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    Moneylenders Reject Government Interest Rate Cap - "It Unfair and Unsustainable"

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    Moneylenders Reject Government Interest Rate Cap -
    • December 5, 2024 • 6 days ago
    in summary
    Moneylenders in Uganda, under the Association of Money Lenders in Uganda (AMLU), have rejected a government-imposed cap of 2.8 on monthly interest rates, calling it unsustainable and unfair compared to higher rates charged by banks. They argue the regulation, introduced without consultation, threatens their role in financial inclusion and economic support for underserved Ugandans.

    Moneylenders across the country have voiced strong opposition to the government’s decision to cap monthly interest rates at 2.8 percent, a regulation they argue was enacted without their input and threatens to undermine their businesses. Operating under the Association of Money Lenders in Uganda (AMLU), the lenders insist that the new cap is unfairly low compared to the rates charged by some commercial banks, which can exceed 17 percent per month.

    Speaking at a press conference yesterday, the association (AMLU) chairperson Mr. Jonan Akandwanaho emphasized that moneylenders play a critical role in sustaining Uganda’s economy by providing loans to individuals excluded from traditional banking services.

    “We understand the need to protect borrowers, but this rate makes it impossible for us to operate sustainably. Why are we capped at 2.8 percent when some financial institutions lend at far higher rates?” he questioned.

    The Ministry of Finance, Planning and Social Development, however, maintains that the cap was implemented to shield borrowers from exploitative lending practices. The Ministry spokesperson Mr. Jim Mugunga defended the regulation, stating that it balances the interests of borrowers, the financial sector, and moneylenders.

    “While we respect the opinions of moneylenders, there are proper channels for addressing their grievances, including legal recourse,” he noted.

    The cap, introduced under Legal Notice Number 21 of 2024 by Finance Minister Rt. Hon. Matia Kasaija, limits Tier 4 Microfinance Institutions and Money Lenders to a maximum annual interest rate of 33.6 percent. For every Shs100,000 borrowed, this translates to a monthly interest of Shs2,800. AMLU leaders argue that such low returns render their businesses unsustainable, forcing them to consider legal action.

    “We were not consulted on this matter,” said Bellata Kamugisha, AMLU’s secretary for compliance and policy. “We’ve written to the Attorney General seeking mediation, but if that fails, we’ll have no choice but to go to court.”

    Mr. Kamugisha also warned that the cap could harm financial inclusion and poverty alleviation initiatives like the Parish Development Model (PDM). “Moneylenders provide timely financial support where banks cannot. For instance, traders facing unexpected tax costs rely on us for quick assistance,” he explained.

    According to the Uganda Microfinance Regulatory Authority, licensed moneylenders serve about 2.5 million customers, with a loan portfolio of Shs1.2 trillion as of the month September 2023. Kamugisha fears that the interest cap could reverse progress in formalizing the sector and hinder efforts to regulate the 60,000 informal lenders operating nationwide.

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