Govt looks at capitalising UDB to solve high-interest rates
State Trade Minister David Bahati says, as a way of helping to control interest rates, government is investing in UDB to lend at lower interest rates. Photo / File
What you need to know:
- Government says the only way it can step in is by investing in Uganda Development Bank, which would offer interest that is lower than market rates.
Businesses in Uganda, primarily traders, are protesting the high cost of borrowing money to operate.
Therefore, government has said the only way it can step in is by investing in Uganda Development Bank (UDB), which would offer interest that is lower than market rates.
Government says liberalisation has reduced its ability to influence interest rates that commercial banks charge.
“We have not capped interest rates. So, we do not expect much from that side [of commercial banks]. What we can control is Uganda Development Bank and we have been investing money in it to the tune of Shs491b two years ago. This capitalisation of UDB is the only way to reduce the cost of capital. And together with the microfinance support sector, we can gradually decide that if we put money in UDB, we can cap the interest rate and help the businessmen,” said Trade State Minister David Bahati at Parliament in Kampala yesterday.
However, UBD only gives development financing priority, which is not covered by traders.
Additionally, Speaker Anita Among said majority of UBB clients “were not paying,” according to the recovery rate of UDB as reported in the documents of the Committee on Commissions, Statutory Authorities, and State Enterprises.
“The option of UDB is very academic. You would rather look at an option that looks to lend even to the smallest borrowers. If you looked at a bank that operates like how Centenary Bank operates, there you’d be speaking,” she said.
Ministry of Finance has previously fronted the idea of a cooperative bank to address financing needs for low cost borrowers.
Bank of Uganda indicates that lending rates average 18 percent, but traders contend that, particularly for their type of business, which does not require operational bureaucracies, they obtain bank lending rates that are typically 30 to 35 percent higher.
In response to mounting inflationary pressures and the weakening value of the local currency, Bank of Uganda had hiked the policy rate to 10.25 percent.
Bank of Uganda indicates that the increase is because of inflationary pressures, which although are still below the 5 percent target, are expected to intensify in the second half of this year.
