More work needed on lending rates

May 01, 2008

Wednesday was the deadline for banks to publish their accounts. All indications are that our banks are in good health, and despite the urgency to lend more and more to the public, are holding bad debts down to manageable levels.

Wednesday was the deadline for banks to publish their accounts. All indications are that our banks are in good health, and despite the urgency to lend more and more to the public, are holding bad debts down to manageable levels.

In a related incident last week, the Bank of Uganda said the Credit Reference Bureau (CRB) would be up and running next month.

Through the CRB lenders will have access to the credit history of potential borrowers and like in other countries where the Bureau exists, lending rates will go up or down depending on the borrowers track record.

Previously, banks have saddled good borrowers with high lending rates to compensate for the bad borrowers’ sins.

This is good news for the economy. To have a private sector led economy, the access to affordable credit is critical.

This is so because if our products have to be competitive abroad and at home, we have to lower input costs to the bare minimum. Through cheap credit, our business community can expand their operations affordably to take advantage of the lower costs of production that come with the new economies of scale.

On an individual level, a financially literate population can take advantage to buy or build homes and start up businesses. However, the CRB is only one piece in the puzzle of solving high lending rates, the Government also needs to better manage its expenditure.

As it is now, because there is some indiscipline in government spending, the Government then has to suck this same money out of circulation by issuing treasury bills. The more money the Government has to withdraw from circulation, the more it pays in interest on treasury bills. The higher the treasury bill interest rates, the higher the lending rates since banks peg their lending rates a few points above the treasury bill rate.

The Credit Reference Bureau is good but it will be even better if the Government exercised more restraint in its spending.

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