KAMPALA —Ugandan borrowers are in for a tough Christmas season as money-lenders tighten their purse strings in response to the Government of Uganda capping lending interest rates.
Legal Notice No. 21 of 2024 under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap 61 issued by Finance, Planning and Economic Development Minister Matia Kasaija, has capped the minimum interest money lenders can charge at 2.8% per month or 33.6%.
Whereas the capping of interest rates is designed to help borrowers by shielding them from exorbitant interest rates, various economists have warned that the unintended consequences might have an adverse economic impact.
“The level of interest should be considered carefully, especially taking into mind the appetite of the general business community to borrow and also lend. For years most businesses in need of short-term financing have been generally borrowing and paying back at the prevailing market rates. Lowering them by law to the enacted levels may seem to make them attractive to borrowers but not to lenders,” said one economist who requested anonymity.
“This Christmas period and the months of December and January are traditionally months when borrowers lean more on money-lenders because of the holiday season and the need for school fees. Now, with the rates being set so low, most money lenders are going to hold back – and that will have an effect on overall economic activity,” he added.
The Association of Money Lenders in Uganda says the situation could have been avoided if the government had been open to discussing with the key players in the sector.
“We bring together legitimate, ethical money lenders who are interested in safeguarding Uganda’s financial systems through ethical credit services to borrowers. We know, for instance, that the increased economic activity in December requires extra financing – and it should be easily and readily available. This time things will be different,” said Mr. Jonan Akandwanaho, Chair of the Association of Money Lenders.
Economist Fred Muhumuza, though, said it would be unlikely that borrowers would suffer.
“Business will go on as usual since the means to enforce are not there and real money lenders are not even formally registered as doing that business. The market will simply go underground, which might raise the charges. Many already disguise lending as sale agreements, or simply say: ‘I have given you money’ but record a higher figure to accommodate interest,” he said.
Business Journalist Paul Busharizi said it was important to factor in the long-term as well as the short-term effects, which he said could be “speculative”.
“The long-term impact of the capping of the money lending interest rates will include a shortage of funds, causing the very thing the law is trying to prevent – high lending rates. To the extent that the Christmas festivities are funded by money lenders, we can anticipate a fall in consumption – fewer people borrowing to enjoy on one hand, and an increase in prices on the other hand as money lenders go underground and charge a premium for the service,” Busharizi said.
Mr. Jonan Akandwanaho said the Association of Money Lenders in Uganda (AMLU) plays a crucial role in lubricating the gears of Uganda’s economy, especially for the lower segments of the formal sector and for the informal sector who cannot access traditional banking services.
Our members serve as a vital lifeline for small businesses, market vendors, and entrepreneurs who rely on short-term loans to purchase inventory, bridge cash flow gaps, or seize time-sensitive business opportunities such as Christmas season activities.
“We are committed to fostering a responsible and ethical money lending environment in Uganda. Our goal is to work closely with regulators and stakeholders to ensure that our services continue to support economic growth while protecting the interests of borrowers,” Akandwanaho added.
