Uganda central bank opposes any commercial lending cap despite Kenya move

KAMPALA (Reuters) - Uganda's central bank is opposed to capping commercial lending rates in the way Kenya has because it could halt lending to smaller firms deemed more risky or encourage banks to lend in foreign currency where the caps don't apply, a top official said on Wednesday.

Kenya passed a law last month capping commercial interest rates at 400 basis points over the central bank's policy rate, now 10.5 percent, sending bank shares tumbling. Banks were due to meet the requirement by Wednesday.

Many people in Kenya, Uganda and across Africa have long complained that commercial lending rates are too high, holding back personal and corporate investment. But some experts say capping rates will make banks less willing to lend, on the basis that their interest income would not offset risks.

Adam Mugume, executive director for research at the Bank of Uganda, told Reuters that introducing interest rate control would deter banks from lending to small-scale retailers or offering mortgages, both deemed riskier segments.

“How will banks price risk? ... Those risky borrowers will go off the credit market," he said, although he said commercial lending rates were too high and represented a "market failure."

According to Bank of Uganda data, commercial banks' weighted average lending rate on shilling loans stood at 23.5 percent in August, down from 24.6 percent in December last year.

Last month, Uganda's central bank cut its benchmark Central Bank Rate (CBR) to 14 percent from 15 percent, its third cut since April. But businesses still complain about high commercial rates.

But Mugume said controlling lending rates on shillings could prompt banks to offer loans denominated in foreign exchange, which in turn could put pressure on the shilling as demand for foreign exchange rose.

"You’re causing more harm ... If you don’t think carefully it can kill the financial sector," he said, adding that the government should identify key sectors struggling under higher rates, such as small businesses, and offer targeted support.

Uganda's financial services sector has expanded from the doldrums of 1980s and early 1990s as growth has picked up. Total assets stood at 21.7 trillion shillings ($6.42 billion) at the end of 2015, compared with 7.5 trillion shillings in 2008.

($1 = 3,378.0000 Ugandan shillings)