Legal Notice No. 21 of 2024 under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap 61 issued by Finance, Planning and Economic Development Minister Matia Kasaija, recently capped the maximum interest rates money lenders can charge at 2.8% per month or 33.6%.

Economists and the business community have all warned that the capped rates will discourage money lenders from conducting their regular business activities as they secure long-term capital based on prevailing free-market rates. Various economists further raised concerns that some money lending activities could go underground, creating higher risks for borrowers —the opposite of what the government intended to achieve.

“MLAU involves ethical money lenders who have an interest in safeguarding Uganda’s financial systems through ethical credit services to borrowers,” Jonan Kandwanaho, Chair of the Money Lenders Association of Uganda, said during a press briefing at Kingdom Kampala. “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.”

He added, “The effect will also be felt by the government because the constricted activity will lead to fewer taxes being paid.”

MLAU plays a crucial role in lubricating the gears of Uganda’s economy, particularly in sectors where traditional banking services may be limited or inaccessible. Its members serve as a vital lifeline for small businesses, market vendors, and entrepreneurs who rely on short-term loans to purchase inventory, bridge cash flow gaps, or seize time-sensitive business opportunities.

The Uganda Microfinance Regulatory Authority (UMRA) reports as of September 2023, 1,302 licensed money lenders had extended loans to about 2.5 Million customers, with an outstanding portfolio of UGX1.2 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, shopkeepers to stock, and transport operators to maintain their vehicles, to mention but a few —all essential activities that keep the wheels of commerce turning. Moreover, by offering financial services to those who might otherwise be excluded from the formal banking sector, MLAU members contribute to financial inclusion, which is a key driver of economic growth and poverty reduction.

MLAU’s ability to process loans quickly and with flexible terms means that it can respond rapidly to the dynamic needs of Uganda’s vibrant informal sector, which forms the backbone of the country’s economy.

“As we hold these discussions we should also recognize the concerns that led us to this point, and we are willing to work with the regulators to address this,” noted Kandwanaho. “We know that there are individuals within our sector whose practices may not align with the highest standards of ethical lending. We are committed to improving the overall integrity of our industry, working with all stakeholders.”

The Money Lenders Association of Uganda believes that through constructive dialogue and cooperation with regulatory bodies and the government, they can address all concerns, improve industry standards, and continue to serve Ugandans responsibly to safeguard the country’s financial future.

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