Encourage savings

Aug 05, 2009

UGANDA was put in the spotlight at the second East African Community investment conference that ended in the Kenyan capital, Nairobi at the weekend. Other members of the regional grouping voiced concern over Uganda’s high interest rates.

UGANDA was put in the spotlight at the second East African Community investment conference that ended in the Kenyan capital, Nairobi at the weekend. Other members of the regional grouping voiced concern over Uganda’s high interest rates.

Uganda was also accused of delaying transit goods and promoting restrictive policies at the Tororo dry port. While there could be a plethora of reasons explaining delays in clearing transit goods and the monopoly status of Tororo dry port, the issue of high interest rates by commercial banks should be immediately addressed.

As the champion of regional cooperation, it should be in the interest of Uganda, not only to level its interest rate with the rest of the five-member bloc, but also to stimulate economic growth.
Commercial banks charge ordinary borrowers interest anywhere between 19% and 28%. With the Credit Reference Bureau in place, the major reason given by commercial banks that it is risky lending to Ugandans no longer holds water.

The Government has also not helped much in bringing down the interest rates by being a heavy borrower. This has made banks to invest more in the less-risky Treasury Bills. But with 91-day Treasury Bill rate dropping to about 6%, commercial banks now also have no more excuses to charge the exorbitant interest rates.

It is high time augmented these developments with policy interventions to encourage savings. With increased savings, banks will be hard-pressed to lend and interest rates shall automatically come down.

We could borrow a leaf from Kenya and the US where all mortage repayments are tax deductible. In the US, even social security savings are tax deductible. If savings become tax deductible, the more people are likely to save.

With banks overflowing with long-term savings, interest rates are likely to come out as they compete for borrowers. But as long as the Government still remains the biggest borrower without any policy measures in place to encourage savings, it shall be a wild dream to expect interest rates to come down.

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