Kampala- The cost at which the country’s private sector borrows is not only prohibitively high but it also doesn’t make sense, according to President Yoweri Museveni.
Lashing out at commercial banks last week while officially opening the 25th Uganda International Trade Fair, President Museveni said interest charged on loans is unreasonably high, describing it as idiotic.
Just recently, Bank of Uganda (BoU) reduced the Central Bank Rate (CBR) from 10 to 9.5 per cent hoping that the move will persuade commercial banks into relaxing interest rates to allow private sector access affordable credit.
However, commercial banks have since then not responded in the way the Central Bank anticipated.
Most financial institutions continue to impose interest rates at an average of 24 per cent, leaving the private sector with no option but to shun borrowing.
This, according to Private Sector Foundation Uganda executive director Gideon Badagawa, is bad for the economy because it constrains the private sector ability to generate economic activities.
Speaking at the event organised by Uganda Manufacturers Association (UMA), Mr Museveni said with such high cost of credit, it is unlikely that the country’s private sector will break-even.
He said: “Borrowing at the interest of 24 per cent is idiotic.”
He added: “You cannot have high cost of interest rate, then high cost of power and then say you have minister of planning. What are they planning? These ministers should come here and explain themselves to you.”
Before the President took a swipe at the commercial banks and his ministers of Finance, Planning and Economic development, the chairperson of the UMA board of directors, Ms Barbara Mulwana, pointed out several challenges manufacturers face, including the cost of borrowing.
She said: “The high cost of capital in Uganda which is about 24 per cent per annum on average compared to less than eight per cent in major competing countries continues to render Uganda’s manufacturers uncompetitive.”
She added: “The high interest rate persists in spite of the fact that the manufacturing sector having the least default rate—non performing loans within the banking sector.”
As a result of high interest rate on loan, domestic borrowing is at an all-time low of eight per cent today.
Mr Museveni pleaded with the manufacturers to bear with him on the issue of high cost of power, saying this is a matter that will be history in a short while.
The President also blamed his predecessors, particular the late Milton Obote and Idi Amin Dada for committing policy mistakes.
He said Obote’s 1970 Nakivubo pronouncement which saw government take control of 60 per cent (up from at most 51 per cent) of more than 80 corporations in Uganda was a policy mistakes that should not have happened.
He also blamed former President Idi Amin Dada for expelling the entrepreneurial class (mainly the Indians) in 1972, saying the decisions by the two former leaders explain why Uganda which was at the same level of development with South Korea is still lagging behind.
According to President Museveni, Islamic Banking will go a long way in solving the interest rate challenge.
He said the principle of Islamic Banking which is rooted in sharing profit and losses incurred is a good idea, describing it as a more friendly finance packaging.
As for Ms Mulwana, fast tracking roll-out of Islamic Banking here will enable the diversification of the credit market as well as provide an alternative to the expensive credit her members are grappling with and also break the monopoly the local commercial banks are enjoying.
In her remarks, Trade minister Amelia Kyambadde noted that security restored by the current government explains all the progress registered in the economy thus far.
“We are seeing key sector of the economy showing good growth. BUBU policy has been successful so far. We have put in place national development strategy and although we are still struggling with Economic Partnership Agreement (EPA) we believe we will get there,” she said.