UGANDA, Kampala | Real Muloodi News | The Economist published a story last year titled ‘Why interest rates are so high in Africa?’, concluding that thanks to their high interest rates, “Africa’s banks are the most profitable in the world, while also being the least efficient.”
Ugandan banks have interest rates between 12 and 30 per cent. This affords Ugandan banks a tidy net interest margin of 5.1388 per cent, according to the World Bank collection of development indicators in 2020. That healthy mark-up in part helps cover to overheads that are higher than in other regions of the world.
Still, compared to European banks, with interest rates less than 2 per cent, some even as low as 0.4 per cent, African banks earn over 17 per cent return on equity for shareholders. This makes them the most profitable in the whole world.
Yusuf Serunkuma, a political theorist at Makerere University, says, “no business started from scratch thrives in Uganda. His opinion is that this high interest rate environment crushes native inventions. “Unless they are not paying taxes, bills such as electricity, rent and other running costs, no business thrives, not even farming.”
“You cannot do business if the bank takes back 15 per cent of the premiums. That is more than the profit margin on any premiums. And sadly, the reason for high interest rates in Africa is simply racist and colonial. Simply put, banks “do not trust Africans.” Banks have endlessly argued that most of the hefty percentages go into “servicing” the loans, whatever that means.”
The Economist shared the story of Robert Matsiko, a Ugandan man whose grain-milling business in Sheema, Western Uganda, was destroyed by fire. Mr Matsiko worked for years to resurrect his business, only to find that after building it back up from the ashes, he is being burned by high interest rates. For Mr Matsiko to buy a new machine, he must borrow from the bank at an annual rate of 22 per cent. “You fear to do that,” he says. Many other entrepreneurs feel the same way, which stifles business growth.
In 2020, the Bank of Uganda estimated that half of the banks’ interest margins are swallowed by operating costs, which is in part why rates are so high.
“Opening up a branch probably costs half a million dollars,” says Patrick Mweheire, Head of East African operations for Standard Bank, the continent’s biggest lender.
“Smaller banks are grounded by the cost of electricity, data storage or simply moving money. If you look at a highway you will see six cash-in-transit trucks, one for each bank, all a quarter full.”
However, critics claim African banks abuse their market power to cheat customers.
“These inefficient but very profitable banks are actually, in many ways, a bunch of thieves who have marshalled the legalese to steal the sweat, toil and resources of Ugandans,” notes Yusuf Serunkuma.
According to The Economist, African governments have tried to bring rates down, but have failed in their efforts. In 2016 Kenya capped commercial-loan rates at four percentage points above the central bank’s policy rate. However, the move backfired as the banks slashed credit to small businesses, opining that the rewards of lending no longer matched the risks. Therefore, the cap was scrapped last year.
However, new models could be the catalyst of change. Joshua Oigara, Chief Executive Officer of KCB Group Limited and chairman of the Kenya Bankers Association, says that mobile banking, credit-information sharing and, before the pandemic, a stable economy, helped to bring down lending costs.
Other banks are saving on the operating costs of brick and mortar establishments by enlisting local agents, such as shopkeepers. Barely 18 months after adopting this model, Standard Bank in Uganda processes more transactions through agents than at branches.
Hopefully this trend continues, and the savings on bank overheads get passed down to businesses and home owners in the form of more reasonable interest rates.
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