HIGH LENDING RATES A SYMPTOM OF BIGGER PROBLEMS

Last week central bank governor Emmanuel Tumusiime Mutebile in sharpest remarks yet directed bankers to lower their lending rates further.

He complained that despite bring the Central Bank Rate(CBR) down to seven percent he has not seen a commiserate drop in lending rates by the bank.

CBR is the rate at which banks borrow money from the central bank.

Banks prime lending rates now range from 16.5% to 20-plus percent.

A study by the central bank pointed out that beyond the cost of money the high lending rates were high overhead costs that come with banking.

"If this is true then Mutebile’s admonishment will have little real effect on lending rates soon....

It has been reported severally that in conjunction with the Bank of Uganda the industry has been making some serious inroads into cutting those costs. 

Two years ago Central bank finally gave the greenlight for agency banking, which has saved banks the cost of opening more branches, while delivering their service for a fraction of their normal costs.

There are also moves to consolidate the transfer of money, with banks sharing bullion vans and collection centers, there are also plans to share ATMs  and other initiatives that will help lower industry overheads.

I am also aware that there are discussions to increase the minimum capital of banks and annual license fees. These two initiatives it is expected, will increase innovation in the industry – banks will look for more things to finance and lower lending rates. If the shareholders put up more money in order to show a return, managers would have to be more nimble and aggressive in the market to stay in a job.

"Key to note here is that lowering the cost of doing business is a collaborative effort between the government in making laws, the central bank in regulating and the industry in executing....

Basically banks take money from people who don’t need the money immediately and lend it to others who have a current need for it.

We charge them for keeping our money and they charge us to borrow the money, their cut is the difference between how much we pay to borrow minus how much they pay us to deposit with them.

Among other things the supply of money in their vaults determines how much they quote for their lending rates. If they have little money they will charge high interest and if they are awash with cash they will ask for lower interest.

"In the given circumstances where people are withdrawing more than depositing you can see how the cost of money goes up....

I think that while the industry is working to lower overhead costs, government should be planning and legislating on how to increase savings in the economy as a means to lowering lending rates.

In more advanced economies as much as 80% of the money in circulation is in the formal financial sector, in Uganda the reverse is true.

  

The net effect of this is that there are lower lending rates in those industries.

Increased financial literacy from its current dismal levels will go some way to increasing savings, but I favour a more direct approach, in addition.

National Social Security Fund (NSSF) was created by an act of parliament in 1985, in which government compelled workers to save five percent of t heir incomes and for their employers to save an additional 10% on behalf of their employees.

Were it not for that fact, most of Uganda’s workers would barely have two shillings to rub together.

The evidence is there for all to see. Easily nine in ten NSSF members have nothing but their NSSF savings to look forward to at retirement, despite the years they have worked.

Assuming pure rationality, one would expect that workers would have saved more of the 95% left over from their income to have at hand multiples of what they have  at NSSF.

"We could wait for savings to grow organically as the economy grows or government through the law can compel us to save more....

Say we increase mandatory savings by just two percentage points, the effect will be felt across the industry.

If the banks have more money to lend, by the laws of supply and demand, the lending rates will fall.

"I think appealing to the banks sense of fair play is a losing strategy, in as far as the rates will not come down as fast as we wish. But if by understanding their business and pushing the appropriate levers we can create a situation where they have no choice but to bring rates down, that would be a more sustainable formula....

There are other issues to consider, like governments huge appetite for borrowing to finance its budget, the relatively low revenue collections too, play a part.

The least of our worries is that the banking industry is dominated by foreign interests. If this was a major problem then the  government owned Housing Finance Bank, Post Office and Pride Microfinance, would be leading players with lower than industry average, lending rates.

 Japan and South Korea government owned banks are not the dominant players in those respective industries, if at all. But their government’s know how to leverage the banks there to support their development agendas, without disrupting the industry or markets.

"Mutebile walks a fine line between letting the banks do what is necessary to remain viable and pandering to populist short term interests....

Bringing lending rates down is not a job for  Mutebile alone but for the Uganda government as a whole. 

The sooner we appreciate that, the sooner that the central bank would not be forced into embarassing, even ineffectual.