THE STATE Minister of Planning and Investment Gabriel Opio recently criticised commercial banks for only giving short-term loans and hiking interest rates.
THE STATE Minister of Planning and Investment Gabriel Opio recently criticised commercial banks for only giving short-term loans and hiking interest rates. He is right on the former and wrong on the latter.
Opio rightly criticised commercial banks for not lending long-term and only giving loans of three or four years.
Most commercial banks are foreign-owned and highly profitable. Of course there is a political risk in long-term lending but the banks have a social responsibility to support Uganda by adding longer-term loans to their portfolio.
Only the Housing Finance Company of Uganda is providing long-term loans and it cannot keep up with demand. If the commercial banks moved into the virtually risk-free mortgage business (like their parent companies in the USA or Europe), the housing market would get a huge boost and housing would become much more achievable for those in salaried employment.
However it is not completely fair to slam the commercial banks for keeping their money on deposit with Treasury Bills and lending only at high interest rates.
The central bank chooses a high Treasury Bill rate to soak up liquidity in the banking sector and control inflation. It is the state that encourages banks to buy T-Bills.
Commercial banks do lend at a high margin over the T-Bill rate but they also face the problems of a cumbersome commercial legal system and pervasive fraud. The private sector has to make a profit.
Opio was right to encourage the banks to become more socially responsible but we should never consider going the way of Kenya that has just enacted a law restricting the interest rates that can be charged by commercial banks. This statist legislation will undermine the finance sector and end up hurting the person it was intended to help, the borrower.