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Uganda opts for ‘policy’ to tame interest rates

Saturday June 10 2017
kasaija

Budget day: Uganda’s Finance Minister Maita Kasaija on June 8, 2017. PHOTO | MORGAN MBABAZI | NMG

Uganda’s Finance Minister Matia Kasaija has sidestepped the interest rates regulation debate by promising to cut domestic borrowing, introduce new financial products and increase funding of a government owned bank to ensure availability of credit for businesses and at a lower cost.

The minister said the government will reduce its domestic borrowing to one per cent of GDP from the current two per cent to avoid crowding out the productive private sector from the credit market.

He is also set to introduce agency, mobile and Islamic banking to help banks diversify their income streams while cutting costs and giving them space to cut interest rates.

“Developments that have affected the state of the economy include high interest rates and non-performing loans. This has constrained private sector growth,” said Mr Kasaija in his budget statement.

Policy intervention vs rates cap

He said the government will inject an additional Ush50 billion ($13.9 million) into the state-owned Uganda Development Bank Ltd (UDBL) for capitalisation in the next financial year. This will bring the total capitalisation of UDBL to Ush150 billion ($4.17m) against a target of Ush500 billion ($139m).

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Uganda avoided taking the route of regulating interest rates taken by Kenya last year when it was faced with similar challenges of high interest rates accompanied by piling up of bad loans by banks.

Mr Kasaija has opted for policy intervention including allowing banks to contract agents to conduct some banking transactions on their behalf, to relieve them from the cost of setting up physical branches.

READ: Uganda banks upbeat on credit growth mid-year

Obligations

Mr Kasaija said the government will be paying Ush300 billion ($83.5m) owed to contractors. Delayed payment of contractors by the government was one of the main factors contributing to a rise in bad loans.

He warned government departments that delaying suppliers’ payments for more than 14 days will see their future Treasury releases withheld until such payments have been made.

Interest rates in Uganda currently average 22 per cent with some sectors such as agriculture being charged up to 30 per cent. Bad loans held by banks stood at 10.5 per cent as at the end of last year, but are reported to have declined to 6.3 per cent in March this year.

ALSO READ: Bank of Uganda cuts key policy rate to 11pc

Uganda has also reviewed regulations governing the pension and insurance industry, which are viewed as a huge source of cash savings to help ease the liquidity challenges faced by banks due to low national savings.

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