About two weeks ago, President Museveni issued a directive to the minister of Finance to promulgate a statutory instrument to operationalize the control of interest rates on loans issued by moneylenders.
This directive was issued at the National Resistance Movement parliamentary caucus meeting held at State House Entebbe on the September 28, 2023. The details of this specific resolution were not divulged to the public, but it seems to have been a step in the right direction.
The directive comes at a time when parliamentarians, including their speaker, Anita Among, had decried the mechanisms conducted by moneylenders in their trade of business. The speaker had even threatened to cancel a memorandum of understanding signed by parliament and credit facilities.
In 2016, Uganda reformed its financing laws by enacting the Tier 4 Microfinance Institutions and Moneylenders Act in a bid to streamline and legitimize financial institutions that had been erstwhile operating without clear regulatory frameworks.
Prior to the enactment of this law, moneylenders, self-help groups and Saccos operated in a seemingly haphazard manner that always caused public outcry. It was not uncommon for moneylenders to issue loans to unsuspecting members of the public with a blanket interest rates that later changed according to the whims of the lenders.
In fact, several moneylenders would draft moneylending agreements and leave a blank space for the interest rate to be inserted after the person obtaining the loan has signed and committed to repay it in a specified period of time.
Others had tendencies of disappearing on the date of payment such that the borrowers become defaulters and the property used as security to obtain the loans becomes immediately transferrable into the names of the moneylenders.
Surprisingly, for several reasons, Ugandans kept falling prey to these highhanded tactics mainly because there was always an urgent need to obtain money without the official banking systems questioning their creditworthiness. This not only affected companies in business but also individuals.
Besides the fact that meagre earnings and a high standard of living pushed Ugandans into obtaining unsecured loans at predatory lending rates from these moneylenders, the lack of a proper regulatory framework for these institutions exacerbated the situation.
Most times, people obtained loans from banks for various reasons like paying fees for children that are on the verge of being chased from school for defaulting. However, these loans would be secured by their matrimonial property or land on which their homes sat.
Upon default, several banks would obtain court orders to foreclose on the properties. Desperate to save their matrimonial homes or other secured properties, several people would reach out to moneylenders for quick bailouts in order to sever their properties from unrelenting banks.
It is at this moment that moneylenders took advantage of the desperate Ugandans and offered unsecured loans at exorbitant interest rates of as much as 30 per cent to 40 per cent. The Ugandans, without any ray of hope, would enter agreements on the understanding that obtaining such loans and saving their property in the process was far better than having banks sell it at a forced sale value.
To rectify these anomalies, parliament deemed it fit to enact the 2016 Tier IV Microfinance Institutions and Moneylender’s Act, the main purpose of which was to build confidence in the financial system of the country and to bring moneylenders within the confines of a regulatory body.
This came with mandatory licensing requirements, compulsory recordkeeping in order to streamline the effective management of moneylenders by the Uganda Microfinance Regulatory Authority (UMRA). Upon its enactment in 2016, the Tier IV Act granted the minister of Finance powers to prescribe a maximum interest rate that moneylenders would charge.
The law even made it an offence for one to charge an interest rate higher than that prescribed by the minister. However, as of 2023, seven years later, no such maximum interest rate has been prescribed by the minister of Finance. It is for such reasons, along with others like failure to strictly operationalize the anti-money laundering laws, that Uganda was put on the ‘grey list’ by the Financial Action Taskforce (FATF) as one of the countries that portrayed underperformance regarding the unsafety and high level of risk of their financial system.
President Museveni’s directive, therefore, is one that has been made in the right directed even though it was not made timeously. The directive, once coupled with other financial and monetary policy considerations, is most likely to push the FATF to reconsider its decision of ‘grey listing’ Uganda.
Unfortunately, even when the President’s directive gave the ministry of Finance a two-week grace period to prescribe the maximum interest rate, there has not been any response from the ministry. Suffice it to say that the 14- day grace period lapsed last week on October 12, 2023.
In light of the president’s directive, it is incumbent on the ministry of Finance to heed to the president’s directive and halt the menace that has become of moneylenders, many of whom have been operating without proper licensing.
The writer is an advocate of the High court.
Source: The Observer