Banks, SMEs need to develop mutual trust – finance official

Eric Rwigamba is the director general for financial sector development at the Ministry of Finance. He is leading a campaign to ensure that financial institutions scale up credit to small-and-medium enterprises (SMEs), and the agriculture sector. Business Times’ Peterson Tumwebaze caught up with him and discussed the role of banks in supporting SME sector growth, and how capital markets can boost SMEs, among other issuesYou are responsible for financial development in the country, what caught your attention during 2013? Although the world economy did not perform as had been anticipated, the local banking sector showed resilience. It has been growing, thanks to stable macro-economic policies in place. This has been reflected in the overall economic growth of the country. We anticipate this growth to continue in the coming year.As you must have seen in the monetary report, the interbank rate reduced from 9.58 per cent to 6 per cent, while the deposit rate dropped from 10.6 per cent to 8.54 per cent during the fourth quarter. These are good indicators, but they are not enough. So we will continue working with all the stakeholders to scale up the performance of banking sector.What mechanisms have you put in place to realise this target? We have drafted a strategy that will strengthen the financial sector and make it easy for banks to extend more credit to SMEs and increase agro-financing. This is because these two sectors are the biggest drivers of our economy and, therefore, assisting them financially will fast-track growth, and create employment opportunities for our people.Banks are hesitant to lend to SMEs, especially startups and businesses whose capital flow is minimal; what are you doing to ensure that banks have confidence in small businesses? It’s not only banks, all investors put their money where the risk is minimal and the rate of return is high. Unfortunately, banks don’t trust SMEs, and that why we are urging them to embrace lease products and micro-insurance because, this way, they can mitigate the risks involved. We are also encouraging SMEs to embrace capital markets, where they can sell bonds to raise cheap funding to earn the banking sector trust so banks can extend more credit to thm. The other option is encouraging private equities and joint ventures.Entrepreneurs complained of high interest rates throughout the year, what strategies are you putting in place to harmonise interest rates in the New Year?The issue of high interest rates results from the fact that banks don’t have enough liquidity to finance long-term business projects. Another problem is that banks secure finance at high rates, which they often transfer onto their clients.We are, however, working with various stakeholders to come up with a mechanism that put the financial sector in position to attract external sources of finances cheaply, including private equities.The government has also put in place a number of measures, undertaken more reforms, as well as ensuring a stable political and economic environment, which I believe will make it possible for big international lenders to extend credit to our banks at lower interest rates.We have also launched a new financial education strategy that will encourage people to save, which will increase bank deposits and bring down interest rates. The East Africa Bribery Index report for 2013 ranked banks as the sixth most corrupt institutions in the country. Does this worry you, and what are you doing do to address this issue?This is a serious problem that concerns everybody, especially considering the fact that banks have a major role to play in developing the economy. However, I believe that some people in the banking sector could be exploiting ignorance of people about how financial services work to cheat them. That’s why we are rolling out a campaign to educate the public about financial services so they can make a distinction between a financial service and a favour.