Commercial lending rates to keep on falling

By Namugerwa Martha

Although the pace at which commercial lending rates are falling is slower than public expectation, Uganda Bankers Association (UBA) is optimistic that rates will continue declining because they are responding to monetary policy directions of the Central Bank.

The chairperson of UBA, who is also the managing director of Centenary Bank, Fabian Kasi, said that they are optimistic that lending rates will come down further, Banks have been reducing their rates since November last year, There are some banks whose prime lending rate at the moment is at 18 and 19 per cent.”

“There is always a lag in interest rate changes in the market and that is the reason why the commercial lending rates have not declined so fast but there is still room for banks to keep reducing their rates,” kasi said.

Kasi further added that although he cannot predict at what level the lending rates will be in June this year and beyond, commercial banks will continue reducing the lending rates.

“Lower interest rates make it cheap for the general public to borrow, this encourages spending and investment and it leads to higher aggregate demand in the economy and the result is higher economic growth,” Kasi added.

Bank of Uganda (BoU) has sustained reduction in its policy rate since April last year but the pace at which the commercial banks have been lowering their lending rate has been so slow.

Interest rate is basically the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

However, Statistics by BoU relating to the current monetary policy shows that lending rates have only reduced by 1.2 per cent over the last one year, which indicates that there has been generally a slow pace compared to reduction in the Central Bank Rate (CBR).

“The rate of decline in lending rates remains low recorded at 1.2 percentage points reduction since March 2016 compared to 5.5 percentage points cut in the CBR whereas time deposit rates have declined by 4.7 percentage points since February 2016 to 11.4 per cent,” said the Central Bank.

In addition to that the central banks’ current monetary policy said that Rates on foreign currency loans and time deposits have also declined by 1.8 percentage points and 1.4 percentage points to 8.3 per cent and 3.0 per cent respectively.

BoU remains optimistic that lending interest rates are expected to decline going forward on account of advice by commercial banks that they would lower prime lending rates would take effect in March 2017.