Friday, August 1, 2008


Earlier this year a scheme was announced to enable public servants own lap top computers. Unless one paid cash upfront, the catch was a bank loan with a 20% interest rate. A quick calculation showed that payments one would make on the interest alone would be much
more than on the lap top itself!
Many Ugandans are choking under the weight of high loan interest rates and despite the pleas of Ugandan authorities, the banks have kept the interest rates up there. Little surprise then that virtually all banks in the country turned handsome profits last year on the back of a very lucrative lending regime.
The Bank of Uganda is reluctant to intervene more directly and lower rates and hopes licensing more banks will bring the rates down. Thanks to the earlier era of structural adjustment, money markets were liberalized in Uganda.
The truth of the matter is that on interest rates, Uganda is more catholic than the pope, because interest rates in the United States are set by the FED, and the interest rates in Japan, Australia United Kingdom are set by their central banks. Closer to home, the central banks in South Africa and Kenya set interest rates.
Interest rates are too critical to the economy to be left purely to market forces and not even the most capitalist economies practice what they preach. Interest rates determine almost everything else in the economy. High interest rates discourage consumer spending, they influence returns savers can make on their investments and therefore investment spending, the cost of mortgages for home owners, the outlook for jobs and perhaps more, critically inflation. Ultimately it is the Ugandan consumer who pays the price of high interest rates as these are passed on in form of the pricing of products consumed.
The bank interest rates in Uganda are within the range of 20-35% on average. In the microfinance industry, the rates are even scandalously much higher. Some charge between 12 % a month. There have even been adverts of those who charge interest rates per week!
A recent study showed that the majority of new small businesses in Uganda don’t make it beyond the first year mark. The cost of credit in Uganda is undoubtedly part of the story.

If the borrowing rates were much lower, the economy would get a big boost and economic growth rates would go up. When lending rates are down they encourage borrowing hence investment and in turn creation of jobs. When rates are high the price of goods and services becomes high and then you get into inflation. Now imagine a situation where these rates are significantly reduced and the impact they would have on commerce and economic growth.

Ugandan banks will argue that the price of money is high as well as operation costs and that lending in Africa carries much risk. The public will continue to view high interest rates as efforts by banks to maximize profits in an oligopolistic market.
In neighboring Kenya, parliament in 2000 passed a bill to regulate interest rates. Under the bill, commercial banks can not set their rates more than three per cent higher than the rate fixed by the central bank. Interest rates in Kenya hover between 12-16% while in Rwanda they are between 16% and 18%.
A limited intervention in setting interest rates by Bank of Uganda is advisable. Intervention in interest rates was credited, partly, for the rise of the economies of South East Asia. Joseph Stiglitz, ex- chief economist at the World Bank and a Nobel prize economist, favours this approach. Unless Interest rates in Uganda are reassessed, the brakes on the economy will remain in force.

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