Banks Should Adopt Technology to Reduce Lending Rates – Mutebile

The Governor Bank of Uganda (BOU) Prof. Emmanuel Tumusiime Mutebile has said banks will need to consider use of innovative technologies, including IT, to deliver banking services if they are to cut operational costs.

According to Mutebile, “high lending rates of interest are primarily the result of the high cost structure of banking in Uganda.”

He maintains that lending rates will not fall in a sustainable manner until banks have been able to bring down their operating costs.

The average annual operating costs of Ugandan banks as percentage of their income earning assets, says Mutebile, is currently around 11 per cent, which is very high by international standards.

The Central bank head was Wednesday morning speaking at the inaugural Annual Bankers’ Conference organized by Uganda Bankers’ Association at Kampala Serena Hotel.

The banking conference was also attended by chief executives and high profile staff of banks, senior managers from the Uganda Institute of Banking and Financial Services.

Prof. Njuguna-Ndugu, Emeritus Governor of the Central Bank of Kenya was the Keynote Speaker.

In his speech Mutebile centered on listing challenges facing Uganda’s banking industry while suggesting solutions to them.

Elaborating more on how bank’s operating costs are fueling the problem of high lending rates, the governor stated that a major shift towards digital, or electronic banking is paramount.

“The adoption of mobile and online banking, together with smart ATMs, will help banks reduce their costs,” Mutebile said.

As they adopt electronic banking technologies, Mutebile explained, key challenges for banks will be to ensure that these new technologies can deliver the same quality of, and access to, services for their customers.

He also mentioned that more traditional technologies and the risks entailed in electronic banking are fully understood and can be managed effectively.

Cautioning banks about electronic banking, Mutebile noted: “banks must ensure that their electronic systems can be safeguarded against cyber-attacks, both to protect the integrity of individual customer’s accounts and to prevent threats to the financial safety of the bank itself.”

“In future, operational risks arising from electronic banking are likely to become of greater significance as potential threats to the financial soundness of banks and their ability to command the confidence of their customers,” he added.

It is against this backdrop, the professor cautioned that “bank regulators need to strengthen their capacities for monitoring the security of banks’ IT systems.”

On using the legislators to push banks to lower lending rates, Mutebile advised against it saying it would be detrimental to banks and customers.

“If lending rates were capped by legislation at levels below the real cost of lending, taking into account operating costs, provisions, and the costs of funds, banks would make losses on their loan portfolios,” he said.

“The banks might also attempt to recover some of their losses by increasing the fees and charges levied on their customers,” he added.

Pointing to how the law enforcement would take a toll on business individuals, he said: “If lending rates were capped, the borrowers who would suffer the most, in terms of losing access to credit, would be SMEs. This is because SMEs are both more risky and involve higher transaction costs for the banks as a share of the amount that they borrow than prime borrowers.”

Reechoing Mutebile’s submission, Prof. Njuguna-Ndugu, said that “banks must find a way of reducing costs. This can only happen with financial inclusion – by going digital.”

Professor Ndugu addressing bankers
Professor Ndugu addressing bankers

Ndugu added that “the poor would want to save but we have to give them instruments for this since they are efficient savers.”

BOU Statistics show that bank lending in Uganda expanded rapidly in the first decade of this century; in real terms the stock of credit expanded four-fold between 2001 and 2011, and this enabled many new borrowers to access credit.

But since 2011 credit growth has slowed and over the last two years, there has been virtually no growth in real terms (after adjusting for inflation).

The main reasons for the stagnation of bank lending lie on the supply side of the credit market.


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