Former Central Bank boss Ndung’u faults interest rate capping

What you need to know:

  • Prof Ndung’u told the first Ugandan inaugural annual banker’s conference in Kampala that the rate capping law has had negative impact on credit access for low-income earners.
  • Critics have accused banks of engaging in “blackmail and economic sabotage to force amendments” to the law.
  • The CBK mid this month said it is set to conclude a study on the law capping interest rates and its impact on the economy in the next one month.

Former Central Bank of Kenya (CBK) governor Njuguna Ndung’u has faulted the rate capping law, saying interest controls have defeated the initial objective of providing affordable credit to consumers.

Prof Ndung’u, under whose tenure financial inclusion grew rapidly, told the first Ugandan inaugural annual banker’s conference in Kampala that the rate capping law has had negative impact on credit access for low-income earners.

“We are achieving the negative of interest rate capping. Monetary policy is now meaningless,” Prof Ndungu was quoted saying by local media. Yearly credit growth recently declined to 2.1 per cent from 17 per cent at the end of 2015, after the CBK introduced caps.

The government capped lending rates last September at four percentage points above the Central Bank Rate, responding to borrowers’ complaints that the cost of credit was too high and banks had repeatedly failed to lower them.

Critics have accused banks of engaging in “blackmail and economic sabotage to force amendments” to the law.

Prof Ndung’u, however, acknowledged affordable credit remains a challenge adding failure by banks to finance small and medium enterprises (SMEs) and the agricultural sector are some of the signals that a lot more needs to be done.

“SMEs are very important to this economy but they are not given financing,” he said in reference to the East African Community bloc.

The CBK mid this month said it is set to conclude a study on the law capping interest rates and its impact on the economy in the next one month.

Governor Patrick Njoroge made the announcement amid growing concern over the slow growth of credit.

“We have gathered more data. We want to present it in a definite way. We will put out a first draft hopefully in a month or so,” said Dr Njoroge.

“The underlying concerns that led to the interest rate caps are still concerns that we hold dear,” he added even he maintained that transparency in pricing of loans by banks was critical in lowering the cost of credit.

The Bank of Uganda like other regional central banks has been keenly watching the Kenyan experiment of rates controls even as the cost of credit remains a challenge in the region.

Uganda like Kenya has implemented some reforms aimed at extending banking services to the unbanked.