Average lending rates on loans have dropped to the lowest level since June 2011, due to the growth in household borrowing. Prof. Emmanuel Tumusiime-Mutebile, the governor Bank of Uganda disclosed this while issuing the monetary policy statement for April 2014.
He explained that interest rates dropped to 20.8percent in February, making it the lowest average lending rate in over 2years.
Commercial bank interest rates shot up in mid-2011 following the double digit inflation forcing bank of Uganda to introduce the monthly Central Bank Rate. The rise in interest rates to up to 28 percent also led to strikes by the Kampala City Traders Association in January 2012.
As inflation dropped to single digits, so did the Central Bank Rate, but then interest rates fell rather sluggishly. Despite the fall in interest rates, Prof. Mutebile, reveals that borrowing by the private sector had only grown by 6.8percent year-on-year to February 2014, which is lower than the 15percent earlier projected by the bank.
Further projection by Bank of Uganda shows that borrowing by the private sector is likely to be further slowed by banks moving on cleaning their books due to a rise in bad loans. According to Dr Adam Mugume, the director research, bad loans increased to 6.7percent in 2013 from 4.5percent in 2012.
Commercial banks, Dfcu and KCB Uganda, that have released their financial results, indicate a rise in bad debts by 80percent and 52percent respectively in 2013. Despite the pickup in credit, BOU remained cautious on the prospects for the economy as the shilling depreciates and rise in prices of imported goods.
The Uganda Shilling has been depreciating since mid-February and this has been attributed to the sentiment surrounding the signing of the anti-gay act. Prof. Mutebile warns that slowed exports and credit growth are likely to affect the performance of the economy in the financial year.
BOU has maintained its projection for economic growth in 2013/14 to 6 and 6.5 percent, driven mostly by government investment. It has also maintained the CBR at 11.5 percent, for the fifth month in a row, cautious of the risks to the economy.