• Wed. Nov 29th, 2023

Commercial Banks Debate Lowering Lending Rates

UGANDA, Kampala | Real Muloodi News | In an effort to boost economic recovery, Bank of Uganda (BoU) cut the policy interest rate on 16th June to stimulate the economy and lower inflation. The Central Bank Rate (CBR) was cut by 50 basis points from 7% to 6.5%. This is the lowest rate ever introduced by the Bank.

The big question is, will commercial banks follow suit with a drop in lending rates? As a comparison, the commercial bank lending rate averaged 18.9% in the quarter to April 2021. 

In the past, CBR reached up to 23% in 2011, which led to an increase in inflation to over 30%. During this time, lending interest rates were also above 30%. As a result, BOU reduced the policy rate in line with the downward inflation trend curve. Lending rates then followed suit and also dropped.

What are the Banks Saying?

According to Adam Mugume, Executive Director for Research at BoU, other banks in Uganda are likely to lower interest rates as they will be in business with the central bank. He explained that previously, some banks reduced their interest rates to as low as 15% annually from 30% keeping in line with BOU’s monetary policy. 

Wilbrod Owor, the Executive Director at Uganda Bankers Association, agreed with BOU but has made no promises so far. He said: 

“Ideally the reduction in the CBR would mean a downward review of lending rates to stimulate growth in the economy,” adding, “but we are in a difficult situation of high non-performing loans and subdued economy.”

Mr Owor added several sectors are underperforming because of coronavirus induced lockdowns, namely education, transport and trade, leading to non-performing loans.

He said the banks were planning to schedule a meeting to review BoU’s monetary policy action in line with their market strategies to come up with resolutions that are good for all players in the economy.

He explained that banks would like to support the economy to recover, but each financial institution is different, therefore there may not be a uniform response. 

What are Economic Experts Saying?

According to Corti Paul Lukuma, a researcher at the Economic Policy Research Centre at Makerere University, banks may respond by lowering their commercial lending rates, but not necessarily because of the drop in the central bank rate. Rather, because they are stuck with money due to decreased economic activity. He said:

“There is limited economic activity, people are saving…and that means banks might want to attract borrowers…that could partly be one of the reasons.”

Mr Lukuma further explains that if a drop in commercial lending rates happens, we can expect a faster recovery of the economy. However, lowering interest rates is not the only factor that plays into economic recovery. He said:

“The Central Bank has done its part.” But added that: “Those in charge of revenue collections must deliver results, and those in charge of spending what is collected must do it carefully to revamp the shaky economy.”


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