Friends,
For an extended period, the prime lending rate in Uganda has remained stubbornly high. Defenders of this rate often argue that the elevated cost of borrowing is due to banks lending to the government at higher rates through Treasury Bonds, necessitating a significant markup on their lending rates to ensure the risk that comes with lending to the private sector.
Upon examining the data, we find that the prime lending rate averages around 19 percent in Uganda, with major banks such as Stanbic Bank offering rates at 19%, DFCU at 20%, Standard Chartered at 19.3%, Centenary Bank at 20.5%, and most other banks exceeding 19%. The Bank of India stands out as the sole exception, with a prime lending rate of 18%.
Interestingly, some of these banks operate in Kenya, where government treasury bonds yield higher rates than in Uganda (Which in the last 2 years can only be interpreted that the risk of lending to Kenyan Government is higher than the Risk of lending to Ugandan Government.)
The white line is the Ugandan risk free 10-year treasury bond rate and the blue line is the Kenyan risk free 10-year treasury bond, showing that in the last 2 years, Kenya’s risk lending to government is higher than that of Uganda.
However, when comparing prime lending rates, Kenya's rates are lower than Uganda's. This raises the question: Are high interest rates in Uganda truly a consequence of treasury bond yields, or are banks becoming overly aggressive and risk-averse, lending to Ugandans at exorbitant rates?
Let's consider the practices of big banks, starting with Stanbic Bank Uganda. In Kenya, Stanbic Bank Kenya offers an average rate of around 17.5 percent, with loans exceeding five years averaging 17.3%, as reported by the Central Bank of Kenya. Yet, in Uganda, the bank's prime lending rate is 19%, with the minimum rate labeled as negotiable and the maximum rate as prime lending rate plus 8%. This suggests that in Uganda, the bank could potentially lend at rates as high as 27%, which is exorbitant by any standard.
If the determinant of borrowing interest rates is indeed the yield on treasury bonds or risk-free lending to the government, then Stanbic Bank Kenya's average interest rate on a 10-year bond is now 17%. This indicates that the bank is lending to individuals at a lower average rate compared to what it offers the government. In contrast, in Uganda, the 10-year treasury bond has an average interest rate of around 15.5%, and Stanbic Bank's prime lending rate is 19%. Thus, in Uganda, Stanbic Bank is lending to individuals at a rate 4% to 5% higher than the risk-free rate.
Stanbic Bank Uganda, being the biggest bank in the country with a Credit Loss Ratio averaging less than 1% in the last 3 years, and NPL ratio averaging 3% in the last 3 years means their loan book is of really good quality, and their customers are paying customers, why then doesn’t this get reflected in lowering the interest rates to the customers to enable more access to private capital but persons and businesses at favorable rate?
The same bank adopts different strategies in these two markets. Is the Ugandan market perceived as too risky, justifying these high interest rates, even though other markets with higher government borrowing rates can afford to lend to individuals and businesses at lower rates than the risk-free rate?
The situation is even more striking when considering banks like Diamond Trust Bank, which manage to offer interest rates in Kenya averaging 11 to 12 percent—600 basis points below the rate at which they lend to the Kenyan government. Yet, in Uganda, we see interest rates of 19% and above. This suggests that factors other than government borrowing rates are driving interest rates in Uganda, as the government of Uganda borrows at a lower rate compared to Kenya. These banks lend to individuals in Kenya at rates lower than the risk-free rate, yet in Uganda, the rates are higher.
If banks truly based their prime lending rates on the risk-free rate of treasury bonds, then borrowing rates in Kenya should be higher than in Uganda, given that Kenyan treasury bond rates are over 300 basis points higher. A 10-year bond in Kenya yields 18%, while in Uganda, it yields 15%. This implies that the risk of government default is higher in Kenya than in Uganda. However, when it comes to lending to the private sector and individuals, it is more expensive in Uganda, where the average prime lending rate is around 19%, compared to Kenya's average of 14% to 15%.
Banks like Equity Bank Kenya lend to individuals at an average rate of 12.2% and to businesses at an average of 16%, both below the rates at which Equity Bank lends to the government. Currently, five-year bonds in Kenya average 17%, and 10-year bonds average 18%. Yet, Equity Bank lends to the government at 18% and to individuals at rates of 15% to 16%, lower than the risk-free rate. Conversely, Equity Bank's branch in Uganda has a prime lending rate of 21.5%.
How can we rationalize this discrepancy? Is the risk of default so high in Uganda that banks justify lending at almost 6% higher than the rates offered to Kenyans at an individual level? What data supports the assertion that banks in Uganda lend at a prime lending rate of 21.5%, which is 500 basis points above the 10-year treasury bond rate?
The cost of lending to the government in Kenya is higher than in Uganda, with Kenyan treasury bonds carrying higher interest rates over the past two to three years. Yet, banks in Kenya manage to lend to the private sector at rates lower than those they offer to the government. These same banks operate in Uganda, where the cost of lending to the government through treasury bonds is slightly lower than in Kenya, but they lend to the private sector at higher rates. Despite similar characteristics between the two countries, the banks' operations and interest rate policies, supposedly benchmarked on the cost of lending to the government, differ significantly. How can we make sense of this?
Hey Alex, Love your content!
Wouldn't things like the Kenya Forex chaos over the last 3 years affect this analysis? What about the significantly more competitive pool of savings and financial products in Kenya where banks have significant competition from SACCOs when it comes to lending.
It is hard to believe that lending to government wouldn't have an impact. At the very least the gov't treasuries send some sort of price signal for loans.
I think just looking at interest rates between the Kenya and Uganda might miss a number of other factors that might affect them and the behaviour of the different players. i.e its probably gov't lending and a number of other factors that affect lending rates.