By CPA John Sebuuma
The Uganda Minister of Finance, Planning and Economic Development has issued a Legal Notice No. 21 of 2024 under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap. 61 – Prescription of Maximum Interest Rate. The notice caps the maximum interest moneylenders can charge at 2.8% per month or 33.6% per annum. The prescribed maximum interest is set on interest money lenders charge on the principal or actual sum of money advanced to a borrower.
Under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap. 61 (“the Act”), the Minister for Finance has the power to control interest rates and may, through consultation with the Uganda Microfinance Regulatory Authority, prescribe a maximum interest rate that a money lender shall charge.
Whereas the Act also applies to Tier 4 Microfinance Institutions like SACCOs, non-deposit-taking microfinance institutions, self-help groups and community-based microfinance institutions, the interest capping prescribed under the legal notice only applies to money lenders.
A money lender is defined under the Act as a company that has been issued a money lending licence and for one to be licensed, they must apply and be issued a licence to carry on a money lending business.
Any person who carries on business as a money lender without a money lending licence commits an offence and is liable, on conviction, to a fine of UGX 4,000,000 and on a second or subsequent conviction, is liable to a fine of UGX 8,000,000. In addition to the penalty, the court may disqualify that person from engaging in a money-lending business.
Where the money lender charges interest higher than the prescribed maximum interest rate, he/she commits an offence and is liable, on conviction, to a fine not exceeding UGX 1,000,000and the court may, in addition to the fine order that the money lender licence be cancelled and that the money lender pays the borrower any money in excess as a result of the interest rate charged.
Government intervention through the regulation of interest rates charged by money lenders aims to address consumer protection concerns and inflationary tendencies, as many licensed and unlicensed lenders impose exorbitant interest rates ranging from 10% to 30% per month. These high rates are often driven by factors such as a lack of financial literacy, desperate borrowing, and insufficient transparency. As a result, individuals have lost their property to money lenders and other lenders due to defaults caused by these steep interest rates, as well as illegal practices like issuing purchase agreements.
Interest rates have also been regulated in some African countries like Kenya and South Africa to set ceilings for interest rates. In Kenya, interest rate capping was introduced in the banking sector in 2016 under section 33B of the Banking (Amendment) Act capping it to 4% above the base lending interest rates by the Central Bank of Kenya (CBK) which caused adverse economic impact and led to repealing the interest rate capping in 2019.
While interest rate ceilings are designed with positive intentions for the economy, they can have unintended negative impacts, particularly for low-income earners and financial inclusion. In response, lenders may resort to business diversification strategies away from financial services, issuing loan agreements with higher amounts than the actual cash disbursements, or illegal practices like creating collateral purchase agreements for loans.
As the government is controlling the interest rates charged by money lenders and other lenders, it should consider the following:
Balance Consumer Protection and Financial Access: While interest rate caps aim to protect consumers from exorbitant rates, they should be set at a level that allows financial institutions to remain profitable and continue offering credit, especially to small and medium-sized enterprises (SMEs) and low-income borrowers. Overly restrictive caps may reduce credit availability and impact financial inclusion adversely.
Consider Alternatives to Interest Rate Capping: Instead of capping interest rates, the government could focus on promoting financial literacy and encouraging competition among lenders. This could include improving transparency in loan terms and fees, thereby empowering consumers to make informed financial decisions. Additionally, supporting alternative lending models, such as fintech solutions, could increase access to affordable credit.
Monitor and Adapt Policies: Regularly assess the impact of interest rate caps on credit access, financial inclusion, and the overall economy. This data-driven approach will enable the government to adjust policies as needed, ensuring they are effective without stifling credit growth.
Encourage Responsible Lending Practices: The government should create incentives for lenders to adopt responsible lending practices, such as better assessing borrowers’ creditworthiness and avoiding practices like hidden fees or collateral-based lending. It is important to ensure that lending institutions are held accountable for unethical behaviour, which can lead to financial distress for borrowers.
Promote Long-Term Solutions: Focus on long-term solutions to improve access to credit, such as enhancing credit reporting systems, encouraging the development of alternative credit scoring models, and promoting greater financial inclusion. This will help mitigate the need for excessive regulation while still protecting vulnerable borrowers.
The author is a Member of the Taxation & Economic Policy Panel of the Institute of Certified Public Accountants of Uganda.
