Several banks have announced their intention to lower prime lending rates since Monday, in response to Bank of Uganda’s latest policy rate trimming.
Standard Chartered, UBA Uganda, Housing Finance, Diamond Trust, Ecobank, and Finance Trust have announced that they are reducing the prime lending rates (the rate at which banks lend to their most credit-worthy customers, and usually the lowest possible rate) for loans in Uganda shillings. The changes will affect both new and existing loans.
Diamond Trust’s prime rate will reduce to 22.5% from 24% starting 1 March, as will Finance Trust’s – from 25% to 23%. Standard Chartered’s will fall to 21% from 22.5% effective 17 March. Housing Finance and UBA’s new rates will go into effect on 20 March; 21% from 23% for the former, and 24% to 20% for the latter. Meanwhile, Ecobank’s new rate starting 22 March is 20.5%, down from 23%.
Last Wednesday, Bank of Uganda reduced the central bank rate – which determines the cost of short-term financing to banks and hence the rate at which they can lend at – by 0.5 percentage points to 11.5%. It was the sixth successive reduction since April 2016.
However, commercial banks are not obligated to follow the central bank’s decision and reduce lending rates. The average weighted prime lending rate declined by 2.5% between February and December 2016, from 25.2% to 22.7%, even as the central bank rate fell 5%. This is despite the interbank rate – the interest rate charged on short-term loans between banks, which the CBR is intended to influence – falling by 4.9% in the period, in line with the policy rate.
But, deposit rates (the interest banks pay on fixed deposits) fell by an average of 5.2% – in line with the central bank rate – from an average weighted rate of 17.3% in January 2016 to 12.1% in January 2017.
At the start of the year, Stanbic Bank had the lowest prime lending rate, 21% (which fell to 20% starting 1 February), while the highest was 25%, which was being charged by four banks: Diamond Trust, Equity Bank, Finance Trust, and NC Bank.
The justifications given for high lending rates – relative to the policy rate – are high operating costs and high risk of lending. Most banks prefer the risk-free option of lending to the government, pricing credit to other borrowers higher than the rate on government debt; the yield on the 91-day treasury bill fell to 14% in January from 19.4% in the first quarter of 2016.
While loan applications have been growing, loan approvals have not, according to Bank of Uganda’s Monetary Policy Report for February. This indicates that banks are reluctant to increase their loan portfolios.
Annual private sector credit growth in the fourth quarter of 2016 rose to 3.7% from 2.8% in the previous quarter, according to the Monetary Policy Rate. Still, it was less than 3% in 2016 – the lowest the sector has seen in a long time, according to Stanbic Bank’s chief executive, Patrick Mweheire.
Banks may also be reluctant to approve new loans because of the high ratio of non-performing loans relative to total loans. It rose to 10.5% in December (from 7.7% in September)- higher than the 8.3% recorded in June 2016, which the Financial Stability Report for 2015/16 said was the highest recorded NPL ratio in 15 years.
“The high rise in NPL’s is likely to increase risk aversion among lenders and consequently weaken private sector growth going forward, which could in turn affect economic growth,” the Monetary Policy Report said.
So, while commercial banks might be reducing lending rates, it is not guaranteed that they will lend more to the private sector (which includes households).