Money lenders sound alarm over Uganda government’s lending rate policy

KAMPALA, UGANDA — Money lenders in Uganda are sounding the alarm over the government’s recent decision to cap lending rates, warning that the policy could have far-reaching consequences for the economy.

The Money Lenders Association of Uganda (MLAU) has expressed concerns that the capped rates will discourage legitimate money lenders from conducting their regular business activities, ultimately affecting the economy.

According to Mr. Jonan Kandwanaho, Chair of the MLAU, the policy will lead to a surge in unregulated lending activities, creating higher risks for borrowers. “During this Christmas season and into the new year when school fees are due, we normally see a surge in borrowing activities,” he said. “This time around, especially as a direct result of this new policy capping rates being introduced at such short notice, the economy is going to tell a different story.”

The MLAU has called on the government to reconsider the policy, citing concerns that it will lead to a decrease in lending activities, ultimately affecting the economy. The association has also warned that the policy could lead to a credit crunch, making it difficult for small businesses and entrepreneurs to access credit.

The Uganda Microfinance Regulatory Authority (UMRA) reports that by September 2023, 1,302 licensed money lenders had extended loans to about 2.5 million customers, with an outstanding portfolio of UGX 1.2 trillion. This substantial figure underscores the sector’s significant contribution to economic activity.

Money lenders often provide the necessary capital for farmers to buy seeds and fertilizers, for shopkeepers to stock their shelves, and for transport operators to maintain their vehicles – all essential activities that keep the wheels of commerce turning.

The MLAU has urged the government to engage in constructive dialogue with the association to address concerns and find a solution that works for all stakeholders. “We are committed to improving the overall integrity of our industry, working with all stakeholders,” Mr. Kandwanaho said.

The government has defended the policy, saying it is aimed at protecting consumers from high interest rates. However, the MLAU argues that the policy will have unintended consequences, including a surge in unregulated lending activities and a credit crunch.