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How can we reduce the cost of borrowing?

By Prof. Augustus Nuwagaba

Yesterday, we spent most of the afternoon discussing the thorny issue of cost of borrowing;

1. A high cost of borrowing is a serious dis- incentive for investment and economic enterprise development;

2. This is because high cost of capital discounts economic activity as it “eats” into resources for business operations and expansion.

3. But what are the reasons for high cost of borrowing in Uganda;

   a) low financial depth- few economic  agents relative to GDP. This means few sources from where one can borrow money.

b) Absence of a saving culture- this means that there will be small portfolios/quantum of money from where people can borrow.

    c)  Ostentatious behavior- this results from consumerism behavior characterised by     flamboyance.

d) Government borrowing- this creates competition which crowds out the private sector, why; because commercial Banks would naturally prefer less risky lending, i.e lending government as compared to individuals.

4. How can we reduce the cost of borrowing?

The answer is one: ENHANCE FINANCIAL DEPTH- avail many sources of financial intermediation which in actual fact will create many sources from which people can borrow.

5. However, this will require a population with HIGH PROPENSITY TO SAVE as opposed to the current population with HIGH PROPENSITY to CONSUME.

6. It is from SAVINGS and not CONSUMPTION, where INVESTMENT sprouts.

Prof. Augustus Nuwagaba is an International Consultant On Economic Transformation.

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