BoU’s Kasekende Blames SMEs For High Bank Rates

The Deputy Governor of Bank of Uganda Louis Kasekende has put the blame of high interest rates charged by Banks in Uganda squarely on the shoulders of Small and Medium Scale Enterprises.

Kasekende made the stunning remarks on Wednesday while delivering a Key Note address to launch the Standard Chartered Bank Socio-Economic Impact Report at Sheraton Hotel in Kampala.

He said banks normally tend to attract a lot of criticism from the public on the nature of their work, but added that the criticism is mainly out of ignorance and sometimes leads to wrong policies.

“Unfortunately public misconceptions of economic issues can sometimes lead to poor policies, an example of which is the counterproductive ceiling on bank lending rates in Kenya,” Kasekende said.

In a candid speech Kasekende said: “The main complaints about banks in Africa are usually two-fold. First, that they charge very high interest rates on their loans. Second, that they restrict their lending to a relatively small segment of the business community, excluding most of the small and micro-enterprises which comprise the bulk of the economy and provide the majority of employment.”

Kasekende admitted; “one cannot dispute that lending rates are very high in real terms,” but added that; “public debate on these issues often betrays a poor understanding of the underlying causes of these problems, many of which lie outside the banking industry itself.”

Kasekende says the reason why bank credit is very expensive is the same reason why banks tend to give credit facilities only to those who already have a lot of money.

He explains: “The two problems – high lending rates of interest and limited access to credit – have a common cause, which is the nature of a large part of the productive base of the economy. Uganda has what is in effect a dual economy which comprises, on one side, a modern formal sector with a relatively small number of medium and large scale enterprises and on the other side, a vast number of mostly informal small and micro-enterprises.”

Kasekede says most medium and large scale businesses have access to bank credit even at rates below the prime lending rates because they have a an established track record of profitability.

“These enterprises have established track records of profitability, are well managed and run according to strict commercial principles, they prepare detailed financial accounts and they can often provide guarantees from affiliates abroad. Hence credit risk is low and the transactions cost incurred by the bank per unit of loan value is also low,” he said.

Kasekende added that this is contrasted sharply with the large majority of the bank customers who are SMEs and whose survival rates are usually low.

“The small and micro enterprises pose very different challenges for the banks. Their revenues are volatile and their long term probability of survival is low. Most do not keep proper financial records. There is often no separation of business expenses and the personal expenses of the owner.”

The banking expert adds: “Banks face severe informational problems in evaluating the creditworthiness of these (SMEs). Loan sizes are small, it is very costly, per unit of loan value, to evaluate their loan applications and monitor their borrowing.”

Kasekende says it is because of the high transaction cost and the associated credit risk involved that loans to SMEs are normally very expensive.

“It is only commercially viable for banks to serve this segment of the credit market if they charge high interest rates,” Kasekende added.”

He said: “This is the principal reason why average lending rates of interest are high in Uganda. Banks in Uganda which have a large retail clientele of small scale borrowers incur much higher operating costs and must, therefore, charge higher lending rates than banks which focus on a relatively small base of large and medium scale corporate borrowers.”

Kasekende said bank rates in Uganda will only go down if the costs that banks incur while serving SME borrowers are sustainably reduced.

2 thoughts on “BoU’s Kasekende Blames SMEs For High Bank Rates

  1. I agree with the Deputy Governor that the cost of administering loans to SMEs are high due high risks, especially for agribusiness loans.
    However, let him throw more light why then, BOU also lends to Banks, even those which lend to commercial entrepreneurs. at high interest rates, above 10% sometimes up to 17-18% p.a

  2. In my opinion this explanation does not add up. U can not tell me that you charge high interest rates because the SMEs might default or end up defaulting. What benefit is it, to charge High interest laons that won`t be paid back any way, but designed cripple the SMEs out of business? Which means high interest rates are designed to limit SMEs borrowing ability and if possible drive them out of competitive business for the so called big guys. Please Mr. Deputy Governor you have shaded light on the problem but not the solution to the problem. Based on the economic situation in Uganda whose purchasing power is very low which is the main reason for loosing the other big guys like Nakumatt and her relatives, Ugandans lossing homes to banks and employment, we should stop these jokes and come up with seriuos policies that are going to uplift Ugandans lives and the economy atlarge. The cost of credit should be affordable and meaningful to make economic sense for business. The payment back of these loans will then be easy and not burdensome to the borrower.

Comments are closed.

Subscribe for notification