Determinants of bank lending rates for the construction sector in Uganda: a case of Stanbic Bank Uganda

Abstract

The study purposely investigated the key factors determining bank lending rates for the construction sector at Stanbic Bank Uganda. The study was premised on three objectives; to investigate the key factors determining bank lending rates for the construction sector at Stanbic Bank Uganda, to evaluate the barriers affecting favorable lending rates in Uganda's construction sector and to develop strategies for improving bank lending rates for the construction sector at Stanbic Bank Uganda. The study adopted a descriptive research design with quantitative study approaches and 108 Stanbic bank staff filled the questionnaire. The study found that several key factors determine bank lending rates for the Loans in the construction sector at Stanbic Bank Uganda, including the cost of funds, credit risk, potential cost overruns, market competition, regulatory requirements, capital adequacy requirements, inflation, loan duration, collateral, and internal risk management policies. Among these, the cost of funds, regulatory requirements, and internal bank policies were most influential in determining interest rates, while the type and value include high perceived risks, limited access to collateral, economic instability, inadequate legal frameworks, and insufficient financial data. Additionally, limited competition between banks, lack of specialized financial products, and delays in construction projects further hinder favorable lending conditions. To improve lending rates, the study suggests strategies such as optimizing risk management practices, offering specialized financial products, strengthening partnerships with stakeholders, providing financial management training, enhancing project monitoring, and promoting competition between banks. These strategies aim to reduce risks and improve financial support for the construction sector. The study recommends improving risk management practices at Stanbic Bank Uganda by using advanced tools to assess creditworthiness and mitigate risks, enabling more favorable lending rates for the construction sector. It also suggests developing specialized financial products, such as project-based loans with flexible repayment terms, to reduce borrowing costs. Strengthening partnerships with key stakeholders in the construction industry is advised to enhance the bank's understanding of industry dynamics. Additionally, leveraging government-backed guarantees, subsidies, and tax incentives is recommended to lower lending risks and costs, fostering more competitive lending rates for the sector.