By Samuel Sanya
JUST as water takes the path of least resistance, firms are starting to borrow cheaply from abroad to side step high lending rates in the Ugandan markets.
Commercial bank lending rates in Uganda are the highest in East Africa leading to lower than projected credit growth and climbing non-performing loan ratios, according to a New Vision survey.
The average shilling commercial bank lending rate in Uganda hit 23% in July, from 22%, and to some extent; rigidities in the Financial Institutions Act are to blame.
Kenya’s average commercial bank lending rate for the six most dominant banks is at 17% for the country’s 43 licensed commercial banks. The average lending rates in the country usually average between 12% and 15%.
Tanzania’s highest prime rates are just at 21%, many commercial bank lending rates in the country are below this point.
Lending rates in Rwanda and Burundi are safely below the 20% mark. Experts argue that infrastructure and structural issues are partly to blame for the high rates in Uganda.
Due to limited access to electricity around the country, semi-developed road network and the uneven distribution of commercial banks, Ugandans spend about $4.2b (sh11.4 trillion) annually to access banking, according to the Global Financial Inclusion Indicators 2011.
Only 20% of the entire Ugandan population has interfaced with a bank and alternative saving mechanisms hold relatively small shilling amounts per household, effectively handing bankers the ability to keep lending rates high.
“Banks have in the recent past attributed and continue to point expensive shilling denominated loans to the high cost of deposit mobilisation,” Bank of Uganda documents reveal.
As a consequence, the non-performing loans ratio in Uganda has gradually climbed to 4.7% of all issued loans at the end of March.
The rate has risen from 4.2% at the end of the year 2012 and 2.1% at the start of 2011.
Adam Mugume, the Bank of Uganda (BoU) executive director research, noted at the end of July that some large firms are borrowing in dollars and from abroad to finance local expansion to avoid the high banking rates.
In the three months to May 2013, the weighted average lending rates on shilling loans averaged 24%. In comparison, interest rates on foreign currency loans are lower at an average 10%.
An analysis of the loans extended also confirms that credit supply has been increasing, but at a much lower rate than loan recoveries.
In the three months to May, credit extended by all depository taking institutions stood at sh2.4 trillion, lower than the loan recoveries for the same period by sh163b.
In the previous quarter, sh2.7 trillion was extended and this was sh102 b, more than the loans that were recovered during that period.
The lower credit extension versus credit recovery in the quarter ended May is most likely due to increased risk aversion by banks following lower loan quality concerns.
Private sector credit growth has been declining since March 2013 and stood at minus 2.3% in May, compared to 1.5% in February.
The building, mortgage, construction and real estate and trade sectors have borrowed the largest amounts in the three months leading to May and account for 55% of total nonperforming loans stock.
Agency banking is the best way forward
The Central Bank has continued to use moral suasion to sway commercial banks into reducing the spread between interest on deposits and on loans, but the results have been measured.
Prof. Emmanuel Mutebile, the BOU governor, recently increased the benchmark Central Bank Rate to 12% to manage inflation expectations and followed with a warning to bankers to lower rates.
Commercial banks make at least 11.5% profit on deposits and the World Bank says the spreads are too high.
Bankers say this is likely to continue until the financial institutions act is changed to allow for agency banking or until commercial oil production starts, whichever comes faster.
Kenya and Rwanda currently allow for agency banking, where shop keepers, super markets, grocery stores and mobile money agents work on behalf of banks to enable individuals to deposit and withdraw their savings.
“There are a lot more current accounts in Kenya, making it cheaper to access deposits for lending. What we need is more people banking to bring lending rates down,” Anthony Kituuka of KCB said.
“Agency banking allows people even in the remotest villages to access banking services through their shop keepers. The Financial Institutions Act should be amended and people sensitised about agency banking,” he added.
If just 500,000 people save at least sh100 every day with their shopkeeper, there would be an additional sh50m for lending every day.
Kituuka notes that a larger banked population will enable the banking sector to move from premium based pricing as even small levels of interest will be able to deliver larger profit.
Alternatively, large sums from the oil sector could provide cheap deposits to sustain commercial bank lending. The oil sector could provide up to $2b (sh5.2 trillion) for the Ugandan economy every year.
Currently, banks are borrowing from the National Social Security Fund (NSSF) fixed deposits at high rates to lend. The NSSF has over sh3trillion in assets and makes over sh130b every month in contributions and interest on Treasury instruments.
Village Savings and Loan Associations (VSLAs) around the country hold about sh43b. Unlike most commercial bank customers, customers of village groups are six times more likely to save with the group than borrow.
These VSLAs, shops and groceries should be empowered to be banking agents to increase financial inclusion and ultimately deliver sane rates.