Commercial banks in Uganda have not only increased interest rates, but also slowed loan application approvals.
This is after the Bank of Uganda (BoU) increased the Central Bank Rate, a benchmark lending rate for commercial banks, from 8.5 to 9 percent in August 2022.
BoU has now increased it by 250 basis points (from 6.5 percent) since the year began as it tries to contain inflation.
The Bank uses adjustment of the CBR under its Monetary Policy to control inflation by regulating the amount of money in circulation. The idea behind it is that when there is little money, there will be less demand for goods and services and this will lead to a fall in price or a slowdown in the rate at which prices rise, hence lower inflation.
According to BoU’s Monetary Policy Report for August 2022, in June 2022, the Bank Lending Survey results for June 2022 show that most banks (60.9%) expect their lending rates to increase in the
quarter to September 2022 citing the increase in the CBR and high cost of funding.
“Six banks have already increased their prime lending rate since July 2022,” the report reads, adding that: “Weighted average shilling lending rates declined to 16.3% up from 18.3 % in May 2022. The decline was driven by big loans to prime borrowers in Trade and Manufacturing sectors at rate below 10%.”
The report adds that total Private Sector Credit (PSC) growth net of revaluation and capitalized interest, declined to 9.2% in the quarter to June 2022 down from 9.6% in Quarter to March 2022.
Declines in credit growth was observed in all sectors, except manufacturing for the month to June 2022.
“PSC growth has stagnated at 8 – 9.5 percent. Some banks have signaled raising the prime lending rates. The rise in the prime lending rates will no doubt compress credit demand. Loan approval rate has stagnated at 53.2%-52.4% of loan applications possibly reflecting persistent risk aversion in the banking sector,” the report says, adding that: “The tightening domestic monetary conditions may continue to weigh-on credit growth in the near- to medium
term.”
BoU says all soft indicators and composite index of economic activity point to a softening economic recovery as high
imported inflation ravages disposable income, consumer and business confidence.
“Economic growth projection for in FY2022/23 has thus been revised downward to 2.5-3.0% from 4.5%-5% in the last forecast round. Growth is expected revert back starting FY 2023/24, with the
output gap expected to close in FY2025/26,” the report reads in part.
