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Elusive credit keeps Ugandans from starting small businesses

Saturday June 27 2015
EA-BankofAfrica

Bank of Africa Uganda headquarters in Kampala. PHOTO | FILE

High interest rate spreads, limited competition in the banking industry and the absence of a collateral registry have prevented many Ugandans from getting credit despite the fact that the business environment is liberalised, the latest World Bank findings show. 

Interest rate spreads refer to the difference between average lending rates and the interest rates offered on customer deposits.

These spreads provide a key benchmark for pricing loans and also reflect changes in banks’ operating costs. Therefore, any rise in a bank’s running costs are directly absorbed by interest rate spreads which, in turn, leads to higher costs of borrowing.

The latest World Bank data indicates that the average interest rate spreads among banks in Uganda was 15 per cent between 2011 and 2013, but rose sharply last year, averaging 20 per cent.

The rise is mainly attributed to steady gains posted by yields earned on Treasury bills and bonds since late last year, and drastic intervention measures undertaken by the Bank of Uganda to slash liquidity levels in the interbank market and discourage banks from speculative actions related to the currency market, analysts said.

In comparison, interest rate spreads in the Kenyan banking industry have averaged close to 10 per cent in recent years amid increased mobilisation of cheap deposits and intense competition in the credit market, observers say.

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World Bank findings show that profit margins accounted for the largest share of interest rate spreads among Ugandan banks, at 6.3 per cent, followed by overhead costs at 4.2 per cent. Cash reserves and credit default provisions accounted for 1.2 per cent and 0.4 per cent respectively.

In 2013, profits accounted for a 7.3 per cent share of the industry’s interest rate spread compared with 5.9 per cent for overheads, 1.5 per cent for reserves and 0.6 per cent in credit default provisions.

Insiders say significant credit risks and fairly steep costs of doing business in Uganda exert an upward pressure on these spreads.

“The average share of profits against interest rate spreads is around three per cent due to the relatively high costs of doing business and the quality of loans which are driven by sector exposure,” argued Claver Serumaga, general manager for business development at Bank of Africa Uganda. “Staff costs are also high due to scarcity of specialists while pressure from foreign shareholders to maximise profits has kept interest rate spreads high.”

Though the number of commercial banks has been growing steadily in the recent past, the level of competition across the industry remains low because it is dominated by a few large players. Four banks hold about 45 per cent of customer deposits in a market made up of 25 players, World Bank figures show.

Only 9.8 per cent of firms in Uganda have a bank loan compared with 23.8 per cent across sub-Saharan Africa. The proportion of investments financed by banks in Uganda is estimated at 3.3 per cent compared with 9.9 per cent recorded among sub-Saharan African countries.

“Often, many small businesses do not get good terms for accessing bank loans or are not familiar with various opportunities for sourcing funds intended for commercial purposes,” said Valeriya Goffe, a finance and private sector development specialist at the World Bank.

Dr Charles Abuka, BoU’s director of financial stability department said there is a need to attract new players with high quality products instead of issuing more banking licences in order to raise overall access to credit.

Though the rollout of credit reference bureau services in 2012 has partly bridged huge information gaps faced by lenders, the absence of a national collateral registry presents a considerable business dilemma.

A collateral registry helps protect a creditor who holds rights to a mortgaged asset and also facilitates attachment of collateral in the event of default.

Faced with scarcity of information, many Ugandan lenders have resorted to raising interest rate spreads in a bid to compensate for hurdles encountered in the assessment of collateral items such as motor vehicles, electronics and financial instruments.

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