I’am Not Comfortable with High Lending Rates – Governor Mutebile

I’am Not Comfortable with High Lending Rates – Governor Mutebile

The Bank of Uganda (BoU) Governor, Prof. Emmanuel Tumusiime-Mutebile has said he is uncomfortable with the high lending rates in the country, reports Innocent Kayiza. 

He made the remarks while speaking at the third edition of the Annual Bankers Conference on the theme – “De-risking Financing & Investment in Agriculture to promote decent youth employment and inclusive growth”.

He noted that a previous edition of the World Bank’s Economic Update on Uganda argued that the high cost and limited access to credit was a binding constraint on Uganda’s economy. This, he said, implies that if only banks and other financial institutions could lower their lending rates and expand the volume of their lending, substantial numbers of businesses in the economy would be able to borrow money for investment in order to boost their output while servicing their debt and increasing their incomes.

“While I remain uncomfortable with the high lending rates and believe that they should be reduced sustainably over time, I dare say that access to credit is not the ultimate binding constraint on economic growth,” Mutebile said.

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He added: “We must think holistically about the challenges holding back the power of finance to transform our economy. Proper diagnostics must reveal the problems that constrain agricultural finance before we devise durable solutions. We must examine the borrowing capacities of the businesses in our real sector.”

On one hand, he said, financial institutions are challenged to rethink their views of bankable projects so as to design solutions for potential borrowers at their level.

On the other hand, Mutebile said the formal sector creditworthy businesses, which have been the main clients of commercial banks, comprise a small share of the economy.

He noted that informal business and micro-enterprises abound and their capacity to utilize credit effectively is constrained, including by inadequate business and technical skills, the high costs of inputs, and unpredictable market conditions.

“Fortunately, some financial institutions have started tackling these problems through business incubation programs.

Moreover, through automation and adoption of new technologies for delivering financial services, it is possible for banks to reduce their operating costs, and pass on the savings to borrowers through reduced lending rates. I am also optimistic that banks will exploit the potential of bancassurance to exploit synergies with insurance to design products for the riskier borrowers,” he said, adding: “But I must add that it will take a comprehensive approach by all sectors to bring about this transformation.”

He noted that government must focus on boosting export-oriented manufacturing and growth of the tradable services.

“This will help to meet the rapidly growing urban demand for food thereby linking urban and rural growth by creating market for rural production, and even reducing the import bill,” he said, adding that such demand-driven agricultural development would foster innovation and advancement in production, processing, and packaging, across all the stages of the chain in catering to the demands of urban consumers of processed products including packaged foods.

He added that Government needs to join hands with finance and all sectors by facilitating urban-rural linkages, “to embed local firms within the supply chains of international retailers, such as the international supermarkets in our cities and towns, and promote export readiness of local firms if we are to be the bread basket of the region.”

He explained that potential areas of further investment for government and the financial sector include roads, cold storage, transport, support for farmer organisations, agricultural extension, and out grower schemes. It is also necessary to address information asymmetries, for example, by matchmaking international firms and local suppliers.

“Only through boosting agricultural development through inclusive rural-urban links will we effectively harness the agriculture sector as a dominant source of employment,” he said.

He added that government must create decent jobs for the youths.

The value added by agriculture, forestry, and fishing as a percentage of Gross Domestic Product (GDP) declined from 49 percent in 1991, to 28 percent in 2000, to 26 percent in 2010, and down to approximately 24 percent in 2018, he said.

“Over the same period, employment in agriculture as a percentage of total employment declined from 74 percent in 1991, to 70 percent in 2000, remained at 70 percent in 2010, and rose to approximately 71 percent in 2018.  While the contribution of agriculture to national economic growth has halved between 1991 and today, the share of the population that is employed in this sector has hardly moved. Moreover, 68 percent of the population is engaged in subsistence farming,” he said.

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