Govt, loan sharks clash on interest rate

But members of the Uganda Moneylenders’ Association have disagreed with the new law that gives powers to the minister responsible for the sub-sector to control the interest rates they charge. 

They said the government couldn’t control what does not belong to it. 

Moneylenders object

Mr Ben Kavuya, the chairperson of Uganda Money Lenders’ Association, told this publication by phone that the law endangers the moneylenders and puts their businesses at risk. 

He said the moneylenders struggle to raise their own capital unlike the deposit-taking microfinance institutions that receive deposits from customers. 

Mr Kavuya said: “This is liberal economy and everyone looks for his or her own capital. Even for the banks that take deposits from the customers you don’t cap the interest rates, but why would you cap it for those whose capital is unknown? These people raise their own capital and lend the money out. So, how do you cap the interest rates for such people?” 

He warned that the minister of Finance, Planning, and Economic Development has no powers to decree what they should do with their own money. 

The lenders instead advised the ministry to cap interests on government funds advanced under the livelihood programmes and on the deposit-taking institutions who use depositors' money to lend to others. 

Mr Kavuya asked the government to review the decision and only implement the law to cap the interests on the deposit taking financial institutions. 

“If you are the one providing the money, like the emyooga [poverty alleviation programmes], then you can determine the interest rate, but where people look for their own money and lend it to the others, it will be difficult,” he said.

Mr Kavuya said they would raise the issues with the minister because it directly affects their businesses.

MPs weigh in

During the debate, Mr Yusul Mutembuli, the Bunyole East County MP, moved a motion asking the Minister of Finance to cap the interests charged by the minister.

He argued that capping of the interest rates by the minister would protect borrowers from exorbitant interests charged by money lenders, who are often referred to as money sharks.

Mr Kiryowa Kiwanuka, the Attorney General, later amended the motion to read as “the Minister shall by notice in Gazette prescribe a maximum interest which a money lender shall charge from time to time provided the first notice shall be issued by the Minister not later than 60 days.”

Several MPs backed the amendment saying for long the lenders have acted with impunity, forcing many borrowers to suicide and lose property after failing to repay loans obtained with exorbitant interest rates. 

The MPs also tasked the Ministry of Finance to ensure the implementation of the Act by issuing regulations that should not go beyond 60 days from the date of enactment of the law.

Committee concurs

The Parliamentary Committee on Finance, Planning and Economic Development in its report to Parliament on the rationalisation of the Uganda Microfinance Regulatory Authority (UMRA) acknowledged that Uganda operates a liberalised economy, where the private sector makes decisions based on the forces of demand and supply.

But also observed that for long, the cost of borrowing has been recognised as high by all categories of financial institutions.

The committee report said the interest rate charged by SACCOs, microfinance institutions, and moneylenders makes it extremely hard for most borrowers to pay back loans resulting in foreclosures, or taking possession of mortgaged property when the mortgager fails to keep up their mortgage payments.

“This has stifled businesses since most of the business capital and income is dedicated to and drained by debt servicing,” the report said.

Committee faults govt

Section 89 of the Tier 4 Microfinance Institutions and Money Lenders Act, 2016, mandates the minister responsible for Finance to, in consultation with UMRA, by notice in the Gazette, prescribe a maximum interest rate that money lenders shall charge.

But the Committee established from Bank of Uganda that whereas the average lending rate of commercial banks is 18.3 percent, a typical Sacco lends at least 3 percent per month or 36 percent per annum.

Moneylenders on average, lend at 10 percent per month or 120 percent per annum.

“Now therefore, despite Uganda running a liberalised economy, the gap between the lending rate of commercial banks (18.3 percent) and moneylender annual lending rate (120 percent) is the reason Parliament passed Section 89 of the Tier 4 Microfinance Institutions and Money Lenders Act, 2016, for the minister to at least provide some level of control that leaves both the borrower and lender economically better off,” the report said.

The committee also faulted the Minister for Finance for not implementing the capping of the interest, eight years after the Act was passed, saying this must take effect with immediate effect.

“The Committee noted that for eight years since the Tier 4 Microfinance and Money Lenders Act came into force, Section 89 of the Act, which mandates the Minister to prescribe the maximum interest, which a money lender should charge, has never been operationalized,” the report said.

“The Committee recommends that the Minister in compliance with Section 89 of the Tier 4 Microfinance and Money Lenders Act, Cap. 61 operationalises the provision for capping of interest rates,” it added.

Government position

The Ministry of Finance, Planning and Economic Development concurred with the Committee report. They said for long the moneylenders have been ripping off borrowers by including unfair terms, which make the latter lose property and livelihoods. 

Mr Amos Lugolobi, the state minister of Finance in charge of General Duties, said the government would not sit by and watch when the moneylenders act with impunity to fleece unsuspecting borrowers. 

“Sometimes you cannot let such things go by where the impact affects the population negatively. You have seen how people have been losing their property to these moneylenders. They tell you we are giving you money at this interest rate, but they don’t disclose for what duration. 

“And some of these lenders have actually abused this. They were using it for self-aggrandizement because they were only looking at their interests, but not the interests of the borrower,” Mr Lugolobi said. 

“We have to protect the interests of all; that is why regulating the money lending business is very important,” he added. 

But Mr Lugolobi assured there is no cause for alarm for those businesses engaged in genuine moneylending as they would be assessed and allowed to continue, but under capped interest rates, which the minister will review from time to time.

He also said stringent focus will be on the dubious moneylenders that have been targeting innocent borrowers and ripping them off.

Mr Lugolobi said the government took the decision after several complaints were registered against moneylenders for confiscating property of borrowers without going through the due process.

“We shall be mindful of the market and we cannot set it so low to the detriment of the genuine business people involved. We shall be monitoring through the regulator instruments issued and we shall work out the formula of how we arrive at that, so the regulations will spell out how this will be done and all the specifics will be included therein,” he said.

By the end of 2023, the government, through UMRA, licensed 1,802 institutions. The parliamentary committee report said under the supervision of the Authority, the number of regulated institutions has grown by more than 600% over a five-year period.

Out of these, 1402 were moneylenders, 249 non-deposit taking microfinance institutions, and 249 SACCOs.

LAW ON INTEREST RATE

Section 89 of the Tier 4 Microfinance Institutions and Moneylender’s Act, 2016, states that where a borrower or a moneylender applies to court for the recovery of money lent or the enforcement of a moneylending agreement or security made or taken in respect of money lent, the court may reopen a transaction if it is satisfied that— (a) the interest charged in respect of the sum actually lent is excessive; (b) the amount charged for expenses, inquiries, fines, bonus, premium, renewals or any other charges, is excessive; (c) the transaction is harsh and unconscionable; or (d) the transaction is such that a court of equity would give relief. Sub-section (2) of the Act says where the court reopens a transaction, the court shall take into account the agreement between the money lender and the borrower and may, notwithstanding any statement or settlement of account or any agreement to close previous dealings— (a) relieve the borrower from payment of a sum in excess of the sum adjudged by the court to be fairly due in respect of the principal, interest and charges, as the court, having regard to the risk and all the circumstances, may adjudge to be reasonable; (b) order the money lender to repay the excess sum paid, by the borrower; (c) set aside, either wholly or in part, or revise or alter any security given or agreement made in respect of money lent; and (d) may order the moneylender to indemnify the borrower if the money lender has realized the security. “A court may, at the instance of the borrower or surety or other person liable, exercise the powers under subsections (1) and (2), notwithstanding that the time for repayment of the loan, or any instalment of the loan, is not yet due,” the law states. Sub-section 4 of the Act says where a court reopens the transaction of a money lender under Sub-section (1), the court may require the moneylender to produce the moneylender’s licence under which the moneylender operates and may endorse on the licence such particulars as the court considers necessary, and the court shall transmit to the Authority a copy of the licence bearing the endorsement.

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