Ugandan MPs want stronger regulation of lending rates

* 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 parliamentary committee is pushing the government to amend the country's financial laws to empower the central bank to regulate interest rates following mounting complaints against high borrowing costs.

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

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

Data from the central bank shows commercial banks' average prime lending rate has fallen only marginally in comparison, to 25.5 percent last month, from 26.8 percent in March.

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

"We're pushing the finance ministry to bring to parliament an amendment to the Financial Institutions Act 2004," Stephen Biraahwa Mukitaale, chairperson of the House's committee on national economy, told Reuters on Friday.

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

In January Ugandan shops shut their doors for three consecutive days to protest against high interest rates which they said were crippling business. They called off their strike partly after promises from the central bank to roll back the tight policy stance.

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

The chief executive officer of the Uganda Bankers Association (UBA), Emmanuel Kikoni, told Reuters banks could not reduce interest rates sharply because they were still holding expensive deposits they took in at the height of policy tightening cycle.

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

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

BoU says Uganda's economy is still performing below potential after being hurt by last year's high inflation and a tight monetary policy and signalled it will continue easing rates until activity fully recovers.

(Editing by James Macharia)

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