Uganda eases lending rate but borrowers not out of the woods yet

Traders at a market in Kampala. Distressed Ugandan borrowers remain optimistic that commercial banks will follow the lead of the central bank to lower the benchmark lending rate and lower the cost of credit. PHOTO | FILE 

By JULIUS BARIGABA

In Summary

• A reduction in the CBR should ordinarily translate into lower interest rates on bank loans as it reduces appetite for Treasury bills and bonds, and pulls down interbank market borrowing. But despite easing the CBR twice in April and June, commercial bank lending rates averaged 23.54 per cent as at the end of June 2016.
• For weeks, the local media has been awash with reports of more than 60 businesses that are in distress and saddled with loans that they have failed to service after the banks raised interest rates between 2010 and this year. The businesses are in need of a bailout to the tune of Ush1.3 trillion ($389.4 million) from the government to pay back their loans.

Distressed Ugandan borrowers remain optimistic that commercial banks will follow the lead of the central bank to lower the benchmark lending rate and lower the cost of credit.

Last week, the Bank of Uganda announced a reduction of the Central Bank Rate (CBR) to 14 per cent, the third successive drop in a process BoU Governor Emmanuel Tumusiime Mutebile said was expected to support the recovery of private sector credit and hence real economic growth. But businesses are not out of the woods yet as commercial banks will take a while to respond.

READ: Uganda cuts key lending rate, sees inflation slowing

For example, a day after Mutebile’s announcement, Stanbic Bank, the largest bank in the country, released healthy half-year results indicating profitability had grown by 57 per cent, enabled by “modification to risk appetite,” a pointer to reduced retail lending.

While issuing the CBR on August 8 — the third successive reduction since April — Prof Mutebile had no answers as to why commercial banks take so long to respond to the CBR.

A reduction in the CBR should ordinarily translate into lower interest rates on bank loans as it reduces appetite for Treasury bills and bonds, and pulls down interbank market borrowing. But despite easing the CBR twice in April and June, commercial bank lending rates averaged 23.54 per cent as at the end of June 2016.

“Of course, I cannot instruct commercial banks to reduce interest rates. But I hope the banks can realise that by lowering the policy rate, we are indicating what should happen,” said Prof Mutebile. “… usually the banks take several weeks… there is a lag [between the policy rate and the banks reducing interest rates].”

As such, many business people remain sceptical about the impact of BoU’s policy rate in a banking sector that is over liberalised.

Slowdown in customer lending

Chief executive officer of Stanbic Bank Patrick Mweheire said the bank had responded to the CBR cut, but did not disclose how soon it will do so to the latest policy rate.

“We have already responded twice — in response to April and June CBR movements. And we will do it again in response to the August 8 movement,” said Mr Mweheire.

And when releasing half-year results last week, Mr Mweheire said that Stanbic Bank achieved solid results due to “the strength of our diversified business model with multiple revenue streams. ”

Revenues grew by 28 per cent and profit by 57 per cent to Ush334.4 billion ($100.4 million) and Ush107.3 billion ($32.2 million) respectively.

“The modifications to our risk appetite where we deliberately slowed down credit growth on most of our retail lending was off the back of the high interest rate environment,” said chief financial officer Sam Mwogeza.

This saw Stanbic maintain a commendable credit loss ratio of 1.6 per cent, that was lower than the 1.7 per cent recorded as at June last year, which is also well below the industry average.