Uganda’s central Bank (BoU) has threatened to cap the interest that commercial banks can charge borrowers, after the industry failed to reduce loan rates in response to cuts in benchmark rates, according to a letter from its governor.
The BoU cut its Central Bank Rate by 200 basis points to an all-time low of 7% between April and June, to try to help jumpstart an economy battered by the impact of the coronavirus.
Its governor Emmanuel Tumusiime-Mutebile said in the letter, – dated July 7, sent to all commercial banks and seen by Reuters – that he was “disheartened” to see they had not acknowledged that reduction with cuts of their own.
The central bank was, therefore, considering invoking a law that allows it to determine maximum and minimum rates that “financial institutions may…impose on credit extended in any form.”
Neighbouring Kenya capped lending rates for its commercial banks on similar grounds in 2016, but scrapped the policy last November after it was blamed for stalling lending to businesses.
Tumusiime-Mutebile said in the letter that weighted average lending rate on loans rose to 18.8% in May from 17.7% in April, at a time when economic activity in Uganda was facing an unprecedented decline due lower demand, lower capital inflows, reduced productivity and mass unemployment
If implemented, the cap would significantly hit revenues at commercial banks, whose leading local players include affiliates of Standard Chartered Bank and South Africa’s Standard Bank.
The World Bank projects growth in Uganda’s economy could slow 0.4% this year from 5.6% in 2019 due to the effects of the pandemic. (Reporting by Elias Biryabarema; Editing by Ayenat Mersie and John Stonestreet)