Uganda’s legitimate money lenders have raised concerns over a recent government policy that caps lending rates, warning that the move could stifle economic activity during the critical Christmas season.
Represented by the Money Lenders Association of Uganda (MLAU), the lenders have urged the government to reopen dialogue on the policy and its implications for the financial sector.
The policy, issued under Legal Notice No. 21 of 2024 as part of the Tier 4 Microfinance Institutions and Money Lenders Act, limits interest rates to a minimum of 2.8% per month or 33.6% annually.
While intended to protect borrowers, the capped rates have sparked criticism from economists and the business community. They argue that the restriction discourages money lenders from offering loans based on prevailing free-market rates, potentially driving lending activities underground and increasing risks for borrowers.
Jonan Kandwanaho, Chair of MLAU, expressed concern about the timing of the policy and its broader economic impact. He noted that the festive season typically sees increased borrowing for consumer spending and school fees. However, he warned that the new policy could result in reduced financial activity and a decline in tax revenue.
The MLAU plays a critical role in Uganda’s economy, particularly in areas underserved by traditional banks. Its members provide vital credit to small businesses, farmers, and market vendors, enabling them to stock inventory, purchase farming supplies, and maintain operations.
By September 2023, licensed money lenders under the Uganda Microfinance Regulatory Authority (UMRA) had extended loans worth UGX 1.2 trillion to 2.5 million customers, highlighting their substantial contribution to financial inclusion and economic growth.
Despite their concerns, the MLAU reaffirmed its commitment to ethical lending and collaboration with regulators to enhance industry standards. Kandwanaho emphasized the importance of constructive dialogue to address the concerns of all stakeholders while safeguarding Uganda’s financial future.
As the country navigates the policy’s implications, MLAU members remain determined to support the informal sector, which forms the backbone of the economy. They hope that a balanced approach can ensure the continued provision of accessible credit while maintaining ethical practices within the industry.