Borrowers' can reduce bank interest rates- experts

BANKING

KAMPALA - Uganda currently has the highest interest rates put on borrowers by banks and financial institutions as compared to countries like Kenya, and Rwanda, among others in the East African Community.

This, according to experts is partly because of a lack of credit score which makes financial institutions unable to know some borrowers' credit history, and ability to pay back among others, making lending to them (borrowers) a risky venture.

A credit score is defined as a numerical expression based on a level of analysis of a person's credit files, to represent the creditworthiness of an individual. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.

"The interest rates in Uganda are market determined while that of Kenya is capped by the law. Here, banks charge interest rates basing on a number of factors such as funding and operational costs as well as profit margins that they are seeking," said Sam Omukoko, the managing director of Metropol Corporation Limited.

Omukoko, interacting with a colleague at the breakfast meeting

He said this during the launch of the credit information platform by Metropol Credit Reference Bureau at Serena Hotel Kampala on Wednesday. The product dubbed Metropol Crystobal allows borrowers to access their credit reports through their mobile phones.

"In the case of Uganda, banks can use credit scores. Once customers' creditworthiness can be measured upon a scale like a credit score, it becomes easy to negotiate terms of credit. What the mechanism does is to try and price customers interest rates on basis of credit scores; customers with very good credit score should be able to pay lower interest rates because the list of default is almost negligible," said Omukoko.

In Uganda, interest rates in some banks go as high as 26% when in Rwanda and Kenya, the rates are at 19% and 14% respectively.

"Customer who has defaulted based on credit score, may not access credit and if they do, they are asked additional collateral. Right now customers don't know why they are being charged the rates they are paying, but behind the scenes, banks practice risk-based pricing system," said Omukoko.

Badru Namwanja, the operations manager Metropol Credit Reference Bureau said the cytosol service will allow borrowers to take control of their creditworthiness, get the freedom to choose from their preferred lender among others.

"This will slightly impact on the lender-borrower relations in the Ugandan market, where we shall see borrowers obtaining increased bargaining power by taking advantage of their positive credit profiles," said Namwanja.