Our money lenders are up in arms. They are not pleased that the government should see fit to impose an arbitrary monthly 2.8% maximum interest rate, making their business practically a lost cause. The cap is a far cry from the 20%-plus they had been used to.
At issue, was the increasing numbers of rogue lenders, mostly operating on digital platforms, resorting to punitive methods in the pursuit of excessive profits. The harassment of customers had reached epic proportions and it was no wonder the law was passed with such haste and glee.
The government insists the interest rate cap is justified, because of the abuse of an otherwise useful and essential service and turning it into something that simply preys on desperate people. Nor can the money lenders claim absolute shock. The writing was clearly on the wall if had paid heed.
In March of this year, Edith Namugga Tusuubira, the Executive Director of the Uganda Microfinance Regulatory Authority (UMRA) said: “As the regulators, we are mandated to make sure that there is sanity and order in the Tier 4 microfinance sector in the country.”
She said, “To this end, we have continued to receive complaints from the public about some money lenders, and we thought it wise to make amendments to the current law. We have sat down with these money lenders and explained why there must be some sanity in the market.”
Even then, UMRA was not proposing an interest cap, but a so-called ‘loan shop’. A published list of all the licensed money lenders and their rates so that potential customers can make an informed decision.
What puzzles, me is why the Association of Money Lenders in Uganda (AMLU) took so long in making efforts to rein in the unscrupulous operators. It wasn’t as if they were hiding.
Reputedly, there are 60,000 informal money lenders, and AMLU which was launched in 2019, has helped transition nearly 2000 of them to formal operations. Peer pressure can be a powerful force for good and AMLU could have used its legitimacy to periodically campaign on the need to adhere to the UMRA consumer protection guidelines.
To be seen to be doing something in terms of self-regulation would have won AMLU time to take effective action as well as inspire some public confidence. Instead, it took another angry intervention by President Yoweri Museveni to wake them up.
The fact that apart from ordinary folk, several VIPs have been caught up in embarrassing situations over loan delinquency, only added to the simmering public resentment.
That air of ‘untouchable’ that influenced the way many money lenders operated quashed any chances of a compromise. The tide was against them, and there were too many stories of people who had suffered emotional turmoil as a result of their operations.
In October, the newly elected AMLU executive committee chaired by Jonan Akandwanaho issued a statement which in part said: ‘President Yoweri Kaguta Museveni has recently raised concerns about exploitative money lenders, which we agree with. We appreciate the President’s concern for the financial well-being of Ugandan citizens, and we are ready to provide solutions.”
The statement continued: ‘To address these concerns AMLU proposes strengthening its working relationship with UMRA. This collaboration will identify non-compliant actors and reinforce the legitimacy of licensed money lenders.
Unfortunately for the money lenders, it was already too late. Three weeks later Parliament passed an amendment to the Tier 4 Microfinance Institutions and Money Lenders Bill 2024 imposing a 2.8% monthly and 33.6% annual cap on interest rates charged.
Most aggrieved are those moneylenders who maintained some level of decency. Over the years, they had steadily built a customer base and a mutual trust between themselves and those who regularly sought them out.
Speaking during a recent news conference, Akandwanaho said, “It would have been possible for us to be consulted because we are stakeholders, who play a big role with a turnover of about UGX1.4 trillion in the lending industry.”
He said, “The cap ignores the realities of our business operational costs, recovery expenses, and cost of capital. We are unfairly targeted, yet banks charge rates as high as 7%.”
As far as AMLU is concerned, the issue is not done and dusted. The Association is currently exploring legal means to lift the cap. But when you are on the back foot, this is probably not the best avenue to take when cleaning the house first would be far better.
Meanwhile, demand has not gone away. Few of us are flushed with cash 24/7, and financial emergencies crop up all the time. Business owners who operate on daily or weekly working capital sourced from money lenders are particularly worried.
As things now stand, no self-respecting money lender in Kampala is going to give it to you at 2.8%. However, if you agree to the pre-cap terms and keep your mouth shut then you may have a deal.
Under the new law, however, a money lender faces a UGX1,000,000 fine and cancellation of their license if he or she charges interest higher than the prescribed maximum.
At the heart of the money lenders’ grievance against an interest rate cap, is that they, unlike banks, use personal money or that of their investors, as the basis for their lending operations. Banks have access to customers’ deposits.
Furthermore, banks have provisions for bad loans; money lenders do not. Although their speed and flexibility is welcomed by borrowers, the risks involved for moneylenders are much higher, because there is always the likelihood that they won’t see the entire loan amount repaid.
As is always the case when we are talking about money, emotions have played a significant role in this issue. Some critics say instead of a wholesale condemnation, a more targeted approach should have been used, beginning with rooting out the culprits.
- Essentially, all that new law has done is encourage moneylenders to carry out their business underground, but undoubtedly to a more limited clientele. At the same time, Uganda is supposed to be a free-market economy, anchored on the laws of supply and demand. Capping interest rates tends to send available credit into hiding.
Again, in a free market economy, people have choices. In spite of being aware of all the known risks and you choose to go to a money lender, you must also face the consequences.
For AMLU itself, it has been a case of missed opportunities. Last year, in the corridors of the finance ministry, talk of an interest cap was already making the rounds. Yet AMLU did nothing in mitigation. This is certainly a bad reflection of the Association’s lack of communication and public relations practitioners when it was sorely needed.
It is also a reminder that ‘A happy customer tells a friend; an unhappy customer tells the world’.
