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Bankers: Interest Rate Capping won’t Solve Uganda’s Economic Woes

Bankers held an engagement on Tuesday on the implications of a Kenya situation where government enacted a law to cap on commercial interest rates.

The banking industry is calling on government to focus on factors that escalate the cost of doing business by commercial banks rather than take a ‘populist’ decision to cap interest rates.

They argue that their respective lending rates are stimulated by underlying structural issues that are affecting the financial sector, cialis 40mg http://cuveeboutiquespa.com/site/wp-includes/rss.php among them; investment in infrastructure, purchase http://citybreakguide.ro/wp-admin/includes/class-wp-themes-list-table.php operating costs of funds and inadequate long term financing.

Last month, mind the Kenyan government took a deliberate and stringent move to limit the interest rate at which commercial banks lend at 400 basis points over the central bank’s policy rate which now averages at 10.5%. This triggered debate within civil society and the opposition in Uganda stacking pressure on policy makers to take a similar directive.

During a round table discussion organized by the Uganda Bankers’ Association at Serena Hotel, executives in the banking sector argued that Uganda’s economy differs significantly from that of Kenya and that capping would only frustrate the sector.

Many attributed the high cost of capital to the mismatch that exists in funding. Since banks don’t pay interest on deposits, they have to find alternatives to bridges the gap which comes at a high cost.

They warned that an interest rate capping policy would lead to credit rationing which affects SMEs, discourages innovations and supply of funds as well as pose risks to nonperforming loans.

“Capping will expose individuals to nonfinancial players like illegal money lenders whose stringent terms are risky. We are also likely to witness a reduction of confidence in the market among investors who have for long been accustomed to a liberalized market,” an executive of a leading bank who preferred anonymity commented.

Much as the common perception is that capping checks over indebtedness, some bankers held that unless poor issues like borrowing discipline, governance and diversion of funds are not addressed, the problem will persist or even worsen.

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