"Public banks are undercapitalised and unable to influence the market. They are instead followers of the private commercial banks," the report reads in part.
Market share pie
The report also notes that Uganda has allocated the least investments in public banks in East Africa where other states have a large market share enabling them to influence market movements. Uganda has a market share of seven per cent compared to Kenya's 22 per cent and Tanzania's 27 per cent.
It is this market share, according to the report, that limits the government's ability to influence domestic lending by way of financing strategic sectors in the economy and setting trends in interest rates.
While the government is incapacitated, commercial banks which are largely driven by profits, have secured their lending against risk by restricting lending to government securities and trade.
"Five commercial banks, largely foreign-owned, hold 61 per cent of the assets in the banking industry. The behaviour of these banks makes interest rates sticky downwards. Most foreign banks minimise local lending and prioritise their lending to trade and government securities," the report adds. This behaviour then influences other banks in regard to credit policies and operations.
Interest rates
The government owns three commercial banks including Uganda Development Bank, Pride Microfinance, and Post Bank. It holds a big stake in Housing Finance Bank. However, these banks are dwarfed by banking giants Stanbic, Standard Chartered, dfcu, Absa, and Centenary, who influence market movements.
This environment has led to Uganda having the highest lending rates in East Africa averaging 22 per cent compared to 14 per cent and 16 per cent in other East African states.
The report defends this lending climate saying that the large informality of the private sector has made it hard for banks to assess and value it appropriately.
"As a result, the borrower is required to provide additional security or collateral, and prudential rules require banks to provide higher amounts, thus tying up capital and limiting lending," the report adds, noting that this creates a high cost of capital.
Contributing factors
The report further delves into the constraints of oligopolistic structure noting that only 20 per cent of Ugandans have collateral in the form of buildings, land, and immovable and movable assets yet this is the default requirement for everyone in order to get loans.
Despite dwarfing the government banks and the public access to loans, the banks are also plagued by high costs of regulatory requirements, infrastructure, limited technology, limited skills, and inefficient public services.
More ties in lending include high operational costs which are predominantly incurred due to the manual processes of tracing and validating information about customers and periods of dispute resolution in commercial courts.
