Moneylenders have rejected a new law passed by Parliament that would have fixed interest rates on loans.
Congress passed the Tier 4 Microfinance Institutions and Lenders Bill, 2024 last Wednesday and it is currently awaiting the President's signature to make it enforceable.
However, members of the Uganda Moneylenders Association are opposed to the new law, which gives ministers in charge of sub-sectors the power to control interest rates.
They argued that the government cannot control what does not belong to it.
Ben Kabuya, chairman of the Uganda Moneylenders Association, told Barron’s over the phone that the law puts moneylenders at risk and puts their business at risk.
He said unlike deposit-taking microfinance institutions, which receive deposits from customers, moneylenders struggle to raise their own funds.
Kabuya said: “This is a liberal economy and everyone is looking for their own capital. We don't put a cap on interest rates even for banks that take deposits from customers, so why do we put a cap on banks with unknown capital? How do we put a cap on interest rates for these people? These people raise their own money and lend money.
He warned that the Minister of Finance, Planning and Economic Development did not have the power to decide what to do with his money.
Instead, the financial institutions recommended that the department cap interest rates on government funds advanced under livelihood programs and on deposit-taking institutions that use depositors' funds to lend to others.
Mr. Kabuya called on the government to review the decision and only implement laws that limit interest rates for deposit-taking financial institutions.
“If you are giving money, like Emyoga (poverty alleviation program), you can decide the interest rate, but if people are looking for the money themselves and lending it to others, it will be difficult. ” he said. .
Mr Kabuya said he would raise the issue with the minister as it directly affected their business.
During the debate, Bunyor East District MP Yusuru Mthembuli tabled a motion calling on the Minister of Finance to put a cap on the concessions he can impose.
He argued that the minister's cap on interest rates would protect borrowers from exorbitant interest rates charged by money lenders, often called loan sharks.
Attorney General Kiryowa Kiwanuka later amended the motion as follows: “The Minister shall, by notification in the Official Gazette, prescribe the maximum interest rate that may be charged from time to time by a moneylender. Provided that the first notice shall be issued by the Minister at the latest.” 60 days. ”
Several MPs argued that lenders had long acted with impunity, pushing many borrowers to commit suicide or lose property after failing to repay loans obtained at exorbitant interest rates. I supported it.
Lawmakers also ordered the Ministry of Finance to ensure implementation of the law by promulgating provisions not to exceed 60 days from the law's effective date.
The Parliamentary Committee on Finance, Planning and Economic Development, in its report to Parliament on the rationalization of the Uganda Microfinance Regulatory Authority (UMRA), said that Uganda operates a liberalized economy and that the private sector is meeting demand. He acknowledged making decisions based on the power of supply.
However, it was also observed that borrowing costs have long been perceived as high by all categories of financial institutions.
According to the commission's report, the interest rates charged by SACCOs, microfinance institutions and lenders make it extremely difficult for most borrowers to repay their loans, resulting in foreclosures and mortgage holders. Possession of the mortgaged property may occur if the owner fails to continue making mortgage payments.
“This puts pressure on businesses as most of their operating capital and income goes towards debt servicing and is depleted by debt servicing,” the report said.
Section 89 of the Tier 4 Microfinance Institutions and Money Lenders Act 2016 requires the Minister of Finance, in consultation with UMRA, to prescribe, by notification in the Official Gazette, the maximum interest rate to be charged by money lenders. .
However, the committee established from the Bank of Uganda that a typical sacco lends at least 3 per cent per month or 36 per cent per year, compared to the average lending rate of commercial banks of 18.3 per cent.
On average, lenders will lend at 10 percent per month, or 120 percent per year.
“Thus, even though Uganda operates a liberalized economy, the difference between commercial banks' lending rates (18.3 per cent) and money lenders' annual lending rates (120 per cent) is such that Parliament has This is why we passed Section 89 of the Financial Institutions and Lenders Act, which in 2016 called for the Minister to provide at least some level of control so that both borrowers and lenders are better off financially.'' says the report.
The committee also criticized the finance minister for not enforcing the interest cap eight years after the law was passed, and said it should come into effect immediately.
“The Committee noted that in the eight years since the Tier 4 Microfinance and Moneylenders Act came into force, section 89 of the Act, which requires the Minister to set the maximum interest rate that moneylenders may charge, has never been operationalized. ” the report said.
“The Committee recommends that the Minister comply with Section 89 of the Tier 4 Microfinance and Money Lenders Act, Cap 89. Section 61 operationalizes the interest rate cap provisions,” it added.
The Ministry of Finance, Planning and Economic Development agreed with the committee's report. They said moneylenders have long been ripping off borrowers with unfair terms that deprive them of property and livelihoods.
Amos Lugolovi, the deputy finance minister in charge of general duties, said the government would not stand by and watch moneylenders take action to defraud unsuspecting borrowers.
“Sometimes you can't leave things like that alone if the impact is negative for the population. You've seen how people are losing their fortunes to these moneylenders. The company has said that it will give them, but it has not specified the period.
“And some of these lenders actually took advantage of this. They used it for self-aggrandizement because they only had their own interests in mind, not the interests of the borrowers.” said Lugolovi.
“We have to protect everyone's interests. That's why regulating money lending is so important,” he added.
However, Lugolovi assured that there is no need to worry as businesses engaged in pure money lending will be assessed and allowed to continue under the interest rate cap. The interest rate ceiling will be reviewed by the minister from time to time.
He also said that strict focus will be placed on shady moneylenders who target innocent borrowers and defraud them of their money.
Lugolovi said the government took the decision after several complaints were registered against lenders for confiscating borrowers' properties without due process.
“We will be mindful of the market and cannot set market prices so low to the detriment of the genuine business parties involved. “We are going to work out a formula to achieve this, so the regulations will spell out how this will be done and all the details will be included there,” he said.
By the end of 2023, the government had accredited 1,802 educational institutions through UMRA. Under the agency's oversight, the number of regulated institutions has increased by more than 600% in five years, according to a parliamentary committee report.
Of these, 1402 were moneylenders, 249 were non-deposit-taking microfinance institutions, and 249 were SACCOs.
Section 89 of the Fourth Tier Microfinance Institutions and Money Lenders Act 2016 provides that if a borrower or money lender applies to the court for recovery of a loan or enforcement of a loan agreement or security created or obtained in respect of a loan, the court: You can resume trading if you are satisfied with the following: (a) The interest charged on the amount actually lent is excessive. (b) amounts charged for expenses, inquiries, fines, bonuses, premiums, renewals, or other fees are excessive; (c) the transaction is harsh and unconscionable; or (d) the transaction is such that a court of equity would grant relief. Subsection (2) of the Act provides that if the court is resuming a transaction, the court shall have regard to the agreement between the lender and the borrower and any statement or statement of account or agreement to terminate the previous transaction shall be taken into account by the court. Nevertheless, it stipulates that the following may be done: (a) relieve the borrower from paying any amount in excess of the amount that the court determines is fairly due with respect to principal, interest, and fees, as determined by the court having regard to the risks and all the circumstances; Be reasonable. (b) order the lender to repay any excess amount paid by the borrower; (c) suspend, in whole or in part, or amend or vary any security or agreement given in respect of any money lent; (d) may order the lender to compensate the borrower if the lender realizes the security; “The court shall consider that under subsections (1) and (2) at the instance of the borrower, guarantor or other responsible party, even though the time for repayment of the loan or installment of the loan has not yet been determined, “There is still a time limit to exercise that power,” the law states. Section 4 of the Act provides that if a court resumes trading with a moneylender under subsection (1), the court shall require the moneylender to produce a moneylender's license for the moneylender to operate; It provides that the details of the license can be approved. If the court deems it necessary, the court shall send a copy of the license with the approval to the authority.
