Most of local banks expect to keep interest rates unchanged for 2nd quarter of FY2019/20

By George Mangula

Recent survey results released by the Bank of Uganda (BoU) indicate that majority of commercial banks (80.4 percent) in the country expect their lending rates to remain broadly unchanged, while 19.6 percent expect the rates to decrease over in the current second quarter that ends on  December 31, 2019.

In an effort to understand the direction of interest rates from the lenders point of view, banks were asked to indicate the direction and magnitude of the change in their lending rates in the coming three months.

Banks that anticipated their lending rates to remain constant attributed it to the stability of the Central Bank Rate (CBR) which now stands at 9 percent, which is expected to further bring down the cost of funds for the banks and the same could be passed on by the banks to borrowers.

The lending rate is anticipated to decrease on average by 0.20 percent, over the quarter to December 2019. It was 19.84 percent in September 2019. Those that anticipated a decrease in lending rates mainly attributed it to the expected decline in CBR and the stiff competition in the market.

The bank lending survey results also indicate that banks tightened their credit standards to enterprises, but eased for households in first quarter of financial year 2019/2020. On the other hand, they expect to tighten credit standards for enterprises and further easing for households in the quarter to December 2019.

BoU says that the major reason cited for the easing of loans to SMEs and short term loans was the deliberate strategy by banks to grow new lending across SME’s and short term facilities while maintaining good portfolio quality and the impact of IFRS9.

On the other hand, BoU says, the approval of loans to large enterprises has tightened as the banks seek to reduce on the large risk exposures and slowdown in economic activities.

“The demand for loans by enterprises and households is expected to increase in the quarter to December 2019, at a higher pace than was anticipated in the previous survey results,” it says.

In the next three months to December 2019, the default rate on loans to both enterprises and households is expected to increase on a net basis, respectively, it says.

Within the household sector, the expected increase in default rate on loans to enterprises is mainly attributed to the; unfavourable economic conditions experienced during the last couple of months, the conditions were partly manifested through high borrowing costs(interest rates), which reduced disposable incomes of households and individual borrowers.