By ABCafrica reporter
The governor Bank of Uganda Prof Emanuel Tumusiime Mutebile has cautioned commercial banks against capping of interest rates, rather advising that they embrace various strategies of reducing their operation costs.
Prof Mutebile was speaking during the Annual Bankers’ Conference in Kampala, last Wednesday. He noted that; although the annual demand for loans is growing at 17 per cent, only 70 per cent of these loans are approved due to skepticism within the banking sector.
Mutebile thus says bankers must embrace swift measures, to cut operation costs including reducing on workers, new financial innovation, popularizing use of ATMs and other cost cutting means.
Currently the annual operation costs of banks stands at 11 per cent, which makes the final interest rate high.
In the last one year, Bank of Uganda (BoU) has eased the CBR by 7 percentage points, whereas commercial bank interest rates have on average dropped by 4.71 percentage points. BoU notes that this reduction in commercial bank lending rates is; “marginally lower than” the CBR reduction. In essence, the banks are slowly responding.
Keynote Speaker, Prof. Njuguna Ndugu, Emeritus Governor of the Central Bank of Kenya said; a major challenge for the banking industry; one which is of the greatest importance for the rest of the economy, is how to strengthen bank lending to the private sector. “Bank lending expanded rapidly in the first decade of this century; in real terms the stock of credit expanded fourfold between 2001 and 2011,and this enabled many new borrowers to access credit. But since 2011 credit growth has slowed and over the last two years, there has been virtually no growth in real terms (after adjusting for inflation)”.
Njuguna added that; the main reasons for the stagnation of bank lending lie on the supply side of the credit market. “Over the last five years, since the first half of 2012, loan demand, as proxied by the value of loan applications received by banks, has grown robustly, by about 17 percent per annum in real terms, but the value of loans actually approved by banks has grown much more slowly. Consequently, whereas in the first half of 2012, banks approved loans in value amounting to 70 percent of the total loan applications that they received, that figure had fallen to 51 percent in the first four months of 2017”, he added.
In Conclusion, Njuguna said; “I believe that the future of the banking industry in Uganda is bright. In terms of productivity, the adoption of international best practices and its use of modern technology, banking is one of the leading industries in Uganda”.