Govt faulted on bank rates
Mar 16, 2010
FREQUENT government borrowing from commercial banks to finance its budget deficit and high risk premium rates on risky small-scale businesses are responsible for the high interest rates on private sector borrowing.
By Alice Kiingi
FREQUENT government borrowing from commercial banks to finance its budget deficit and high risk premium rates on risky small-scale businesses are responsible for the high interest rates on private sector borrowing.
Gerald Ssendawula, the chairperson of the Private Sector Foundation Uganda (PSFU), said high Treasury Bills and high risk premium rates on risky small-and-medium enterprises (SMEs) were the determinants of interest rates charged by commercial banks.
“The private sector is competing with the Government through the Treasury Bills because the Government uses TBs as a method of borrowing to cover deficits.
“The risk premium rate is high because the Government is a safer borrower and it requires no security to borrow, while private businesses have to provide business plans, collateral, balance sheets and cash flows. Also, a high interest is charged because banks do not trust SMEs as they are known to disappear or change identity,†he explained.
Ssendawula added that it was unfair for the public sector to financially out-compete the private sector which pays tax. “The private sector should be the one to easily access money from banks to increase production and be able to pay taxes to the Government.â€
However, Gideon Badagawa, the PSFU executive director, said the problem at enterprise level was not access to money.
“We are not prepared well enough to be able attract the attention of banks to give us money. “The risk premium is being addressed from the demand side of financing to help SMEs develop more bankable projects and become less risky to bankers,†he explained.
He added that SMEs needed a lot of guidance on the advantages and disadvantages of the alternative forms of financing. Badagawa was speaking in an interview on the sidelines of the annual PSFU day at the Uganda Manufacturers Association show grounds at Lugogo in Kampala.
“SMEs need business advisory services, development and support of on how best to present their investment projects to potential financiers. These are key prerequisites for SMEs growth, job creation, income generation and the subsequently economic transformation.â€
Gaggawala Wambuzi, the trade state minister, called on more small businesses to save and open accounts with Savings and Cooperative Society Organisations (SACCOs). He also advised them to have valuable goods, assets, service and good loan reputation.
“The Government lends money to SACCOs at 10% interest for agriculture, trade at 12%. With this type of saving in SACCOs and the Government support, SMEs can transform into big businesses.â€
Banks are now in competition with SACCOs this will now make the banks to start lowering the interest rate,†Gaggawala said.
FREQUENT government borrowing from commercial banks to finance its budget deficit and high risk premium rates on risky small-scale businesses are responsible for the high interest rates on private sector borrowing.
Gerald Ssendawula, the chairperson of the Private Sector Foundation Uganda (PSFU), said high Treasury Bills and high risk premium rates on risky small-and-medium enterprises (SMEs) were the determinants of interest rates charged by commercial banks.
“The private sector is competing with the Government through the Treasury Bills because the Government uses TBs as a method of borrowing to cover deficits.
“The risk premium rate is high because the Government is a safer borrower and it requires no security to borrow, while private businesses have to provide business plans, collateral, balance sheets and cash flows. Also, a high interest is charged because banks do not trust SMEs as they are known to disappear or change identity,†he explained.
Ssendawula added that it was unfair for the public sector to financially out-compete the private sector which pays tax. “The private sector should be the one to easily access money from banks to increase production and be able to pay taxes to the Government.â€
However, Gideon Badagawa, the PSFU executive director, said the problem at enterprise level was not access to money.
“We are not prepared well enough to be able attract the attention of banks to give us money. “The risk premium is being addressed from the demand side of financing to help SMEs develop more bankable projects and become less risky to bankers,†he explained.
He added that SMEs needed a lot of guidance on the advantages and disadvantages of the alternative forms of financing. Badagawa was speaking in an interview on the sidelines of the annual PSFU day at the Uganda Manufacturers Association show grounds at Lugogo in Kampala.
“SMEs need business advisory services, development and support of on how best to present their investment projects to potential financiers. These are key prerequisites for SMEs growth, job creation, income generation and the subsequently economic transformation.â€
Gaggawala Wambuzi, the trade state minister, called on more small businesses to save and open accounts with Savings and Cooperative Society Organisations (SACCOs). He also advised them to have valuable goods, assets, service and good loan reputation.
“The Government lends money to SACCOs at 10% interest for agriculture, trade at 12%. With this type of saving in SACCOs and the Government support, SMEs can transform into big businesses.â€
Banks are now in competition with SACCOs this will now make the banks to start lowering the interest rate,†Gaggawala said.