Last year Uganda’s central bank estimated that half of banks’ interest margins are swallowed by operating costs
was a young man his grain-milling business in Sheema, western Uganda, was destroyed by fire. These days, after building it back up from the ashes, he is being burned by high interest rates. To buy a new machine he must borrow from a bank at an annual rate of 22%. “You fear to do that,” he says. Many other entrepreneurs feel the same, which stops their businesses from growing.
. “Opening up a branch probably costs half a million dollars,” says Patrick Mweheire, who heads east African operations for Standard Bank, the continent’s biggest lender. Smaller banks are ground down by the cost of electricity, data storage or simply moving money, he adds. “If you look at a highway you will see six cash-in-transit trucks, one for each bank, all a quarter full.”
Many bankers save themselves the hassle by lending to the state instead. The double-digit interest rates that the government pays set “a floor” on the rates paid by everyone else, says Adam Mugume of Uganda’s central bank. In the average African country, according to the European Investment Bank, lenders’ holdings of public debt increased from 14% of their assets in 2008 to 19% by 2017.
Governments have tried and failed to bring rates down. In 2016 Kenya capped commercial-loan rates at four percentage points above the central bank’s policy rate. The move backfired. Bankers slashed credit to small businesses, reasoning that the rewards of lending no longer matched the risks. The cap was scrapped last year.
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