Central Bank Moves to Fix Lending Rates as Commercial Banks Remain Adamant

Bank of Uganda has said it may consider fixing lending rates for Commercial Banks which to-date have refused to follow its lead in lowering interest rates as the Covid19 economic crunch prevails.

The Central Bank is allowed under Section 39 (1) (d) of the Bank of Uganda Act (2000) to “prescribe–the maximum or minimum rates of interest and other charges, which in the transaction of their business financial institutions may pay on any type of deposit or other liability and impose on credit extended in any form.”

Bank of Uganda says it is growing impatient on Commercial Banks declining to cut their lending rates despite the recent drastic Central Bank lending rates (CBR) reduction.

The CBR is currently at 7%– the lowest it has ever been — and it was hoped that Commercial banks would follow suit.

But they haven’t. Instead, according to BoU Governor Prof Emmanuel Tumusiime Mutebile, the weighted average lending interest rate on shilling denominated loans increased to 18.8 percent in May 2020, from 17.7 percent in April 2020.

Mutebile described this as “disheartening” in a letter to all Commercial Bank executives and the Uganda Banker’s Association  on Tuesday.

“I therefore, expect a faster reaction to the CBR reductions by the commercial banks. I applaud the commercial banks which, in line with monetary policy stance, have lowered lending interest rates,” Mutebile said.

If there is no positive response, the Governor said the Central Bank may consider fixing the lending rates in consultation with the Minister of Finance

The Central Bank’s threat comes amid grimmer projections of the Covid19 pandemic impact on the economy.

The World Bank yesterday revealed that Uganda is likely to see its slowest economic growth since 1986.

Businesses and households continue to suffer the brunt of the pandemic arising from lower demand, lower capital inflows, reduced productivity, unemployment, and loss of incomes due to lockdowns and travel restrictions.