposits are retired from the system,” said Mr Kalan.

Similar case

In Kenya, the average lending, savings and deposit rates stood at 17.45 per cent, 1.53 per cent and 6.53 per cent respectively, in May, when the CBR stood at 8.5 per cent.