The agony of a bank borrower

Banking in Uganda is one of the most lucrative industries. This is evidenced by the annual report and accounts of the banks themselves showing that they make billions of shillings in profits every year. Consequently, the industry has attracted a lot of investors from outside Uganda and since the majority shareholders of the foreign-based banks are domiciled outside Uganda, their profitable operations mean that they remit dividends to their shareholders who live abroad. In this way, Uganda exports its foreign exchange to other countries through the dividends paid out.

It is a well-known dictum that is only a fool who uses his own money for business. Wise businessmen borrow all the time. It is also known that the main, almost the sole activity of banks, is to receive deposits from their customers and lend them out. All their other activities rotate around these two. They get their income and profitability from the interest and other charges which they levy on their borrowers and depositors. Therefore, one would have expected banks to be eager to lend money. However, judging by the red tape attached to borrowing from banks in Uganda, it seems as if they regard lending money out as a favour.

To get a loan, a borrower has to write a feasibility study of the project for which he needs to borrow the money. Of course this requirement is logical because the bank needs to be sure about the subject matter of the loan. But the cost of writing a feasibility study is very high especially as it is written at a time when the borrower is not sure whether the bank will lend him the money or not.

The bank will then closely scrutinize the feasibility study before making a decision whether to lend or not. In many banks this is a lengthy process where many departments are involved. One would be lucky if the time taken in analyzing the feasibility study would not exceed one month.

When a decision to lend has been made the bank requires the borrower to fill a multitude of forms. This exercise takes another month or so. In the meantime, the borrower is kept waiting.

When the loan is approved, the bank gives a letter of offer to the borrower indicating the conditions of the offer and requiring his acceptance. In some banks, it takes several days between writing the letter and signing it. If the borrower accepts the terms he will be required to pay to the bank a commitment fee of 2 percent of the approved loan.

Acceptance of the loan does not mean its immediate disbursement because the borrower has yet to meet several expenses to enable the bank to prepare documents for his signature. He has to pay inspection fees for the bank to look at the security, search fees to prove the genuiness of the security; acceptance fees because he has accepted the loan; registration of mortgage fees; survey fees to inspect and value security; legal fees to prepare the documents; ledger fees for effecting book entries; insurance premium for insuring the security and a lot other fees. All these are paid before the loan is disbursed to the borrower. So the borrower must be a rich man to be able to afford to borrow.

Interest rates on loans range between 20- 30 percent. What kind of business do you know that can afford such interest rates? Is it any surprise that so many borrowers lose their securities because of failure to repay their loan?

Banks in Uganda make huge profits from these high interest rates and can afford to lower them without any risk of loses. This would encourage borrowing and help develop the economy.

John Ssebaana Kizito is the former President of the Democratic Party (DP).