Inside the fight over loans, interest rate cap

The Association of Money Lenders of Uganda has petitioned Attorney General Kiryowa Kiwanuka and Finance minister Matia Kasaija, opposing the recent decision to cap interest rates for moneylenders.

The contentious cap, set on November 8, 2024, limits the maximum interest rate to 2.8 per cent per month (33.6 per cent per annum) under Section 89(1) of the Tier 4 Microfinance Institutions and Money Lenders Act.

REGULATION AND HISTORICAL CONTEXT

Moneylenders in Uganda are regulated by the Uganda Microfinance Regulatory Authority (UMRA) under the 2016 Tier IV Microfinance Institutions and Money Lenders Act. Historically, lenders had the freedom to set their own interest rates, often leading to exploitation, with rates reportedly reaching as high as 240 per cent annually.

President Yoweri Museveni has been vocal about the issue, describing moneylenders as a growing problem.

“They deceive people, charge exorbitant interest rates, and disguise lending contracts to seize property, especially from illiterate borrowers,” Museveni said in October, vowing to strengthen legal protections against such practices.

LEGAL AND ECONOMIC PUSHBACK

The rate cap has sparked outrage among moneylenders, who argue that it unfairly targets their industry while overlooking similar practices by commercial banks and other financial institutions. Edgar Ayebazibwe, a lawyer representing the Association of Money Lenders in Uganda criticized the decision as inequitable.

“Moneylenders contribute Shs 1.7 trillion to the economy and provide financial services to those excluded from formal banking,” he said.

Ayebazibwe also noted inconsistencies in the government’s approach, pointing out that banks and Tier IV institutions charge higher rates, yet moneylenders are restricted. A moneylender, speaking anonymously, echoed these concerns.

“We borrow from commercial banks at 30 per cent per annum, which leaves us with only a 0.8 per cent monthly profit after lending at the capped rate. This margin doesn’t cover our operational costs, including taxes, employee salaries and rent,” he said.

He also highlighted risks specific to the industry, such as loan defaults, and expressed frustration over the government’s focus on licensed moneylenders while ignoring unregulated “briefcase lenders” who exploit borrowers with rates exceeding 50 per cent.

INDUSTRY FRUSTRATION AND WIDER IMPLICATIONS

Jonathan Akandwanaho, chairperson of the Association of Money Lenders in Uganda (AMLU), decried the lack of consultation and warned of the economic implications.

“We are being unfairly targeted while other institutions charge up to 7 per cent monthly. The lending industry, with a turnover of 1.4 trillion shillings and 1,800 registered lenders, serves a significant population,” he said.

Akandwanaho also emphasized the industry’s role in financial inclusion. With lenders typically aged between 29 and 30, the sector bridges the gap for many Ugandans unable to access formal banking services.

ECONOMIC CONTEXT AND THE PATH FORWARD

Critics of the cap argue that it fails to consider the high operational costs faced by moneylenders and the competitive landscape, where app-based and telecom lenders charge rates between five per cent and eight per cent monthly.

Supporters of the regulation, including President Museveni, see it as a necessary measure to protect borrowers from exploitation. However, the petitioners plan to challenge the cap in the High court and Constitutional court, seeking an injunction against its implementation.

As the debate unfolds, the government faces the dual challenge of balancing borrower protection with sustaining a sector that serves as a lifeline for Uganda’s financially underserved populations. The resolution of this conflict could set a precedent for how Uganda navigates financial regulation in the years to come.

The Observer has uncovered that Uganda hosts over 60,000 informal lenders, many of whom many remain in the black market despite efforts by the Uganda Microfinance Regulatory Authority (UMRA) to formalize the sector. The recent cap on interest rates, which limits lenders to 2.8 per cent monthly (33.6 per cent annually), could unintentionally push many of these lenders further underground, according to industry experts.

Some licensed lenders have already scaled back operations, citing financial constraints caused by the cap. Historically, moneylenders have played a crucial role in supporting marginalized groups such as market vendors and schoolchildren, who often face rejection from traditional banking institutions.

CALLS FOR MARKET-DRIVEN SOLUTIONS

Akandwanaho emphasized that interest rates should be driven by market forces. “Let supply and demand dictate the rates,” he argued.

“If one company offers loans at 2.5 per cent per month and another at three per cent or four per cent, clients can choose what works best for them.”

He pointed to global examples, such as the United Kingdom, where moneylenders charge daily rates of 0.8 per cent. He noted that the lending industry is indispensable, stating, “This industry is here to stay. We are working to formalize it and encourage fair practices through our association.”

While he acknowledged the existence of lenders charging exorbitant rates, Akandwanaho argued that such practices are mostly confined to unlicensed lenders. He stressed that banning or over-regulating the entire sector due to a few bad actors would harm the economy and leave underserved populations without access to credit.

ECONOMIC AND REGULATORY CHALLENGES

The interest rate cap could have broader economic repercussions, Akandwanaho warned.

“At the macro level, the financial sector will be affected. Investors considering Uganda may be discouraged by overly restrictive regulations. Where banks decline to lend, we step in to fill the gap,” he said.

UMRA has historically denied licenses to lenders offering rates above 10–15 per cent, yet many lenders operate at slightly higher rates to account for risks and operational costs. Akandwanaho noted that while lowering rates is ideal, it must align with market realities.

“It’s better to lend at a lower rate and recover your money than to lend at a higher rate and fail to collect,” he added.

He also highlighted UMRA’s limitations, pointing out that the regulator has only 35 staff overseeing over 1,800 lenders, many of whom operate in remote areas. Akandwanaho criticized the merging of UMRA with the ministry of Finance, describing it as a move that increased bureaucracy and stifled efficiency.

THE NEED FOR TAILORED REGULATION

Akandwanaho stressed the importance of distinguishing between online lenders, financial institutions, and traditional moneylenders.

“Different types of lenders serve different market needs. It’s important to categorize and regulate them appropriately,” he said.

To address these challenges, He suggested closer collaboration between the government, regulators and stakeholders in the lending sector. He reiterated the association’s commitment to formalizing the industry, ensuring fair lending practices, and supporting UMRA’s efforts to bring informal lenders into the fold.

MONEYLENDING IN UGANDA

Accessing loans from banks in Uganda depends on a borrower’s transaction history, the collateral provided, and the loan amount sought, according to a source who is also a moneylender. The interest rates for such loans are not fixed but vary between 10 per cent and 20 per cent, depending on the perceived risk of the borrower’s business and the bank’s lending policies.

“The interest rate is negotiable,” the source said, highlighting that banks assess risk and collateral to determine the terms of their loans.

THE IMPACT OF MONEYLENDING PRACTICES

The challenges of moneylending extend beyond commercial banks, particularly for those involved in informal or unregulated lending. In August 2023, the speaker of parliament, Anita Annet Among, raised concerns over exploitative practices by some moneylenders targeting members of parliament (MPs).

Among threatened to terminate the memorandum of understanding (MoU) between parliament and certain moneylenders following complaints of harassment and exorbitant interest rates imposed on MPs. She emphasized the financial distress many legislators faced, which often resulted in court battles and public embarrassment.

HIGH-PROFILE LOAN DEFAULTS

Several MPs have fallen victim to severe financial consequences due to defaulted loans. Among them are:
• Robert Mwesigwa Rukaari, who was charged with failing to repay a loan of Shs 700 million.
• Davis Kamukama, who owed Shs 69.1 million.
• Dr. Patrick Mutono, who was remanded for defaulting on a Shs 300 million loan. These cases exemplify the financial strain some lawmakers face and highlight the high-risk nature of money lending agreements.

• Last month, former MP Isaac Musumba was sentenced to six months in prison after failing to repay Shs 160 million borrowed from one Charles Wakwale. Musumba had promised to repay the amount within four days of receipt but failed to fulfil his obligation.

A GROWING CONCERN

The financial difficulties of high-profile borrowers illustrate a broader issue in Uganda’s moneylending sector, where high interest rates and strict repayment terms can lead to legal consequences and reputational damage.

The rising trend of borrowers falling into financial distress has prompted calls for tighter regulation and greater transparency in the moneylending business to protect borrowers from exploitative practices.

As parliament reviews its agreements with moneylenders, the debate over fair lending practices remains a pressing issue in Uganda’s financial landscape.

A DELICATE BALANCING ACT

The debate over the interest rate cap reflects a larger tension between protecting borrowers and sustaining a vital industry. While the cap aims to curb exploitative practices, it risks sidelining the very lenders who serve Uganda’s financially excluded populations.

As policymakers and regulators navigate this complex issue, the focus must remain on creating a balanced framework that ensures borrower protection without stifling the industry’s ability to thrive. A collaborative approach, informed by data and stakeholder input, will be key to achieving this equilibrium.