WHAT TO DO ABOUT THE HIGH LENDING RATES

About two weeks ago in a seminar hosted by the Bank of Uganda the vexing question of what is causing high lending rates rared its ugly head again.

In one presentation, “Determinants of interest rate Spreads in the Uganda banking system,” presented by financial sector deepening, Uganda boss Rashmi Pillai narrowed it down to the high cost of capital our banks are working with.

She showed that

viewed against regional operators our banking industry is not abnormally lucrative and neither are the costs of doing business unusually high....

She showed that  only between three to 38 percent of the people use the banks. The lower figure representing the poorest 40 percent of the population and the higher percent is the Kampala population.

Interestingly between 28 and 45 percent of Ugandans belong to savings groups. Even 41 percent the poorest 40 percent use the savings groups.

They didn’t examine in much detail why we opt for the savings groups over the banks, but I imagine apart from ease of dealing with the savings groups for most, people are intimidated with dealing with banks.

Despite the strides the industry has made in opening more branches, though the truth be told their coverage is still anemic at best, and easing  their processes people are still wary of the banking system.

"What mobile money has shown us is that we are not averse to saving we just need more convenient channels. A few years ago it was reported that on people were living a few hundreds of thousands on their mobile money accounts for months untouched.

To lower the cost of funds to the banks we need to save more with the banks, which are now relying on the more expensive shareholders funds and high cost fixed deposits to finance lending.

The question is how to incentivise people to save more?

It helps that inflation is within managable levels, the average inflation rate overt he last decade is just above seven percent, it could it be lower were it not for the 19 year spike in 2011, when inflation peaked at 30 percent.

Encouraging, rather than discouraging savings group is also good, because these deposit their funds with the banks. The ten year moratorium on tax on income for SACCOs was useful.

In the new NSSF bill it will affect employers with less than five employees  as was required in the old law. Hopefully this will encourage more people to save or at least NSSF will compel more employers to sign on their workers.

Unfortunately, efforts to make monthly savings tax deductible was defeated. In western economies they make retirement savings tax deductible to incentivise people to save more. Maybe more negotiations are in order to allow this to pass. It should be that the more one saves the better the tax break.

Government should even consider increasing the mandatory savings for retirement to as much as ten percent of a workers’ income.

Increased monies flowing into the banks will force them to shovel it out the door any which way they can. Banks making money by lending – to government or private sector. Government  appetite for debt while huge is finite and as this wanes, as it should, banks will have to create new products for their clients.

As it is banks are seating easy with on average less than 50 percent of their assets in credit to the private sector.

It is why you can be a client of a bank for more than 10 years and only doing salary loans. They have little to no incentive to wonder what you do with their credit and how can they interest you in other products – a mortgage or asset financing or something. They have it too easy.

Of course there are people who want things to remain just the way they are. Who don’t want to rock the boat. 

Bankers looking to meet their profit targets easier, for one. With lower lending rates they would have to work harder to meet targets.

"It seems like high lending rates will have to stay for us for a while. With tax revenues slipping and the donor community looking more inward to their own countries, government is being forced to borrow more and more from the public...

Given a chance between lending to government and the public the decision is an easy one for any bank manager. While individuals pay higher they are a higher risk proposition.

In India a few years ago as a way to curb corruption they banned all high denomination notes. They gave people are deadline to submit these notes and of course if you parked a bullion van outside your bank the revenue authorities would be on hand to get their pound of flesh and the equivalent of the financial intelligence authority got a chance to ask some tough questions. 

In our case we ban the use of sh50,000, sh20,000 and even sh10,000, not too far fetched given our increased use of electronic means of pavement. The poor who rarely interact with these notes and also have no access to electronic payment means, would barley feel the inconvenience.

One of the by products of this exercise in India was that bank deposits jumped and there was fall in lending rates.

There will be a lot of gnashing of teeth in the hills of Kampala – Nakasero, Kololo, Mutungo and Naguru, but they will be fine and we would all be better for the exercise.