Money lenders and some private sector players have warned of dire consequences to the economy over the new interest cap of 2.8 percent per month for money lenders instituted by the Uganda Microfinance Regulatory Authority (UMRA) and approved by the Ministry of Finance.
Jonan Kandwanaho, the Chair of the Association of Money Lenders in Uganda (AMLU) said his team is considering court action, while other options are still being discussed since there were no prior consultations made to stakeholders.
UMRA, Ministry of Finance and money lenders have been in a cat and mouse relationship over the last few years over unregulated interest rates which were largely driven by the free market dynamics.
Edith Tusuubira told the CEO Magazine that the new move is meant to, “implement fair practices in the market.”
On November 15th, Finance Minister Matia Kasaija in a published legal notice, announced that the maximum interest rate a money lender is required to charge on the principle or the actual sum of the money advanced as a loan to a borrower, is 2.8 percent or 33.6 percent per annum.
A section of the public have welcomed the move citing financial exploitation from money lenders, while others view it as a case of winners and losers.
Stephen Obeli, an e-commerce player, says the Ministry of Finance took a step in the direction, calling for similar measures to other players in the market.
“My hope now is that the same rules can quickly be extended to banks, and any other institution that is involved in lending; loans given through mobile money are great but the rates are parasitic.
Akandwanaho, the country’s money lenders’ leader castigated the move noting that some lenders have halted business because 2.8 percent is not tenable considering their sources of capital remain expensive.
He also noted that the new interest cap is likely to push away investors, or even lead to financial exclusion for small informal businesses, some of which are not served by banks. .
“We’re definitely being targeted because telecom companies are lending at 9 percent per month and have the liberty to automatically deduct from simcards; banks which use public money are lending at a rate of 20 to 30 percent,” Akandwanaho remarked.
John Walugembe, Uganda’s Small and Medium Enterprise Chie said, government is taking a contradictory stance.
“When we had issues with high interest rates by commercial banks, the government said you can’t cap interest rates in market- based economy which is correct because Kenya’s attempts to cap interest rates did not work,” Walugembe said.
“You must appreciate the drivers for high interest rates; you have to look at the cost of capital, transaction fees, and operational costs. Government can provide low- cost capital inorder to bring down the interest rates, or work with money lenders to reduce operational costs, or cap transaction fees,” he added.
Walugembe warns of consequences where some money lenders, who have no interest in joining the black market, are likely to give up the business which will hurt many businesses.
He says, it is also likely that a black market will emerge because there are people willing to borrow or lend at those rates, and it will be an uphill task for the government to regulate these markets.