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Small Borrowers Bear The Brunt Of High Interest Rates – BoU

The Bank of Uganda (BoU) has revealed that interest rates continues to decline, but customers of small-sized loans are charged higher rates compared to big ones.

According to the Monetary Policy Report for June 2018, the Weighted Average Lending Rate (WALR) has declined to 20% and 7.8% in April 2018 for Shilling and Forex denominated loans, respectively.

“While the WALR  averaged 20%, a further decomposition shows that over the last four months about 50% of new loans were disbursed at rates less than 20%, mainly to large corporations and prime borrowers,” the report reads in part.

It adds: “Customers of small-sized loans continue to obtain credit at higher rates, with some accessing credit at rates higher than 30%.”

The report says high transaction costs associated with small-sized loans and high default risk results into higher rates for smaller borrowers.

It adds that Private Sector Credit (PSC) growth continues to strengthen partly due to a reduction in supply side constraints and improving economic conditions.

Shilling-denominated loans grew by 12.7% in April 2018 relative to 7.7% in November 2017, contributing 7.3 percentage points to PSC growth.

Forex loans grew by 0.8% relative to -3.7% in November 2017, contributing 0.4pp to PSC growth.

“A sectoral decomposition shows a notable recovery in growth of credit to the manufacturing, and Building, Mortgage, Construction & Real Estate sectors. PSC growth is projected to improve further on account of lower NPLs and higher GDP growth,” the report says, adding: “Asset quality continues to improve, with the ratio of NPLs to total loans declining to 5.3% in March 2018 from 7.2% in September 2017. This increase in credit growth if sustained is likely to boost private investment & consumption, which should in turn boost growth.”

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