Ugandan MPs want stronger c.bank regulation of lending rates


* C.bank says economy performing below potential

* Traders have protested high interest rates

* Banks say will reduce lending rates at slower pace

By Elias Biryabarema

KAMPALA, Oct 12 (Reuters) - A Ugandan parliamentarycommittee is pushing the government to amend the country'sfinancial laws to empower the central bank to regulate interestrates following mounting complaints against high borrowingcosts.

Commercial banks in east Africa's third largest economyraised their lending rates sharply last year on the bank of anaggressive round of monetary policy tightening by Bank of Uganda(BoU), or central bank.

Since early this year, though, BoU has gradually rolled backits benchmark Central Bank Rate (CBR) , bringing itdown to 13 percent this month from a high of 23 percent.

Data from the central bank shows commercial banks' averageprime lending rate has fallen only marginally in comparison, to25.5 percent last month, from 26.8 percent in March.

The central bank governor, Emmanuel Tumusiime-Mutebile, hascomplained that commercial banks have maintained "exorbitant"lending rates even after cutting the CBR significantly.

"We're pushing the finance ministry to bring to parliamentan amendment to the Financial Institutions Act 2004," StephenBiraahwa Mukitaale, chairperson of the House's committee onnational economy, told Reuters on Friday.

"The amendment should give powers to the central bank tohave a stronger say in how much interest is charged depending onthe prevailing macroeconomic environment."

In January Ugandan shops shut their doors for threeconsecutive days to protest against high interest rates whichthey said were crippling business. They called off their strikepartly after promises from the central bank to roll back thetight policy stance.

Biraahwa said the lawmakers were not suggesting a return tothe bygone days of "price fixing" but that banks were exploitinga lax regulatory regime to "squeeze the consumer."

The chief executive officer of the Uganda BankersAssociation (UBA), Emmanuel Kikoni, told Reuters banks could notreduce interest rates sharply because they were still holdingexpensive deposits they took in at the height of policytightening cycle.

"Interest rates won't come down that fast and I don't thinka stronger regulation is the answer," he said.

"If banks took in expensive deposits, what do you want themto do ... they will reduce interest rates but at a pace thatmakes business sense to them."

BoU says Uganda's economy is still performing belowpotential after being hurt by last year's high inflation and atight monetary policy and signalled it will continue easingrates until activity fully recovers.

(Editing by James Macharia)

((nairobi.newsroom@reuters.com)(Tel. +254202224717))


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