Stephen Kaboyo, the Managing Director at Alpha Capital Partners
On 7th July, BOU issued a circular to commercial banks warning them of the persistently high lending rates and indicating that if nothing is done, it could invoke section 39 of BOU act that gives the Central Bank powers in consultation with the Minister of Finance to set ceilings on lending rates.
Stephen Kaboyo, an analyst and Managing Director at Alpha Capital Partners has weighed-in on what BoU directive to commercial banks to lower interest rates means to the banks, clients and the economy at large.
Below are his views on this development:
What does this mean and why now?
BOU seems to been running out of patience and this sort of response is what I would call a reality check responding to the current economic play as a result of Covid-19 effects.
It has been a lot soul searching and inventory taking for BOU on the subject of high lending rates. In normal times, one would not have expected such a hawkish tone from the Central bank given its strong free market credentials, but in the current times, the monetary authority is saying they have done everything possible in their rulebook and the signals are ineffective.
For quite some time, BOU has been using the moral suasion approach to convince commercial banks to respond to the accommodative monetary policy stance, but this has fallen on deaf ears.
Clearly, the spread has been very large and the policy rate has had little effect on commercial banks liquidity management and pricing which essentially means that there has been a weak monetary policy transmission. This does not only have an economic implication but also puts the Central Bank’s credibility on the line.
What factors drive interest rate spreads and reasons behind high lending rates?
Uganda embraced free market policies and from a theoretical point of view, this was expected to enhance competition and efficiency in the financial sector.
The results have been somewhat mixed and going by international comparison, the cost of credit in Uganda remains the highest in the region.
Commercial banks have attributed the high lending rates to high costs of doing business which has created inefficiencies in the process of financial intermediation.
How are banks expected to respond?
In my view, it is not going to be business unusual. Banks will have to take a closer look at the changing market conditions in these uncertain times and managing balance sheets is going to complicated, they will have no choice but to reset their revenue outlooks, change their financial assumptions, tweak their business models, and review and restructure their operations in light of the current market environment.
