Uganda has warned banks to ensure that interest rates do not reach a level where they need to be capped.
Speaking at the launch of Bank of Africa mortgage financing services, Mr David Bahati, the Finance state minister for Planning, said banks should ensure that they keep interest rates within manageable rates in response to the Central Bank Rate (CBR).
Banks, he said, seem to be pushing government to consider introducing a law capping lending interest rates.
“While we understand that you need to take charge of the risk you endure, we continue to be concerned about the interest rates you charge.
"As the Central Bank continues to lower the prime lending rate [CRB], we do not see the response of the commercial banks,” he said.
Currently, Uganda's central bank rate (CBR), the rate at which central bank lends to commercial banks, stands at 9 per cent compared to commercial bank interest rate of about 21 per cent.
Interest rates are still a major concern for borrowers, many of whom cite them as the biggest impediment to private sector credit.
According to Mr Bahati, high interest rates have a negative impact on business growth and the country as a whole.
“I had started drafting a Bill to cap interest rates the way Kenya did… I abandoned that idea, but it appears you [banks] want to force government to do just that,” he said.
Mr Bahati acknowledged that although banks have been reducing lending rates, the rate has been slow which has made interest rates unaffordable for majority borrowers.
The CBR has been reducing since October last year. Commercial bank interest rates have since reduced from an average of 23 per cent to the current 21 per cent.
However, bankers and civil society organisations argue that capping interest rates would be detrimental to the economy saying the legislation in Kenya, which Mr Bahati is talking of has failed.
Ms Rashmi Pillai, the Financial Sector Deepening Uganda director of programme, during the annual bankers’ conference said reports from interest capping in Kenya had indicated that the policy had failed with banks becoming more risk averse.
Interest rates, she said, ensure that banks protect themselves against risky customers as well as mitigating the high cost of money.
Mr Bahati also indicated that increased government borrowing has raised competition in the money markets thus pushing out private sector borrowers.