The recent rise in lending rates in Uganda, driven by an increase in the Central Bank Rate (CBR), is creating a challenging environment for borrowing, particularly affecting Small and Medium Enterprises (SMEs)
The economic landscape, still recovering from the impacts of COVID-19, is facing a new hurdle as borrowing costs rise, discouraging new investments and hindering business growth.
Despite recording a profit after tax of UGX 235.5 billion for the first half of 2024, an improvement from UGX 200.2 billion in the same period in 2023, Stanbic Holdings Uganda Ltd (SHUL) reports that the business environment remains unfriendly.
According to SHUL’s CEO, Francis Karuhanga, the uptick in inflation, rising interest rates, and currency fluctuations have all contributed to this challenging environment.
The CBR, which rose from 9.5% in December 2023 to 10.25% in June 2024, has been particularly impactful, leading to a slight increase in lending rates. For prime borrowers, interest rates oscillated between 16% and 21%, a range that is proving prohibitive for many would-be borrowers, particularly small businesses.
This rise in lending rates has not only affected individual borrowers but has also had broader implications for the private sector. Private sector credit growth remains sluggish, below 10%, and stood at just 6.6%, a clear indication that borrowing is still far from pre-COVID-19 levels.
While SHUL’s customer loan book grew by 9.5%, the overall credit demand remains subdued, as higher borrowing costs deter many potential borrowers.
Impact on Young Businesses
The CBR hike has had severe repercussions for young businesses, which are crucial drivers of Uganda’s economy. These enterprises often rely heavily on loans to finance their operations and expand their businesses.
However, with the increased cost of borrowing, many SMEs are finding it difficult to access affordable credit. The higher interest rates squeeze profit margins, making it challenging for these businesses to compete and grow.
The situation is further compounded by the fact that even as the CBR increases, commercial banks are quick to raise their lending rates, but when the CBR decreases, the lending rates do not necessarily follow suit.
This discrepancy creates a long-term burden on businesses that have already taken out loans at higher interest rates, limiting their ability to invest in growth and innovation.
As borrowing costs rise, businesses may be forced to increase prices to maintain profitability. This not only affects the businesses’ competitiveness but also leads to higher costs for consumers, potentially slowing down consumer spending and economic growth.
In a country where consumer spending is a significant contributor to GDP, any reduction in spending can have far-reaching consequences for the broader economy.
In response to these challenges, SHUL has been focusing on inclusivity policies aimed at supporting small businesses and farmers who might not compete for credit on the open market.
The bank invested UGX 100 billion in SMEs, women, and youth enterprises during the first half of 2024, demonstrating a commitment to supporting these vulnerable groups.
Additionally, SHUL’s sustainability efforts, particularly in agriculture, are aimed at ensuring that supported farmers embrace climate-friendly practices, which can help mitigate some of the long-term risks associated with borrowing.
However, while these initiatives are commendable, the broader issue of high lending rates remains a significant barrier to growth for many young businesses.
As the cost of capital increases, the ability of these businesses to innovate, expand, and contribute to the economy is curtailed. Without affordable credit, the potential for SMEs to drive economic growth and create jobs is severely limited.
Do you have a story in your community or an opinion to share with us: Email us at editorial@watchdoguganda.com
