Bank of Uganda threatens to cap lending rates

In a recent development, the Bank of Uganda has issued a warning to commercial banks, threatening to cap the interest rates that they can charge borrowers. This drastic measure comes after the industry failed to reduce loan rates in response to cuts in benchmark rates set by the Central Bank. The move aims to address the persistent lag in the response of commercial banks to the Central Bank rate, which has been a point of contention for some time. Historically, the Central Bank has used the Central Bank Rate (CBR) as a guiding instrument for commercial banks to determine the pricing of money lent in the economy. However, there has been criticism against commercial banks for not adjusting their rates in line with the Central Bank's policy stances. This lack of responsiveness has prompted calls for interest rate caps, similar to measures implemented in Kenya in recent years. The ongoing COVID-19 pandemic has further underscored the limitations of a free market economy during times of crisis. Despite efforts to stimulate the economy by reducing the Central Bank rate, commercial banks have failed to pass on the benefits to borrowers. This has led to a situation where the average lending rate remains high, around 18.5%, despite the Central Bank's efforts to bring it down to around 16% or even lower. David Wallakira, a policy analyst and development economist, highlighted the repercussions of commercial banks' non-compliance with the Central Bank's guidelines on the ground, particularly for Small and Medium Enterprises (SMEs). The failure of commercial banks to adjust their lending rates according to the Central Bank's directives creates a mismatch between the support expected by SMEs and the actual market conditions. As a result, SMEs continue to face challenges accessing affordable credit, which is vital for sustaining their operations and navigating the economic downturn caused by the pandemic. The impact of commercial banks' reluctance to follow the Central Bank's policies extends to the restructuring of loans for businesses and individuals. Despite the Central Bank's directive to extend loan repayment periods to provide relief during the crisis, some SMEs have been denied these restructuring options by commercial banks. To address this issue, the Bank of Uganda has established a tribunal to oversee loan restructuring decisions and ensure that commercial banks have valid reasons for denying such requests. Overall, the Central Bank's threat to cap lending rates signifies a shift towards more stringent measures to enforce compliance within the banking sector. By taking a more active role in monetary policy and signaling its readiness to intervene if necessary, the Bank of Uganda aims to safeguard the interests of borrowers, especially SMEs, and facilitate the economic recovery process amid the challenges posed by the ongoing pandemic.