Uganda will not follow Kenya in capping interest rates, minister says

The Uganda government is not planning to cap interest rates like neighbouring Kenya, according to the State Minister of Finance for Planning, David Bahati.

“I don’t think we will, because it will be a mess,” Mr Bahati said while delivering an address at the Annual CEO Forum organized by CEO Summit Uganda at Serena Hotel Kampala on Thursday.

Instead, the Uganda government plans to help businesses access capital by capitalising the Uganda Development Bank, Mr Bahati said. The minister said government has invested Shs50 billion in the bank, which will go up to Shs500 billion in five years.

Mr Bahati said that of recent there have been calls asking the government to play a larger role in the economy through legislation, something it is reluctant to do. “We believe that the economy should be driven by the private sector,” the minister said.

Mr Bahati’s remarks echo those expressed in a speech by President Yoweri Museveni at the Joseph Mubiru Memorial Lecture in September 2015, which indicated that his government does not intend to return to the days when interest rates were centrally controlled. “The lending rates which banks charge are market-determined,” Mr Museveni said in the speech, delivered by Mr Bahati.

“In setting interest rates, banks must take into account the cost of their funds, the costs of administering loans and the possible losses which might be incurred if the borrower defaults. Although lending rates in Uganda are high, they have not been so high as to impede a very rapid expansion of bank lending, which has increased almost five fold in real terms since the start of the millennium.”

Kenya’s president on Wednesday signed into law a bill that establishes a cap on interest rates for bank loans. The bill caps interest rates at four percentage points above the Central Bank base rate. It also requires deposit interest rates to be at least 70% of the benchmark rate.

The Banking (Amendment) Bill, 2015, which was passed by Parliament in July, also requires banks and financial institutions to “disclose all the charges and terms relating to the loan” before granting a loan to the borrower.

Kenya’s Central Bank has opposed the law, releasing a statement “expressing concern on the adverse consequences of capping interest rates” when the bill was passed by Parliament. These adverse consequences, according to the statement, include “inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission.”

The president however said his decision to sign the bill was influenced by consultations that show that “Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks.”

Kenya’s parliament has on two previous instances attempted to cap interest rates, but while there was dialogue with banks and promises of change, the banks did not follow through with caps, a statement released by State House Kenya said. In absence of legislation to force their hand, banks also failed to live up to their promises and interest rates “continued to increase along with the spreads between the deposit and lending rates.

“Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.”

On its part, the Kenya Banker’s Association said it is “committed to bringing down loan interest rates, promoting a savings culture and enhancing consumer protection,” and welcomed “the spirit” of president Kenyatta’s decision.

The association however said that “an arbitrary rate cap” is not in “the best interests of the majority of people and businesses that this law seeks to support.

“The reality is that there is little evidence from other countries that such interventions have helped the majority of citizens, and in a number of countries such laws have been reversed to promote financial inclusion.”

Days before the president signed the law, the banker’s association announced measures it hoped could stop the bill from becoming law. A memorandum of understanding signed by the banks with the Central Bank committed to reducing interest rates following Bank of Kenya’s July reduction in the Central Bank rate.

The bank’s said they would cut their lending rates by 1% and “allocate Sh.30 billion to enhance financial access for SMEs.”

Lending rates in Kenya currently average 18%, while deposit rates average 8%. This is lower than Uganda, where lending rates currently average 23%. Bank of Uganda lowered interest rates by 1% on 8 August, citing as one of its reasons the need to stimulate borrowing by the private sector. Even then, commercial banks are not obligated to cut their lending rates in line with the decision.