The cost of borrowing from commercial banks is not likely to go down soon due to structural problems in the lending chain as well as behavioral problems among Ugandans that have made the undertaking a risky exercise, officials at the Bank of Uganda have hinted.

Dr. Adam Mugume (Pictured), the Director of Research at BoU says that financial institutions incur high transactional costs in chasing borrowers as well as verifying land titles that are given by borrowers as collateral.

Whereas the Bank of Uganda introduced the Financial Card under the Credit Reference Bureau (CRB) as a way of reining in bad borrowers, but Mugume says that majority of bank clients are still reluctant to get the cards.

The lack of cards is a major risk, which banks cater for by charging high interest rates averaging 21.3 percent per annum on shilling denominated loans.
Recently Stanbic Bank started arguing its clients to acquire financial cards to ease their loan acquisition and BoU officials anticipate that if most Ugandans can acquire CRB cards, the risk premiums imposed on loans would go down, hence the lending rates.

In addition, Mugume noted that commercial banks are charging higher rates because they incur added costs in repairing their computer systems software that regularly break down.

"Commercial banks are charging high interest rates because they incur high costs to hire software experts from South Africa," Mugume added: "This is a crucial operation cost that could not be ignored,"

The high level of inefficiency at the land registry due to bureaucracy and corruption has further compounded the cost incurred by banks. Mugume says that banks affix the costs of securing titles directly on the interest rate.

A 2008 study of Ugandan businesses done by Makerere University found that the lack of capital was the greatest impediment to increased investment in Uganda. The study identified corruption as another bigger impediment to investment.

In addition to the cost, loans by Ugandan banks are generally of short term tenures which makes borrowing for longer term projects even more difficult.

Ugandan banks remain conservative and have been criticized for a lack of enthusiasm when it comes to lending to all but the largest bluechip operations. Interest rates for 12-month corporate loans generally run between 19% and 25%. blog comments powered by Disqus

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