WB report blasts banks over excessive profits

Feb 26, 2013

Commercial banks are cheating borrowers, a new report has pointed out. According to the World Bank, the margin between borrowing and lending rates are ‘excessive’.

By Samuel Sanya

Commercial banks are cheating borrowers, a new report has pointed out. According to the World Bank, the margin between borrowing and lending rates are ‘excessive’.

Commercial banks access credit cheaply; paying less  than 4% per annum on customer deposits before charging borrowers rates in excess of 25% on loans. Because of the heavy debt burden, most Ugandans cannot save much, yetbanks make off with huge profits. This has prompted the World bank to advise the Central Bank to closely monitor commercial banks, taking punitive action where necessary to correct this.

Ugandans save only 1.5% of GDP per household each year, far below China’s 38%, India at 34.7% and Turkey at 19.5% after disposing of heavy loan repayments, health, transportation, entertainment and other related living costs. “Commercial banks continue to report high overhead costs and excessive spreads between borrowing and lending rates.

Regulatory authorities should closely monitor banks’ practices and, if necessary, take punitive action to correct them,” the report read.

The report titled “Unleashing Uganda’s Regional Trade Potential” notes that increased transparency and innovation will improve the development of inclusive finance and reduce overhead costs. It points out that there should be a framework for banks to fully disclose the cost of borrowing, improve connectivity of bank platforms, reform laws on sharing of customer information, and develop customer protection laws.

The Bank of Uganda has reduced the benchmark Central Bank Rate to lows of 12% but commercial bank lending rates have stayed at highs of 25% per annum in the month of January making credit expensive hence slowing economic recovery. “Broader access to financial services should be encouraged through the promotion of the micro finance industry and through development of new products to facilitate increased access such as mobile money,” the report says.

Herman Kasekende, the Standard Chartered Bank Uganda boss noted that the banking industry is actively innovating to increase the reach of banking services through online solutions, high yield fixed deposits and salary overdrafts.

“The spreads are continuing to narrow as a result of stiff competition. With the use of modern technology, banks no longer need to invest in brick and mortar.  Technology is continuing to change the shape of banking,” said Herbert Zaake, Stanchart bank's corporate affairs head. “You would need at least $400,000 (sh1b) to put up a fully-fledged branch, and you could struggle to profit from it as a standalone,” he added.

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