The impact of online loan apps on Uganda’s financial sector

by Business Times
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Uganda has seen a notable increase in the number of online lending platforms, also known as quick loan apps.

The introduction of these online lending Apps has to a big extent changed the financial landscape and how citizens access credit in the country. By simply using a smartphone and having internet access, one is now able to secure loans in a matter of minutes. This is a complete difference from the traditionally lengthy processes typically associated with conventional banking institutions.

This level of convenience has become essential for many Ugandans, especially small business owners and low-income earners who previously faced significant barriers in accessing formal credit services.

However, this convenience carries a considerable price. A large number of these online lending applications function outside the regulatory oversight of the Bank of Uganda.

Unlike conventional banks and microfinance institutions, these digital platforms are not subject to strict financial regulations intended to safeguard consumers. This lack of regulation has fostered an environment where predatory lending practices have thrived.

The defining feature of these platforms is their ability to provide immediate, short-term loans, typically requiring minimal documentation. While this can be highly beneficial in emergency situations, the outcome is extremely worrying.

Many Ugandans have come forward with nasty experiences, saying that online lending platforms disbursing funds fall short of the agreed-upon amounts. For example, a borrower might request 100,000 shillings but only receive 50,000, yet remain obligated to repay the full 100,000, plus exorbitant interest rates exceeding 100% in most of the cases.

Victims say repayment is typically demanded within a brief period, accompanied by aggressive collection tactics, including endless phone calls and public shaming via messaging apps, should payment not be made promptly.

It has been reported that borrowers receive threatening calls shortly after borrowing, with lenders warning of reputational damage and public embarrassment if repayment is not made immediately.

Lenders send defamatory messages to borrowers’ contact lists, including personal photos, upon missing repayment deadlines.

An ongoing social media campaign under the hashtag #IllegalOnlineLoanApps on X (formerly known as Twitter) has brought to light noteworthy concerns.

One message sent to a borrower reads, “check page 5 in the local newspapers tomorrow. Failure to pay your loan will result in all your information being published, and a bounty will be placed on your head.”

Other victims share their bad experiences with unscrupulous online money lending platforms.

“I am a victim too of this #onlineloansscam. I got my first money from mara app. I had applied for 50k, they sent me 34k for a period of 8 days and requested me to pay back 62k. I had nothing to do since I was doing badly. I got the loan and paid them back their money the 62k but the pressure and threats they gave me was too much,” one anonymous victim shared.

Another victim wrote, “The apps have caused us so much stress and anxiety and surely must be stopped. I got into the bad habit of using these apps and it becomes like an addiction, getting from A to clear B and from B to clear C and eventually external borrowing to clear the apps but the cycle never ends. Then some of the apps brought down on google play still operate and send clients the app for installation. I think our best bet would lie with mtn and airtel stopping these transactions completely.”

Online lending platforms have wreaked havoc on Ugandans’ financial lives, perpetuating exploitative practices despite the Uganda Microfinance Regulatory Authority’s (UMRA) endeavors to establish and enforce stringent regulations for money lenders, ensuring their compliance with established standards and safeguards.

According to UMRA Act “a digital credit provider must not make unauthorized or unsolicited calls, social media channels, or messages to customers’ contact lists who were not parties to the loan transaction.”

Additionally, UMRA only grants licenses to lending institutions that have a physical presence, refusing to authorize loan providers that operate solely online or without a tangible location.

Recently, Bank of Uganda warned payment service providers against dealing with unlicensed digital lenders.

In a May 29, 2024 circular to all payment service providers and payment system operators, the Central Bank said that unlicensed digital lenders have been reported to engage in predatory lending behaviour, unethical collection practices and harassment of borrowers.

“You are therefore reminded of the provisions of Section 54(h) of the National Payment Systems Act, 2020 which states that credit products can only be offered in partnership with licensed lenders, with the approval of the central bank. You are further reminded that Section 6 of the Anti-Money Laundering Act, 2013 (as amended) and Regulation 18 of the Anti-Money Laundering Regulations, 2015 (as amended) require an accountable person to undertake customer due diligence measures before establishing any business relationship and thereafter perform due diligence on an ongoing basis,” the Central Bank’s circular reads in part.

It adds: “Pursuant to Regulation 53(2)(d) and (j) of the Anti-Money Laundering Regulations, 2015 (as amended), you are hereby directed to conduct due diligence on all digital lenders before engaging in business relationships, to ensure that they hold valid licences and to obtain confirmations from UMRA.”

The Central Bank said it will institute the necessary administrative measures against any institution that fails to abide by the above directive.

The rise of online lending apps underscores a critical gap in Uganda’s financial regulatory framework.

While the Bank of Uganda has made strides in regulating traditional financial institutions, the rapid proliferation of digital lending platforms has outpaced current regulatory measures. This calls for an urgent review and extension of regulatory policies.

Implementing measures such as interest rate caps, mandatory transparency in loan terms, and stringent licensing requirements could mitigate the risks associated with these platforms.

By setting limits on how much lenders can charge (interest rate caps), borrowers are protected from unfair loan costs.

Additionally, requiring lenders to clearly explain all loan details (mandatory transparency) empowers borrowers to make informed decisions.

Stringent licensing requirements can weed out unscrupulous lenders and ensure only reputable operators remain in the market.

These measures can help prevent debt traps, reduce financial distress, and promote responsible lending practices.

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