{UAH} The Banks are not the problem
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12:04 PM |
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The Banks are not the problem. The problem is high demañd for credit from many risky borrowers versus low credit supply in the domestic market.
Why are interests rate high or what are interest rates?
An interest rate or the cost of credit is a function of risk the borrower poses to the lender. Before your loan is approved, your application goes through a process of underwriting to determine your level of risk based on your credit worthiness or credit score. If your credit score is bad you are considered a risky borrower and the cost of your borrowing will ultimately be higher relative to someone who has a good credit score.
You are not given a good interest rate on borrowing just because you are a Ugandan or Indian. Your credit worthiness or credit score must pose low risk to the credit supplier.Note, there is neither free nor cheap money out there even in the Banks.
Remember, you are competing for limited credit supply with everyone else in the global market place including governments all over the World. Yes, governments borrow from Commercial Banks through treasury bills/bonds and it's often safer to lend government than risky small borrowers. Those with money to lend want a return on their investment at low cost and low risk and they don't do it for charity.
If an Indian borrows 2Bn/- at an interest of 15% per annum relative to a Ugandan at 22%, it boils down to the relative credit worthiness of the Indian and Ugandan respectively.
Does Bank of Uganda and government need to continue reforms in the Financial Industry? Of course possibly in areas of regulation and compliance.
We don't have much credit in supply domestically to meet local demand. The actors in the local financial sector need to build and sustain relationships with external credit suppliers to attempt meet local credit demand and if those trust relationships are broken, the local actors will have even more limited capacity to meet local demand. With high demand versus low supply, the ripple effect is that many ideas will remain on paper, collect dust and the cost of borrowing for the lucky few that percolate through will even be higher.
So, Uganda can opt to demand foreign banks or credit suppliers buy an operating license in Uganda for them to extend liquidity to local actors, the problem is what incentives Uganda has to offer to these credit suppliers in return that reduces their cost and risk of default to incentivise their appetite relative to other markets competing for the same credit.
If every borrower can now renege on paying their loan just because a portion of the loan was from a foreigñ credit supplier with no operating license in Uganda per the recent ruling in the Commercial Court, that alone increases our overall national risk profile as borrowers which will translate into even higher interest rates.
We need to develop a culture that commits people to honor agreements and financial obligations. If you are a tenant who defaults on paying your rent including utility bills for services you consume, chances are you are risky borrower. Ugandans struggle to pay their rent and utilities consistently and that feeds into their credit worthiness or risk profile.
Finally, if the issue of financial nationalism against international Banks is now motivation enough to rally Ugandans around the idea of starting their local or indigenous banks that can address their local problems than the stringent requirements of the international Banks, they should follow through with the agenda. But remember, all local Banks have come up before and collapsed like a pack of cards and closed by Bank of Uganda.
It is the CARTOON ECONOMY STUPID!
Mzee Kabulasoke.
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-- Why are interests rate high or what are interest rates?
An interest rate or the cost of credit is a function of risk the borrower poses to the lender. Before your loan is approved, your application goes through a process of underwriting to determine your level of risk based on your credit worthiness or credit score. If your credit score is bad you are considered a risky borrower and the cost of your borrowing will ultimately be higher relative to someone who has a good credit score.
You are not given a good interest rate on borrowing just because you are a Ugandan or Indian. Your credit worthiness or credit score must pose low risk to the credit supplier.Note, there is neither free nor cheap money out there even in the Banks.
Remember, you are competing for limited credit supply with everyone else in the global market place including governments all over the World. Yes, governments borrow from Commercial Banks through treasury bills/bonds and it's often safer to lend government than risky small borrowers. Those with money to lend want a return on their investment at low cost and low risk and they don't do it for charity.
If an Indian borrows 2Bn/- at an interest of 15% per annum relative to a Ugandan at 22%, it boils down to the relative credit worthiness of the Indian and Ugandan respectively.
Does Bank of Uganda and government need to continue reforms in the Financial Industry? Of course possibly in areas of regulation and compliance.
We don't have much credit in supply domestically to meet local demand. The actors in the local financial sector need to build and sustain relationships with external credit suppliers to attempt meet local credit demand and if those trust relationships are broken, the local actors will have even more limited capacity to meet local demand. With high demand versus low supply, the ripple effect is that many ideas will remain on paper, collect dust and the cost of borrowing for the lucky few that percolate through will even be higher.
So, Uganda can opt to demand foreign banks or credit suppliers buy an operating license in Uganda for them to extend liquidity to local actors, the problem is what incentives Uganda has to offer to these credit suppliers in return that reduces their cost and risk of default to incentivise their appetite relative to other markets competing for the same credit.
If every borrower can now renege on paying their loan just because a portion of the loan was from a foreigñ credit supplier with no operating license in Uganda per the recent ruling in the Commercial Court, that alone increases our overall national risk profile as borrowers which will translate into even higher interest rates.
We need to develop a culture that commits people to honor agreements and financial obligations. If you are a tenant who defaults on paying your rent including utility bills for services you consume, chances are you are risky borrower. Ugandans struggle to pay their rent and utilities consistently and that feeds into their credit worthiness or risk profile.
Finally, if the issue of financial nationalism against international Banks is now motivation enough to rally Ugandans around the idea of starting their local or indigenous banks that can address their local problems than the stringent requirements of the international Banks, they should follow through with the agenda. But remember, all local Banks have come up before and collapsed like a pack of cards and closed by Bank of Uganda.
It is the CARTOON ECONOMY STUPID!
Mzee Kabulasoke.
Allaah gives the best to those who leave the choice to Him."And if Allah touches you with harm, none can remove it but He, and if He touches you with good, then He is Able to do all things." (6:17)
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