Uganda banks in loan battles over rising interest rates

Kampala is bracing for a showdown between traders and banks over rising lending rates.

Through their lobby Kampala City Traders Association (KACITA), business people are complaining about the move by banks to adjust lending rates upwards, which will also affect existing loans.

Citing the risk of forfeiting the collateral used to secure the loans, the business community is threatening to boycott the financial sector unless initial interest rates are maintained.

The traders want commercial banks to refund cash deducted in excess interest on old loans, or face industrial action.

Among actions planned is the withdrawal of deposits made to commercial banks plus a campaign to mobilise stakeholders to boycott their (banks) services.

“We have given all concerned banks nine days to return money collected from revised interest rates on old loans or face industrial action,” said Everest Kayondo, the Kacita chairman.

The traders accuse banks of abusing the discretion clauses in the loan contracts to arbitrarily increase interest rates to levels that are crippling clients’ ability to service their loans.  

The lobby, consisting of Uganda Manufacturers Association (UMA), the Uganda Shippers Council, Uganda Teachers Association plus Uganda Taxi Owners and Drivers Association has petitioned the ministries of Trade and Finance to restrain banks from revising rates on running loan contracts.

Traders have also dismissed as treacherous, a recent proposal by the Bank of Uganda, requiring commercial banks to resort to loan restructuring to ease the tension on grounds that it promotes “perpetual annuity” in favour of commercial banks.

In defence of banks

Responding to traders’ demands last week, central bank governor Emmanuel Tumusiime Mutebile, defended the banks arguing that revising lending rates in tandem with the Central Bank Rate was in conformity with the institution’s current monetary policy employed to tame inflation. 

“When we tighten the monetary policy by raising the CBR, commercial banks are expected to follow suit by raising their lending rates. I have no legal basis therefore, to force them to charge specific rates.

It is a matter between them and their clients,” Mr Mutebile said advising disgruntled clients to shift from banks with high interest rates maintaining that “Uganda is a market economy.”

Mr Mutebile attributed the trader’s plight in part, to ignorance and laxity which results in the majority of borrowers ignoring the terms of the loan contracts they sign with commercial banks. He said government could address this issue by establishing finance educational clinics in the near future.

“Obviously, if a client signed a contract with a variable rate, it means banks will automatically revise it when the CBR rises unless the rate is renegotiated,” Mr Mutebile said.