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Bank of Uganda does not regulate moneylenders, says governor
Money exchanging hands. Moneylenders are always very easy to access but they come with many challenges which can distress individuals and firms further yet Bank of Uganda says it does not regulate the business. FILE PHOTO
What you need to know:
Fact. Money lending in Uganda is not entirely illegal.
Kampala.
On July 26, a group comprised of businesspeople privately gathered at the Serene Suites in Mutundwe, a Kampala suburb, to discuss the state of the economy and the trending bailout crisis.
Some of those businesspeople and their companies are on a list of companies seeking a bailout.
War with moneylenders
During the meeting, they revealed that on top of failing to meet obligations with commercial banks, some distressed companies were now tussling it out with moneylenders.
“Many of the distressed companies run to moneylenders to get quick money to service the loans at the banks, however, the failure of the businesses to recoup the money invested has further plunged them deeper into debt,” one of them narrates on condition of anonymity.
The individuals went on to reveal how one of the personalities on the list had borrowed in excess of Shs5 billion from a moneylender at an interest of 10 per cent per month.
The businessman has already defaulted on the payments and the money is closing on his property. Every month the businessman is required to pay at least Shs500 million in interest per month, which he has defaulted on.
Performance of the economy
“The economy is bad and we have been forced to run to money shacks, most of who are today holding people’s property. Some of the loan sharks are against the bailout because they stand to lose out on the security staked for the loans given,” he adds.
This is just one of those stories about moneylenders operating in Uganda. As the businessmen explain, the moneylender is easy to access. Some of the distressed businesses went to moneylenders because they had utilised loan facilities in the commercial banks, institution that could not extend more money to them.
As a result, moneylenders are also clamouring for the same property that banks have an interest in.
Regulation
Moneylending business in Uganda is largely unregulated making it operate a shadow banking system. At a recent town hall meeting in Mbarara to mark 50 years of existence, Dr Louis Kasekende, the Bank of Uganda (BoU) deputy governor, cautioned Ugandans against borrowing money from moneylenders.
This was in response to a question from a businessman in the audience that requested BoU to reign in on moneylenders.
“If I were you, I would be very careful with an unregulated financial system. The Central Bank does not regulate money lenders,” Mr Kasekende warned.
Not taxed?
On top of being unregulated, moneylending business also doesn’t incur taxation charges such as withholding tax and income tax like the formal banking system. According to the BoU mandate, their regulation falls under the formal banking system. That is commercial banks, credit institutions, microfinance and deposit-taking institutions as provided for in the Financial Institutions Act 2016, the Microfinance Deposit Taking Institutions Act 2003 and the Bank of Uganda Act 1993.
Has the law been ignored?
Moneylending in Uganda is not entirely illegal as there are provisions under the Money Lending Act, 1952, that allow them to operate. However, according to Financial Sector Deepening Project Uganda (FSDU) study conducted by Ernest Kaffu and Paul Rippey, even those provisions in the Act are ignored.
“It is noteworthy that the law is almost totally ignored: Moneylenders seldom apply for a licence, consistently exceed the interest rate ceiling, and rarely keep anything resembling proper records. Finally, most loans are guaranteed not through a contract but through a sales agreement for the goods offered in guarantee,” the study reveals.
In February 2015, the Law Reform Commission recommended that Money Lending Act, 1952 be amended to fit the socio-economic trends in Uganda. One of those proposals is to have the minister of Finance pass regulations on what interest should be charged by the lender.
The advantage
Due to the regulatory environment of the financial industry, banks and lending institutions function under strict guidelines that often cause excessive delays.
Therefore, because hard money loans are typically sought when timing is a critical issue, money lenders come in to give fast relief through quick private fixes in form of loans.
This is “hard money loan” which is a short-term solution usually secured using real estate or physical possessions.
The underwriting decisions on private lending are based on the hard assets of the borrower.
Private lending offers significant advantages over financing with a bank, including speed and flexibility - little paperwork.
