Distressed Ugandan borrowers remain optimistic that commercial banks will follow the lead of the central bank to lower the benchmark lending rate and lower the cost of credit.

Last week, the Bank of Uganda announced a reduction of the Central Bank Rate (CBR) to 14 per cent, the third successive drop in a process BoU Governor Emmanuel Tumusiime Mutebile said was expected to support the recovery of private sector credit and hence real economic growth. But businesses are not out of the woods yet as commercial banks will take a while to respond.

READ: Uganda cuts key lending rate, sees inflation slowing

For example, a day after Mutebile’s announcement, Stanbic Bank, the largest bank in the country, released healthy half-year results indicating profitability had grown by 57 per cent, enabled by “modification to risk appetite,” a pointer to reduced retail lending.

While issuing the CBR on August 8 — the third successive reduction since April — Prof Mutebile had no answers as to why commercial banks take so long to respond to the CBR.

A reduction in the CBR should ordinarily translate into lower interest rates on bank loans as it reduces appetite for Treasury bills and bonds, and pulls down interbank market borrowing. But despite easing the CBR twice in April and June, commercial bank lending rates averaged 23.54 per cent as at the end of June 2016.

“Of course, I cannot instruct commercial banks to reduce interest rates. But I hope the banks can realise that by lowering the policy rate, we are indicating what should happen,” said Prof Mutebile. “… usually the banks take several weeks… there is a lag [between the policy rate and the banks reducing interest rates].”

As such, many business people remain sceptical about the impact of BoU’s policy rate in a banking sector that is over liberalised.

Slowdown in customer lending

Chief executive officer of Stanbic Bank Patrick Mweheire said the bank had responded to the CBR cut, but did not disclose how soon it will do so to the latest policy rate.

“We have already responded twice — in response to April and June CBR movements. And we will do it again in response to the August 8 movement,” said Mr Mweheire.

And when releasing half-year results last week, Mr Mweheire said that Stanbic Bank achieved solid results due to “the strength of our diversified business model with multiple revenue streams. ”

Revenues grew by 28 per cent and profit by 57 per cent to Ush334.4 billion ($100.4 million) and Ush107.3 billion ($32.2 million) respectively.

“The modifications to our risk appetite where we deliberately slowed down credit growth on most of our retail lending was off the back of the high interest rate environment,” said chief financial officer Sam Mwogeza.

This saw Stanbic maintain a commendable credit loss ratio of 1.6 per cent, that was lower than the 1.7 per cent recorded as at June last year, which is also well below the industry average.

“This is a further demonstration of the resilience and diversity of the bank’s earnings where a slowdown in customer lending activity was compensated for by strong performance from non-customer related revenue streams that grew by 64 per cent,” said Mr Mwogeza.

Non-performing loans

Even in the event that commercial banks respond to the latest CBR cut, rates in Uganda will remain the highest in the region, presenting a potential recipe for creditors to default on their loans.

According to BoU officials, high interest rates have seen non-performing loans in Uganda banks increase from 4 per cent in June 2015 to 7.4 per cent in June this year.

The benchmark lending rate in Rwanda is 6.5 per cent, while it is 10.5 per cent in Kenya and 12 per cent in Tanzania. Beyond commercial banks’ slow response, economists say external factors that create uncertainties in the international economic activity could constraint demand for Uganda’s exports.

“It’s hard to gauge the impact of the latest CBR at current stage because most of the risks are external,” said Adam Mugume, the BoU executive director for research.

“For instance, nobody knows the impact of Brexit from the European Union, or how the oil prices will behave in the international market; there is also South Sudan which takes 5 per cent of our export but has become unstable, and we are not sure whether elections will take in the Democratic Republic of Congo,” Dr Mugume said.

For weeks, the local media has been awash with reports of more than 60 businesses that are in distress and saddled with loans that they have failed to service after the banks raised interest rates between 2010 and this year. The businesses are in need of a bailout to the tune of Ush1.3 trillion ($389.4 million) from the government to pay back their loans.

Government executives including Finance Minister Matia Kasaija have indicated that some of the firms seeking bailout are Uganda government suppliers, while others borrowed from commercial banks in order to supply goods to South Sudan.

In 2013, war erupted in South Sudan and the government went broke before paying the Ugandan firms, rendering them unable to service their loans.

However, government officials argue that some of the distressed firms were poorly managed.

“Some firms supplied government but were not paid. Then there are those that were south Sudan suppliers. For others it was poor corporate governance…. We need to go back to school and learn how to run businesses,” said Dr Mugume.  

With businesses in distress and commercial banks not in a hurry to lower interest rates to ease access to credit, growth may be registered only in public investments in infrastructure projects. For instance in the third quarter of financial year 2015/16 Uganda’s real output declined due to low economic activity. 

Still, BoU says it expects inflation to drop and stabilise around the policy target of 5 per cent over the next six months and thus a “continued easing of the monetary policy is warranted.”