Banks to stop penalising borrowers for early loan repayments this week

This week, starting on December 1st 2023, millions of Ugandan borrowers from Supervised Financial Institutions (SFIs) have cause to smile. The SFIs, under their Uganda Bankers Association (UBA), will cease the unpopular but long-practised, habit of penalising borrowers who choose to repay their loans early.

According to a source familiar with the decision “It applies to all outstanding loans regardless of amount, currency or tenor”.

This is after the SFIs came under pressure from the Central Bank’s Deputy Governor Dr. Michael Atingi-Ego and Dr. Tumubweinee Twinemanzi, the Executive Director, Bank Supervision.

Following Bank of Uganda pressure that included a Deputy Governor’s meeting with industry CEOs on 23rd August 2023 and a follow-up letter by the Executive Director, Bank Supervision on 12th September 2023, the Banks under their Uganda Bankers Association  (UBA) in a Friday 13th October 2023 meeting resolved to drop/abolish the practice of early loan repayment fees/charges on outstanding loans.

The association then, in a 16th October 2023 letter communicated to the Central Bank of this decision. On 18th October 2023, the UBA, issued a public statement, confirming the same,  saying the unpopular practice would be halted effective 1st December 2023.

The practice has been a subject of public outcry and criticism from consumer organisations as well as the central bank, arguing that this increases the cost of borrowing.

“As long as you had an existing facility that you would like to pay off, early repayment fees will not be applicable. Also, going forward on all new loans, early repayment won’t be applicable,” Wilbrod Owor the Executive director of the Uganda Bankers Association (UBA) told CEO East Africa Magazine in an online interview.

“Early repayment fees have previously largely been applied on mortgages and long-term loans,” he added.

Uganda Bankers’ Association (UBA) is an umbrella organisation for financial institutions licensed and supervised by the Bank of Uganda. Established in 1981, UBA is currently made up of 26 commercial banks, 2 development Banks and 8 Tier 2 & Tier 3 Financial Institutions.

The Central Bank has recently been increasingly vocal about the rising cost of borrowing/lending it says, compounds the debt burden and subsequently the credit risk, which in turn deters the banks from lending.