15 August 2016

Manage interest rates without capping them

By Fabian Kasi

First, banks should be given a conducive atmosphere for growth so that they increase economies of scale to lower the cost of operations. This should eventually influence the sustainable reduction in the interest rates.

Secondly, regulators should focus on regulating consumer protection. For example, the measures that Bank of Uganda is taking to ensure that all banks give key fact documents every time a client is accessing banking services, is a move in the right direction. All banks are currently supposed to display tariff guide and complaints handling guidelines in all banking halls.

Additionally, policy makers should focus on creating an enabling environment for an innovative ecosystem of financial service providers so that new and better and cheaper ways of delivering financial services are developed.

More competition among financial institutions should be encouraged so that more choices are available to borrowers.

We need to encourage more savings so that banks can access a bigger pool of relatively cheap and longer term funding. We should remind ourselves that we have one of the lowest savings rate in Africa. Other countries with good savings culture are likely to have friendly interest rates. Rates are even much better in the developed world where all money is channeled through financial system.

We also need to adopt a good loan paying culture to lower default rates and the credit risk.
The measures above would help to prevent unscrupulous providers while ensuring healthy credit markets.

The market should be left to determine the price of credit. Competition should be left to drive efficiency and innovation within the banking sector to the benefit of the borrowers. The role of the regulator should be to create an enabling environment that fosters transparent pricing as well as flow of low-cost funding into the country. Policies should also aim at creating an environment that promotes sustainable financial inclusion partnerships with the private sector.

Fabian Kasi is the chairman Uganda Bankers Association.



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