Loan borrowings remain high despite high lending rates Top story

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In short
According to Dr. Adam Mugume, the Executive Director of Research in the central bank, shilling-denominated loans stood at 23 percent at the end of 2015, meaning borrowers were undeterred by the high cost of money.

Private sector lending still remains high at 23 percent despite the high benchmark lending rate of 17 percent.
 
According to Dr. Adam Mugume, the Executive Director of Research in the central bank, shilling-denominated loans stood at 23 percent at the end of 2015, meaning borrowers were undeterred by the high cost of money.
 
Since October 2015, the Bank of Uganda maintained the prime lending rate, known as Central Bank Rate (CBR), at 17 percent. The CBR determines the rate at which commercial banks borrow from the central bank and among each other which in turn determines lending to borrowers.
 
The higher the CBR, the higher the onward lending rates. The aim is to dampen aggregate demand and in turn rein in inflation which stood at 9.1 percent by December 2015.
 
Mugume says the objective had been to dampen private sector borrowing to below 20 percent but borrowers were undeterred. On the other hand, foreign currency denominated loans reduced, mainly due to volatility in the forex exchange.
 
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The effect of borrowing in a foreign currency is that should the shilling weaken further the borrower has to fork out more money to repay the loan.
 
Meanwhile, the shilling fell to its lowest level this year, testing the 3500 key level on the sell side and remained volatile for most of the trading week.
 
Since the start of 2016 the shilling had shown signs of stability, averaging just over 3,300 on the buy side and 3,400 on the sell side. This trend had started around November 2015 through the festive season.
 
But this week the shilling started showing signs of fragility, ending the week rather weaker.
 
Stephen Kaboyo of Alpha Capital Partners, watchers of the financial market, says the weakening was due to an upsurge in demand linked to building positions by market players as pre- election sentiment weighed in.
 
Kaboyo says foreign currency inflows were also scanty during the week.
 
Ugandans vote in a general election on February 18, just a month away.
 
In the international currency markets, the dollar lost its footing against major currencies after Brent Crude oil prices fell sharply to below 30 dollars per barrel, triggering steep declines in US equity markets.
 
According to Kaboyo, the shilling is likely to strengthen slightly as corporate companies settle mid-month taxes, but going forward the shilling will remain subdued.

 

About the author

David Rupiny
In his own words, David Rupiny says, "I am literally a self-trained journalist with over 12 years of experience. Add the formative, student days then I can trace my journalism roots to 1988 when as a fresher in Ordinary Level I used to report for The Giraffe News at St Aloysius College Nyapea in northern Uganda.


In addition to URN for which I have worked for five years now, I have had stints at Radio Paidha, Radio Pacis, Nile FM and KFM. I have also contributed stories for The Crusader, The New Vision and The Monitor. I have also been a contributor for international news organisations like the BBC and Institute for War and Peace Reporting. I am also a local stringer for Radio Netherlands Worldwide.


I am also a media entrepreneur. I founded The West Niler newspaper and now runs Rainbow Media Corporation (Rainbow Radio 88.2 FM in Nebbi). My areas of interest are conflict and peacebuilding, business, climate change, health and children and young people, among others."