By David Mugabe & Samuel Sanya
Commercial banks are predicting that fewer Ugandans are likely to borrow from them after they raised their lending rates.
This is because most Ugandans have fixed salaries that are rarely adjusted even with the rising cost of living. Higher lending rates will eat into their fixed incomes.
â€œCredit demand is expected to come down as the cost rises, and very few retail clients can increase their income/salaries,â€ says Charles Katongole, head of assets and liability management, Standard Chartered Bank.
For now, contrary to expectations, loans to households and individuals for private consumption climbed by 15% in July compared to 7.3% in June, according to information from the central bank.
Part of the explanation for this is that people have not changed their life styles.
But still instead of calming prices, Martin Muhwezi, a member of the investors club says the increases in the Central Bank Rate (CBR) will serve to increase prices beyond the current levels through expensive commercial bank credit in the short term.
â€œThe cost of manufactured goods will just keep going up with increases in the cost of credit leading to higher inflation. Why? We have to borrow expensively, manufacture and transfer the cost to the consumer in the form of high commodity prices,â€ says Muhwezi.
Godfrey Ssali, a policy officer at the Uganda Manufacturers Association says that even when inflation is being caused by supply deficiencies, it is now harder to add a night shift to the usual day time work hours or to acquire extra land for production, purchase extra vehicles to increase the company fleet and purchase generators to boost production during electricity load shedding since credit is costly.
Most commercial banks have increased their prime lending rates at least once, with some have increased their rate twice in the last three months to match increases in the CBR.
The bench mark rate that is supposed to guide commercial bank lending rates has been on the rise, starting out from 13% in July, rising to 14% in August before hitting 16% in September.
The rise is expected to clamp down on inflation which has persisted, reaching 21.4% in August from 18.7% in July and stabilise the shilling by reducing consumer expenditures while promoting saving.
At the release of the latest CBR, Louis Kasekende the Bank of Uganda (BoU) deputy governor said the rediscount rate - the rate at which the Central Bank charges commercial banks for loans, has been set at 21% and 22% when borrowing against eligible collateral.
â€œThe BoU is raising interest rates in order to curb the growth in bank credit, which has expanded rapidly over the last 12 months, to encourage higher levels of saving and to provide more support to the exchange rate,â€ he explained.
â€œIf the inflation deteriorates in the next few months, the BoU will implement further increases in the CBR,â€ he added.
On September 9, Standard Chartered Bank raised its base lending rates from 20.5% to 23.5%.
The sharp rise from 20.5% to 23.5 compared to the previous 1% change according to Standard Chartered Bank is reflective of the changes in the current market environment, with the CBR up 200 bps and core inflation up to 20%
â€œMost significant was the upward increase in the Central Bank Reference Rate that was increased from 14% to 16% (in addition to the other changes regarding the policy rates) signaling a move to tighten liquidity over the month of September,â€ said Katongole.
But the corporate side and the retail side have since reacted differently to the changes with demand for credit especially from the corporate side remaining strong.
â€œThese still have sufficient margin and can pass on the increased cost to their consumers,â€ said Katongole.
Going forward, bankers like Ajay Kumar, Crane Bankâ€™s deputy managing director is optimistic about the current BoU interventions saying that the worst in the economy has passed.
â€œThe rise in the CBR and rediscount rates affected our clientele but not very significantly. The entire CBR mechanism takes a while to take effect but I do not imagine the rate going beyond the current rate,â€ he said.
Standard Chartered views the medium term economic outlook as very attractive with oil production, emerging regional markets, the many large corporate are positioning themselves to take advantage of the situation.
Christine Alupo, the BoU assistant director communications told Business Vision that the Central Bank does not intend to out rightly dictate the rates that commercial banks charge by adjusting the CBR.
She, however, pointed out that banks are at liberty to adjust their interest rates according to their, individual, liquidity profile and credit market assessment.
Therefore the rate of choice can be higher or lower than the CBR for the month.
â€œThe tighter monetary policy stance (increase of CBR to 16% from 14%) being pursued by the Bank of Uganda is expected to slow down credit growth.
â€œInflation is expected to start falling by the end of 2011 and continue through 2012. Assuming no other external shocks, core inflation should fall to single digits and eventually to the target of 5% in mid-2013,â€ said Alupo. Core inflation was at 20% in August.
Also the Central Bank September monthly monetary policy report indicates that despite previous increases in the CBR, money in circulation has continued to rise, nearly reaching sh2, 000b in July from sh1, 800bn in June this year.
In line with expectations, private sector credit is showing signs of abetting, growing at a slower rate of 41.8% in July from 44.4% the previous month.
Lending to agriculture, manufacturing and trade grew by 29.8%, 33.1%, and 53.4% respect