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Interest rates ruling opens an old wound
There is need for regulatory measures to protect borrowers in Uganda’s financial system. PHOTO/FILE
What you need to know:
- This ruling exacerbates concerns over high lending rates and the vulnerability of borrowers in Uganda’s financial system, amplifying the ongoing debate surrounding the need for regulatory intervention.
On September 28, 2023, President Museveni raised concerns about the high interest rates charged by moneylenders in the country. The bewildered incumbent questioned where moneylenders derive the authority to charge 20 percent interest on loans per month, adding that this is “causing suicide to our young people.”
“While chairing the NRM caucus at Entebbe State House this afternoon (September 28), I directed the minister for Finance to put out a statutory instrument within two weeks on the interest paid to moneylenders in accordance with the inflation which the NRM will support,” President Museveni posted on his X (formerly Twitter) handle, adding: “These moneylenders who are causing suicide to our young people, who allows them to operate? Why should someone charge 20 percent interest on a loan per month? This must stop.”
Five months after the presidential directive, a High Court judge has condemned a businessman to more than twice the amount they borrowed from a commercial bank with interest at 28 percent.
Monitor contacted Mr Ramathan Ggoobi—the Finance Ministry Permanent Secretary/Secretary to Treasury (PSST)—on whether any steps have been taken to effect the presidential directive which had a two-week deadline. On February 21, PSST Ggoobi said he was on the “road” and would “revert” when he settles. He did not respond to subsequent reminders.
This publication also reached out to the Bank of Uganda. Dr Natamba Bazinzi, the BoU spokesperson, said he had forwarded our request “to the relevant team.” By press time, they were yet to respond.
Ssuuna’s case
Last year, Bank of Africa sued Mr Fred Ssuuna to recover more than Shs414m, an outstanding balance on a loan of Shs240m the bank gave him on May 15, 2017. Mr Ssuuna had borrowed Shs240m to finance the purchase of a property (Shs200m), with the balance of Shs40m to finance his working capital. The loan was to be paid back in two years.
Mr Ssuuna pledged his property in Block 858 Plots 8 and 9 at Misozi as security for the loan and Bank of Africa subsequently registered a mortgage on the same property.
When Mr Ssuuna defaulted on repayment of the loan, he introduced to the bank Anxious Atumanya as a potential buyer for the land he had put up as security for the loan at a cost of Shs280m. Ms Atumanya agreed to purchase the property on condition that in the event that she was unable to effect transfer of the title into her name or the title was cancelled, Bank of Africa would refund her money.
Things fall apart
Bank of Africa issued the undertaking to Ms Atumanya and subsequently a sale agreement was executed between the bank and Ms Atumanya. Court records show that Ms Atumanya failed to effect the transfer of the property into her name because of conflicts over the said property.
The Senior Land Management Officer from the Ministry of Lands, Housing, and Urban Development at the Masaka Ministry Zonal Office contacted the Bank of Africa. The commercial lender was informed that the title deed, which Mr Ssuuna had provided as collateral, was mistakenly issued by the Rakai District Land Board. This error occurred because the land in question actually belongs to the Sangobay Zone/Area.
Consequently, the title was forwarded to the commissioner of Land Registration for cancellation and the land reverted to Uganda Land Commission (ULC).
After the determination that the land should return to the ULC, Ms Atumanya, on February 28, 2022, wrote to Bank of Africa, requesting a reimbursement of her funds. She also returned the title deed and release documents to Bank of Africa.
Loan reinstated
In a May 6, 2022 letter, Bank of Africa informed Mr Ssuuna that his loan had been reinstated with a balance of Shs297,305,306. The lender added that the loan would continue to accrue interest of 28 percent per annum until it was fully settled.
In the subsequent suit before the High Court, Bank of Africa prayed for judgment against Mr Ssuuna for the payment of Shs414,713,371 at an interest rate of 28 percent from the date of filing the suit until payment in full.
The bank also asked court to award it general damages, interest on general damages at a rate of 28 percent per annum, and costs of the suit.
Bank of Africa was represented by Ms Alowa Patricia Majwere of M/s OSH Advocates. Court records show that although Mr Ssuuna was served by the bank, neither he nor his lawyers made their case before the court.
Court was informed that the interest rate per annum was 26 percent when Mr Ssuuna took the loan from Bank of Africa. At the time of filing the case, however, the interest rate was 28 percent per annum. The bank, through Mr Abubaker Kiberu, the senior manager operations, informed the court that interest rates keep changing.
Lender makes its case
Court tasked Bank of Africa to make its case as to why damages should be awarded to the bank with interest at a rate of 28 percent per annum from the date of filing until payment in full.
Lawyers for the bank informed the court that the bank incurred costs in trying to recover the loan and that the events that led to the filing of the suit went as far back as 2021. The bank consequently asked court to award it damages of Shs20m and costs of the suit.
In the February 19 ruling, Judge Harriet Grace Magala of the Commercial Division of the High Court ruled the case in favour of the bank. She ordered that Mr Ssuuna is liable to pay Bank of Africa Shs414,713,371. Judge Magala further awarded the bank an interest rate of 28 percent per annum on the sum of Shs414,713,371 from the date of filing the suit until when Mr Ssuuna pays in full.
Court, however, slashed the general damages of Shs20m that the bank had asked for by half. Bank of Africa was also awarded the costs of the suit.
Capping lending rates
President Museveni’s directive, if implemented, would push Uganda to cap lending interest rates which are currently market-driven. In 2016, the Kenyan Parliament approved a Bill to amend the Banking Act, introducing limitations on bank interest rates for both lending and deposits.
This measure aimed to control interest rate spreads and led to the enactment of the Banking (Amendment) Act, 2016 by Parliament. It was subsequently signed into law taking effect on September 14, 2016. The amendment imposed a cap on lending rates, restricting them to 4.0 percent above the Central Bank Rate (CBR).
A study found that although there was an immediate increase in demand for credit after the capping of lending rates, credit to the private sector continued to decrease. Additionally, the study revealed that banks started to rely less on interest income, but some increased fees on loans to make up for the loss. Small banks have seen a significant decline in profitability, which could threaten their sustainability.
Kenya’s move, however, delivered mixed results. For example, capping interest rates caused banks to favour lending to government and large corporations over small, and medium (SMEs). Kenyan banks, according to several studies, became more cautious about lending to smaller borrowers seen as riskier yet the restrictions imposed by the law prevent banks from adjusting interest rates to account for the risk.
High lending rates
The issue of high lending rates for both businesses and households has been persistent in Uganda. High lending rates make it hard for businesses to get loans for productive investments, which are crucial for achieving strong economic growth.
Commercial bank lending rates have averaged at 20 percent or higher, while deposit interest rates can be as low as five percent.
The big difference, known as the ‘interest rate spread,’ causes several problems. It raises borrowing costs for businesses, hurting their profitability. It also affects individuals who borrow money for day-to-day expenses, trying to bridge the gap between what they spend and what they earn, and slows down economic growth overall.
Experts argue that reducing this gap between lending and deposit rates could help address these issues and promote a healthier economic environment.
A January 2020 study by the International Growth Centre (IGC), which compared interest rates in Uganda to other countries in the region, found that “interest spreads in Uganda are relatively high” and that the same have been consistently so from 2007 to 2018. The findings were attributed to high real lending rates.
“Ugandan banks are very highly capitalised, which in turn requires a high level of profitability to generate the return on capital that the shareholders require,” the study concluded.
The IGC study also found that official interest rates in Uganda, in the form of real government bond rates, were the highest among the countries in the region such as Kenya, Botswana, Rwanda and South Africa. This, the study concluded, influences the overall level of bank interest rates and also gives banks an incentive to hold government debt rather than make risky loans.
