Uganda’s lending rates are the highest in the East African Community (EAC) region, the Bank of Uganda (BoU) has revealed.
This is stifling credit to the private sector and consequently the growth of the economy.
BoU’s Monetary Policy Report for October 2017 also reveals that profitability indicators in Uganda are the lowest in the EAC region.
The report shows that Return On Assets (ROA) averaged at 11.3% in Uganda in FY2016/17 compared to 26.4% recorded in Kenya and 19.8% in Tanzania.
BoU attributes it to “structural constraints such as the high cost of doing business in Uganda, which cannot be addressed by monetary policy alone.”
Although BoU has been reducing the Central Bank Rate, a benchmark lending rate for commercial banks over time, interest rates have largely remained high.
BoU says the Weighted Average Index (WAI) lending rate averaged 21.6% in July and August 2017, compared to 21.1% in May& June 2017.
In Kenya, the key rate is at 10% and given the fact that the country adopted interest caps last year; commercial banks cannot charge interest rates above 14%.
On Tuesday, the Central Bank further eased the CBR to 9.5%, down from 10% in August 2017 on account that core inflation is forecast to remain around the medium-term target of 5 percent and economic activity is slowly gaining momentum.
Prof. Emmanuel Tumusiime-Mutebile, the BoU Governor said the cautious easing of monetary policy was warranted to boost Private Sector Credit (PSC) growth and strengthen the economic growth momentum.
Growth in PSC has remained subdued in Uganda and BoU survey indicates that lending rates are largely expected to remain unchanged.
The report reveals that average annual PSC Growth in Quarter to August 2017 was 5.8% relative to 6.1% in Quarter to May 2017
Additionally, Shilling denominated loans grew by 8.0% relative to 8.5% in the previous period.
“Modest PSC growth despite sustained monetary easing in part highlights supply-side constraints,” BoU says, adding that demand for credit remains robust while supply remains subdued.
There is a significant disparity between value of loan applications and approvals, BoU says.