They capitalise on financial illiteracy and gullibility of Ugandans, to fleece them! But how is this affecting the economy?
As banks elsewhere continue to struggle to balance their books following the financial crisis that began in 2008 and the resultant economic recession in Europe and North America, those in Uganda found a lucrative income source — the financially illiterate and largely gullible Ugandans, who were abandoned by their own government.
Every year, banks in Uganda are posting supernormal profits. Last year Standard Chartered Bank made a profit of Shs132 billion, Stanbic Bank followed closely at Shs130.7 billion while Crane Bank made Shs80.3 billion. In total, banks raked in over Shs560 billion in profits after tax and risk. The same huge profit margins were recorded among Credit Institutions (Tier 2) and Micro Deposit Taking Institutions (Tier 3).
Someone unsophisticated may ask: What’s wrong with banks making money? Isn’t it the main reason they engage in business? Ii is the same question Bank of Uganda Governor Emmanuel Tumusiime-Mutebire, asks those that raise this concern.
Of course there is nothing wrong with banks making money. According to traditional management, the goal of any business organization is to make money for its shareholders. However, what we need to ask, and indeed is being asked even in industrialized economies lately, is: “What’s wrong with banks making money responsibly or ethically?”
High lending rates
Many people have raised enough noise about the high lending rates banks charge borrowers in Uganda compared to other countries in the region. Authorities and the banks themselves have attributed this to structural rigidities that raise the cost of doing business in Uganda, such as poor infrastructure (energy, roads, ICT etc), risky borrowers due to limited information about Ugandans, and lack of long term finance. These are logical challenges, but over time we have improved them without much response from banks.
It is embarrassing to find government official documents stating unashamedly that banks are making obscene profits “because of high interest margins.” For starters, interest margin is the difference between the interest income generated by banks (from interest charged on borrowers) and the amount of interest paid out to their lenders or depositors. In Uganda such difference is bound to be high because banks charge very high lending rates on borrowers (averaging 23% today) but offer very low interest rates to savers/depositors (3.2%).
In February this year, a World Bank report indicated that banks in Uganda were cheating borrowers. According to the report, the margins between borrowing and lending rates were excessive yet they accessed credit cheaply.
The World Bank advised BOU to closely monitor commercial banks and take punitive action where necessary to correct this anomaly. Nothing practical has been done by BOU to effect this wise recommendation, and Ugandans should not expect BOU to do anything anyway! Our market fundamentalists at BOU have a habit of telling us, “This is a liberal economy, we cannot do anything.”
I remember one time the BOU’s Executive Director for Supervision, one Justine Bagyenda, told Ugandans; “It is your duty to bargain with banks the interest rates you can afford.” It is in Uganda where regulators of financial markets think money markets function like those for tomatoes and beans! Even markets tomatoes will fail if tomato sellers were allowed to cartel like banks in Uganda do.
Another main channel through which banks in this country continue fleece Ugandans is through hiding information from borrowers.
Banks give borrowers incomplete information
I have a relative who recently borrowed Shs7 million from a bank that poses to be a “bank for the poor”. She filled forms with the help of a credit officer who informed her that she would have to pay back Shs8.82 million in 12 months (implying that Shs1.82 million was meant to be the interest). They did not tell her that this implies she was being charged an interest rate of 26%. They only told her she should check her account within 24 hours for the money.
On checking her account, she found Shs6.68 million instead of the Shs7 million she had applied for. Some Shs320,000 had been deducted. This means the interest she paid rose to Shs2.14 million (30.6% per annaum). The credit officer did not even explain to her why that deduction was made! When she inquired, she was told that is the bank’s policy. Banks typically tell borrowers that such deductions are done to cover what they call arrangement fees, insurance cost and so on.
The problem is not the costs; the problem is why banks keep such critical information a secret until such a time when the borrower has no choice. Banks have refused to provide borrowers full information when they apply for loans to help them make informed decisions.
For over a decade now there have been outcries from all corners asking Bank of Uganda, the regulator of the financial sector, to ensure banks fully disclose the information related to the full cost of their loans to borrowers before lending them money. Nothing, beyond the academic “dialogue with banks to improve transparency in pricing methodology” has been done by the BOU to effect this recommendation.
Even the forms that people fill need to be translated in local languages so that uneducated borrowers can understand what they are signing. In their standard contract, banks state that they reserve the right to change (ordinarily to increase) interest rates unilaterally. This is information banks print in very small letters and in a font that is practically difficult for a desperate borrower to see. Why? Why have we allowed banks to establish themselves on the basis that they are entitled to make huge profits all the time?
Another way to prove the BOU does not have the teeth to trim banks’ excessive appetite for our money is the ineffectiveness of its benchmark policy rate, the Central Bank Rate (CBR). It tells us it sets the CBR supposedly to influence the lending rates. On several occasions when the BOU reduces the CBR, commercial bank lending rates remain high, making credit expensive.
The CBR is only effective when it is raised. In such as a case banks instantly follow it up and raise the lending rates. But when it is taking a downward route, they look the other way. Why? Can’t the BOU do anything to these callous banks?
Mr. President, globally, banks have lost the confidence of people, having almost brought down the global economy in the melt-down of 2008. In the USA, for example, some 19 large banks were found by authorities to have repeatedly flouted the laws leading to loss of billions of dollars. Some of the world’s biggest banks such as Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, AIG, and many others were found to have repeatedly broken anti-fraud security laws.
We also remember the big scandal surrounding the LIBOR — London Interbank Offered Rate (an index of the interest rates that banks in the UK use to lend to each other) — when Barclays Bank and others risked the credibility of the world’s financial sector by rigging interest rates in order to squeeze out more profits.
Therefore, there is prima facie evidence of repeated violations of the rules by banks that amount to a generic institutional problem. The fact that it is not just one bank, or even several banks, but almost all the financial institutions that are hiding critical information from their clients, and the would be regulators seem unconcerned, means that we are dealing with a generic industry-wide problem.
Bank of Uganda has done nothing, beyond rhetoric, to ensure banks, credit institutions and MDIs do not cheat people by using information asymmetry. BOU only responds when working on challenges banks face. In whose interest is BOU operating? Officials at BOU will tell you they are publishing information related to bank charges in print media to increase information, and that they are in dialogue with the banks to encourage them to be transparent in the pricing methodologies. These are bogus and illusory interventions which won’t do much to tame these hyenas.
Why not standardize the loan application form? Why not directing banks to translate their documents into local languages and propose a penalty of noncompliance? Why not expose banks in media that cheat and point out those that excel in customer delight? Why not imposing sanctions with teeth?
In economic theory, cheating is a very simple cost-benefit analysis. What’s the probability of being caught? How do I stand to gain? How much punishment will I get if I get caught? BOU need to think about effective remedies along those guiding principles. But history has shown BOU can’t do much on its own accord.
Mr. President, you need to whip BOU. Mutebire and his team must stop behaving as if they are agents of commercial banks. They should be told that their casino economics is endangering the safety of our economy and thus our politics.
Whenever Ugandans feel cheated, misled, mistreated, ignored or coerced by banks in the process of making their abnormal profits, they turn away from banks. I have friends who are millionaires but do not keep money in banks. Many Ugandan businessmen no longer use banks. They do not trust banks. This is dangerous for our economy. It will keep the country as a cash economy and might increase insecurity and murders.