To cap or not to cap interest rates

The Parliament has passed a law mandating the Minister of Finance to prescribe a maximum interest rate that money lenders may charge their borrowers. Not surprisingly, the moneylenders’ association has “rejected” the new law, arguing that the government has no right to control what does not belong to it since the money they lend is their own and the government does not know where it comes from. They also propose that the government should cap interest rates by banks which use depositors’ money.

Unfortunately, the moneylenders cannot reject a law passed by Parliament; only the President has power that permits temporary rejection of a law passed by Parliament. The moneylenders may also wish to remember that the government can indeed control many things that do not belong to it. It can, for example, insist that all privately owned cars stop at a red light or that they are driven at a certain speed.

But having said all that, the government and its operatives need to be a little more systematic when doing certain things. The Ministry responsible for finance which is supposed to implement this new law is at least on paper also charged with the function of planning.

Any rational human being would know that you plan on the basis of knowledge and that knowledge is quite often obtained from answering some easy and difficult questions. If that is not done, then any plans will not achieve set targets or will only do so by accident, not by design. 

In this case, it should not be forgotten that there is already the microfinance and moneylenders Act that gives powers to the Minister of Finance to cap interest rates by moneylenders and for the last 8 years, the Minister has not used those powers. So, for the Government the first question to address should be why?

The other questions to ask and answer are: Where do moneylenders get the money they lend? It certainly does not fall like manna from heaven, and the government has a right to ascertain that such monies are not the proceeds of crime such as money laundering, drugs and human trafficking.

In that connection, the people in government may wish to ponder this. A person I know very well took a mobile money loan ostensibly from a mobile money company. When the person delayed paying, he received text messages from a bank, demanding payment. So was the loan from the mobile money company or from a bank? Could banks be the source of moneylenders’ manna from heaven after all? 

Next the Government should ask: why does a borrower go for a moneylender’s loan at 120 percent interest per annum when a bank has money to lend at 18 percent? And my final suggested questions: is there a connection between moneylenders, microfinance companies, and some commercial banks? If so, what is the connection? If there is a connection, does it serve any useful purpose to cap interest rates at moneylender level, if at all?

Makerere University has an entity called the Economic Policy Research Centre. Perhaps it should be commissioned to answer these and other pertinent questions before future attempts to enact laws that cannot be effectively implemented.

HGK Nyakoojo

Buziga, Kampala.