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BoU Boss: Why Banks Are Lending To A Few Large Borrowers

The Bank of Uganda Deputy Governor, Dr. Louis Kasekende has revealed why Ugandan commercial banks have low appetite to lend to majority Ugandans (Small and Medium Enterprises) is low.

“…the informal small and micro enterprises pose very different challenges for the banks. Their revenues are volatile and their long term probability of survival is low. Most do not keep proper financial records. There is often no separation of business expenses and the personal expenses of the owner. Banks face severe informational problems in evaluating the creditworthiness of these enterprises,” Kasekende said.

He made the remarks at the launch of the Standard Chartered Bank Socio-Economic Impact Report held at Sheraton Hotel, Kampala on March 21, 2018.

“Furthermore, because loan sizes are small, it is also very costly, per unit of loan value, to evaluate their loan applications and monitor their borrowing. Consequently, because of the high transaction costs and credit risks involved, it is only commercially viable for banks to serve this segment of the credit market if they charge high interest rates,” he added.

He revealed that this is the principal reason why average lending rates of interest are high in Uganda.

“Banks in Uganda which have a large retail clientele of small scale borrowers incur much higher operating costs and must, therefore, charge higher lending rates than banks which focus on a relatively small base of large and medium scale corporate borrowers,” he noted.

He noted that Uganda has what is in effect a dual economy which comprises, on one side, a modern formal sector with a relatively small number of medium and large scale enterprises and on the other side, a vast number of mostly informal small and micro-enterprises.

He said the medium and large scale formal sector enterprises have access to bank credit and many of them can borrow funds at interest rates which are well below average for all borrowers and in some cases even below the posted prime lending rates of banks.

“Many of these borrowers can also access offshore finance. The reasons why these borrowers can access credit relatively cheaply are straightforward to understand; these enterprises have established track records of profitability, are well managed and run according to strict commercial principles, they prepare detailed financial accounts and they can often provide guarantees from affiliates abroad. Hence credit risk is low and the transactions cost incurred by the bank per unit of loan value is also low,” he said.

Is it possible for bank lending rates to be lowered without at the same time reducing the access to credit of those small scale borrowers who are the most costly for banks to serve?

“Certainly Yes; but this will only be possible on a sustainable basis if the costs of serving these borrowers can be reduced,” Kasekende said.

He noted that the establishment of the Credit Reference Bureau (CRB) is intended to offer banks better access to reliable information about the loan history and thus the creditworthiness of loan applicants and thereby reduce informational costs, but these costs are only a relatively small part of the overall costs which banks incur in lending to small scale borrowers, so the CRB will not, on its own, bring about a substantial reduction in the cost of credit.

In the long run, he said, reducing intermediation costs will benefit from government’s continuous efforts in improving the business environment such as investment in infrastructure and efficacy of commercial justice system. Most importantly for banks, lowering costs will probably require employing information technology to replace traditional banking methods of delivering loans and other financial products and for assessing loan applications.


In the foreword to the socio-economic impact assessment report, Lamin Manjang, the CEO of SCB Kenya points out that SCB is investing heavily across its banking group in digital technology with the aim of enabling 80 percent of its customers’ transactions to be conducted through non branch channels. Last week, it was also reported that Standard Chartered Bank is launching its first digital only retail bank in Cote d’Ivoire; this bank will have no physical bank branches and will be a testing ground for the delivery of digital financial services.

According to Kasekende “this is clearly the direction in which banking is moving worldwide. Digitalisation has already brought about dramatic improvements in access to payments services and a reduction in the costs incurred by customers in making payments in East Africa,” he said, adding that the challenge for banks is to realise similar improvements and cost savings in the delivery of loan products.

“This will certainly be much more difficult, but if banks can do this, lower lending rates and an expansion of access to credit will become a more realisable prospect,” he said.

The independent socio-economic impact assessment of Standard Chartered Bank’s operations in East Africa, prepared by the consultancy firm Steward Redqueen, addresses the the contribution of the bank to the economy and to social welfare, in a rigorous and comprehensive manner using an input-output methodology.

It sets out to quantify the contribution which Standard Chartered Bank’s operations, principally its lending to the private sector, made to GDP and employment in Kenya, Tanzania and Uganda, in 2016.

The impact arises from both the direct support which SCB’s lending provides to its borrowers and the second round effects on the borrowers’ suppliers and other indirect effects. These contributions to GDP and employment are far from being negligible.

In Uganda, SCB extended domestic credit to the private sector, through both on- shore and offshore financing, of just over $900 million in 2016, which amounts to about 3.6 percent of GDP. The socio-economic impact report estimates that SCB’s lending supported value added of 3.5 percent of GDP and almost half a million jobs. Hence each Shilling of SCB’s lending supported GDP of a similar magnitude.

“This might not appear very large until we recall that bank finance generally provides a borrower with funds to purchase both factor inputs and material inputs, whereas it is only the factor inputs which comprise GDP.

Therefore, the fact that there is an almost one for one relationship between SCB’s finance and the magnitude of GDP which it supports is indicative of finance being a scarce resource in Uganda and that marginal returns to capital are high, at least for the borrowers of SCB,” Kasekende said.

He added: “High returns to borrowing also suggest that funds are being intermediated efficiently; i.e. channeled to those borrowers which are able to use funds most productively.”

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Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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