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BOU chief urges banks to lower interest rates to ease borrowing
Publish Date: Apr 11, 2011
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By Patrick Okino

DR. Louis Kasekende, the Central Bank deputy governor, has urged the banking industry to lower interest rates to attract more clients.

“Kenya and Tanzania have average rates of 15%, but Uganda is still over 19%.

“This is a big margin for the borrowers,” Kasekende at the launch of Housing Finance Bank branch in Lira over the weekend.

A rise in interest rates means more customers are likely to default on their loans.

Kasekende named loan defaulters and high operation costs as the main causes of high interest rates, but called the financial institutions to work out modalities to reduce the vice.

He, however, noted that although there were challenges in the industry, access to financial services had improved in the last decades.

Kasekende lauded Housing Finance for expanding to Lira, saying it would encourage the commercialisation of agriculture.

Nicholas Okwir, the bank managing director, said their aim was to increase outreach, visibility and competitiveness.

He said the Lira branch was the 15th across the country. He another branch would be opened in Gulu.

Fears that bank lending rates may rise followed increases in treasury bond yields since the beginning of the year.

Although commercial banks peg their lending rates on treasury bill rates, a high bond rate will provide an alternative risk-free avenue for bank deposits. The 91-day treasury bills are at 9.6%.

The two-year treasury bond rates rose to 13.4% in February, up from 8.8% as at January 25. The 10-year treasury bond rates leaped to 13.2%, from 10.8%

Commercial banks normally set loan interest rates depending on the rate at which the Government is paying on treasury securities. They (TBs) are used as a benchmark because they are a risk-free lending opportunity to banks.

The other factors considered in lending rates computations are inflation rates and risk premiums. The weighted rate was 19.7% in December, which was a drop from 20.4% in November.

“Lending rates could rise since the monetary policy stance is tightening,” Elliot Mwebya, the Bank of Uganda communication director, stated.

“The recent rise in interest rates on the Treasury Bills and bonds reflect low liquidity in the market,” adding that the bank “will continue to moderate the increase at every auction, either by limiting the amounts offering in every auction or participating in the secondary market.

The bond is currently traded at the Uganda Securities Exchange.

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