Banks set to cut interest rates

Amid intense pressure from the public and BoU, banks finally budge on interest rates

For about a year, the prayer of John Kasimoni, a general merchandise wholesaler in Kikuubo market, has been having the interest rate on a variable bank loan he obtained from a bank reduced.

It all started when Kasimoni walked into a bank and obtained a three-year loan of Shs 100 million from the bank in June last year to recapitalise his business.

At the original interest rate of 25%, he was supposed to pay monthly installments of Shs about Shs 4 million per month for 36 months.? Over the 36 months, he would have to pay back interest equivalent to more than Shs 44 million.

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But on November 1, 2011, Kasimoni received a letter from the bank informing him that the bank had increased its prime lending rate to 28.5%, and his monthly installments had automatically grown to more than Shs 4.5 million per month effective immediately. This meant an increase of Shs 530,000 on his monthly installments.? This was money he had to fork out from his capital. He almost lost his house - which he had staked as security for the loan - to the bank.

?I didn?t know there was such a condition in the loan contract or I wouldn?t have taken it,? Kasimoni said bitterly, adding that he has not thought of going back to any bank for a loan.

For now, Kasimoni is barely managing to pay off the old loan and still feels petrified when one mentions going back for another loan. ?I wouldn?t go back to banks for loans. I really fear,? he said.

Traders? protests

Early this year, traders under their umbrella body Kampala City Traders Association (KACITA) staged a three-day strike and shutdown shops protesting the spike in interest rates which saw most of them lose property and close business.

Some commercial banks hiked interest rates to over 30% from as low as 15% in the first quarter of 2011. The hike was influenced by increases in the central bank?s central bank rate which touched highs of 23% from 13%. The rate increment was aimed at fighting inflation which peaked at 30.4% in October last year, the highest since 1993.

According to the Bank of Uganda commercial banks weighted average rates jumped to 26.9% in July 2012 from 21.7% in July 2011. Not surprisingly, commercial banks registered some of their biggest profits ever in the last financial year.

There is hope that traders? prayers could be been answered with most commercial banks announcing some cuts in their bank lending rates in response to the recent reduction in the central bank rate to 13%, the level it was at in July last year before inflation spiked.

For instance, KCB reduced its interest rates from 26% to 24%, Ecobank reduced to 25% from 26%, Stanchart is now at 21%, Centenary Bank is at 22% down from 23% while Stanbic will cut to 21% from 26%. Dfcu and Crane Bank stand at 25%.

In an interview with The Independent on Oct. 12 Everest Kayondo, the KACITA chairman, said:? ?We are a bit relieved with the interest rate cuts but we are not yet there,?, adding that loans were still expensive for borrowers.

He argued that in July last year when the CBR was at 13% most banks had their base lending rates below 20%. Today, the CBR is back at 13% and no bank has lowered their base lending rates below 20%.

Kayondo feels the pain for his members who lost property to banks and closed business because of the ?unmanageable? hikes in interest rates.

?That we will live to remember,? he said, adding that to avoid a repeat of such pain, he insists on government coming up with a policy forcing banks to cut interest rates in line with the central bank?s CBR ?even if we are in a liberalised economy.?

Even Members of Parliament on the National Economy are pushing for a similar move. They are urging the Finance minister to push for the amendment to the Financial Institutions Act 2004 so that the central bank can have a say on how much commercial banks charge on loans once economic conditions change.

Isaac Nkote, senior lecture of Finance at Makerere University Business School, told The Independent on Oct. 13 that it is very hard to regulate banks? interest rates when they operate in a liberalised economy since many had different ways of determining interest rates say the degree of risk and the type of borrower.

?Setting new interest rates by a bank is a management issue and it takes some time,? he said, adding that banks would always reduce interest rates when they expect good market conditions in a period of six months.

Nkote said even amidst high interest rates ?serious? borrowers would always borrow. ?It depends on the business one does and the bank they are dealing with.?

Emmanuel Tumusiime Mutebile, the central bank governor, has on several occasions publicly admitted that he could not force commercial banks to reduce interest rates because he does not have that mandate.

?But for the interest of the business community and the economy, legislators should look into that,? Kayondo said.

Mutebile cut the CBR by two percentage points to 13% in October down from 15% in September due to the disinflationary momentum reported by the Uganda Bureau of Statistics. The bureau reported on Sept. 28 that annual headline and core inflation fell sharply to 5.4% and 4.8% respectively in September from 11.9% and 11.4% in August driven by sharp falls in food prices and other falls in the other components in the inflation basket.

BoU?s most recent CBR cut brought the cumulative fall in the rate, since February this year to 10 percentage points.? The rate cut, according to Mutebile was expected to influence commercial banks to reduce their interest rates charged on loans.

?However the reduction in the CBR has not been passed on fully to commercial banks? lending rates,? Mutebile complained. ?I hope that in October, we will see a significant reduction in bank lending rates for all borrowers,? he added.

But the governor said he expected no further cuts in the CBR since inflation had fallen back to where it was last year in Q1.

But Philip Odera, the chairperson of the Uganda Bankers Association and managing director of Stanbic Bank, the largest bank in terms of market share and asset base, was optimistic.

?Banks will continue to reduce their interest rates as long as there is enough and cheap liquidity in the market,? Odera told The Independent on Sept. 12, adding that the central bank had just cut the CBR something that he said needs some time to have the cost of funding in the market falling and ?for commercial banks to assess the future.?

Wise borrowers

Odera, whose bank has announced a cut in its base lending rate to 21% effective Nov. 1 down from a high of 29% a few months ago, said the bank currently welcomes customers who are not ?rushing? to take up loan products but those who are demanding for broad knowledge on how to borrow from the bank and ?use the money wisely? and make profits out of their business.

?We want your business to grow so that we can also grow,? he said.

He said they are now encouraging borrowers to access loan products in groups so that it becomes easy for them to payback. Those could be workers of a particular company or farmers attached to an organisation or private company which they supply with agricultural output.

Like Odera, A.R Kalan, Crane Bank?s managing director, said they were happy to see inflation in single digits and the central bank reducing the CBR. Kalan promised to cut their base lending rates, which stood at 26% further as market conditions continue to be favorable.

The business community and the public might have the view that commercial banks are out to exploit them and maximize profits but Odera urged the public not to see banks that way. He said banks are contributors to economic growth through financing productive sectors.

?We are all working towards having our economy growing,? he said.

But with the economic growth slowing down due to lower productivity as a result of lack of credit, many will continue to doubt Odera?s assertions. For instance, Uganda?s economy grew at 3.2% in the fiscal year that ended on June 30, 2012 down from 6.7% expansion in the year earlier. However, there is optimism that the next 12 months will be better as productive sectors get the necessary boost to enable the economy to grow at the desired level of about 7% per annum.

But for now, all that people like Kasimoni are thinking about is having the interest rate on their loans go down. If for instance, Kasimoni?s bank effected the reduction to 21%, he will pay back at most Shs 3.3 million per month, Shs 700,000 less than the smallest amount he ever paid back and about Shs 1 million lower than the highest amount he ever paid.?? How long the banks will have to wait to accept to make this kind of ?loss? is what remains to be seen.

Trend of interest rates and the CBR from June 2011 - October 2012

Source: http://www.independent.co.ug/business/business-news/6651-banks-set-to-cut-interest-rates

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