Banks, Borrowers Seek Elusive Solution to High Interest Rates

Keith Jefferis, the Senior Advisor to the Botswana Ministry of Finance and Economic Development, says operational costs in Uganda account for 60% of the expenses of banks compared 40% in other countries, and this contributes to the high lending rates in Uganda.

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The private sector players have called on the government to start guaranteeing loans to the private sector, as experts call for cross-border single licensing of banks, as a way of helping reduce interest rates. 

In a brainstorming session seeking ways that may help reduce the interest rates that commercial banks charge when lending out to the private sector, they have also urged the government to reduce its borrowing from the local financial sector so as to stop state competition with private borrowers. 

The average interest rates in Uganda range between 17% and 22% depending on a bank, but even at a single bank, the rates will vary depending on the status of the borrower. At an average 19.5% per annum, credit in Uganda is among the highest in the region, with Tanzanian banks charging an average 13.6%, Kenya 14%, and Rwanda 17%. 

Surprisingly, Uganda has the lowest ratio of bad loans compared to the total loans, or the non-performing assets ratio, according to figures at Stanbic Bank East Africa.

Keith Jefferis, the Senior Advisor to the Botswana Ministry of Finance and Economic Development, says while the government has a duty to play to see the cost of operations reduce for banks in Uganda, the commercial banks themselves must work on their systems, including embracing automation.

He says operational costs in Uganda account for 60% of the expenses of banks compared 40% in other countries, and this contributes to the high lending rates in Uganda. 

Dr Jeffris says competition contributes a lot to lowering of the cost of loans, but Uganda’s sector is dominated by few major banks, while the majority are too small to pose significant competition.

The total assets of the 25 licensed bank in Uganda are worth about 35 trillion shillings, but about 22 trillion shillings worth of the assets are held by only 5 banks. Jeffris proposes that creation of medium-size banks, consolidation of small banks and allowing banks to operate across borders in the EAC freely as is the case in Europe, will create the desired competition. 

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Cross-border banking competition.”//  

The persistent borrowing by the government from the local market has always been blamed for the high interest rates. Government borrows from banks through issuing debt papers or treasury bonds and bills.

The Ugandan government offers the highest return on bonds at up to 16% and this is more than double the rate offered by the governments in the Southern African Development Community, SADC countries.

The major attraction to lending to government is that government debt is considered almost risk-free, compared to the highly risky lending to the private borrowers. 

The Executive Director, Financial Sector Deepening Uganda, Rashmi Pillai says  only half of the commercial banks' credit portfolio is to the public, with the rest going to the government, crowding out the private sector. 

She says this has a negative effect on both the borrowers and the banking sector itself.    

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Banks in Uganda offer an interest of as high as 5% per year on deposits, but they charge borrowers almost 20 percent, and experts say the gap is too big. 


Private Sector Foundation of Uganda Executive Director, Gideon Badagawa says competition alone will not help much to bring the cost of borrowing down.   

He blamed the government policies and structures that have failed to leverage the technological advancement to improve the operations of banking, adding that the National ID, for example should be able to help banks to tell the creditworthiness of an individual.  

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Kampala City Traders Association Chairman Everest Kayondo blames the Bank of Uganda itself for the mess when it steadily raised the Central Bank Rate to 23% to tame high inflationary levels in 2010, when inflation went up to 30%. 

The high central bank rate was aimed at making the cost of money to commercial banks high, so that they find it hard lending to the public, and in the end reduce the amount of money in circulation.


BoU has since reduced the rate to 7% to encourage banks to cut their lending rates also, since the cost of money is now low, but this has not happened as fast as it was expected.

Kayondo says when the banks were raising the interest rates in line with the rise in the CBR, they challenged the bankers on whether they would ensure low lending rates when CBR went down in future and inflation stabilized, and the banks gave assurance, which has not been realized to-date. 


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The Uganda Bankers Association admits that if the banks share platforms they will be able to cut on their operational costs. 

But Wilbroad Owuor, the Executive Director of UBA, also blames the government for what he calls huge structural problems which are keeping the cost of doing business high. 

Owuor says recently in a meeting with the finance ministry, they held the government liable for leaving economic decisions to politicians instead of technical people and intellectuals.       

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