Uganda’s lending rates have remained high for over 30 years now, averaging 21% amid a liberalized banking sector that would rather see costs lowered. Most times, banks fail to adjust their rates even when the central bank – Bank of Uganda – lowers its benchmark, something that sees unregulated moneylenders charging exorbitant rates.
In a bid to rectify these issues at hand, the government has introduced and re3cently gazette the Tier 4 Microfinance Institutions and Money lenders Bill, 2024 that caps money lending interest rates at 2.8% per month, which is about 33.6% annually. Whereas this has been seen as a right step in the right direction, a number of experts urge that these rates remain high.
Signed by the Minister of Finance, the Rt. Hon. Matia Kasaija, the law targets predatory lenders most known as “Shylocks”. This however, for critics leaves challenges for moneylenders who rely on private capital. Ben Kavuyo, the Uganda Moneylenders Association Chairperson notes that capping rates could however threaten their operations as they source their own funds with no public assistance unlike banks that benefit a lot from customer money deposits.
Another problem with the financial sector in Uganda is that it struggles with limited formal financial inclusion as seen by a recent FinScope survey which revealed that 52% of adults still rely on informal services while only 14% use banks. Bureaucratic hurdles and high collateral requirements in formal banking drive many to moneylenders despite their exorbitant rates, that often exceed 10% per month.
With all this in play however, Banks continue to defend their position on rates, citing operational costs and the need for robust risk management due to unreliable credit histories. Additionally, borrowing from commercial banks typically incurs interest rates between 16-25%, occasionally reaching 30%. Also, government borrowing from local banks further cuts private sector access to affordable credit, expounding the matter.
Improving credit profiling systems to address such challenges is what finance experts suggest. Economic Policy Research Centre’s Dr. Brian Sserunjogi calls for better credit reference bureaus to categorize borrowers and reduce defaults. He further adds that even with the Bank of Uganda rate adjustments, efficient credit systems are essential for meaningful change.
As the new law bites and makes progress, experts note that more is needed. Consolidating government funds to lower formal credit costs and encouraging financial inclusion could alleviate reliance on predatory lenders. Additionally, ensuring banks’ balance profitability with affordable rates will be critical for fostering sustainable economic growth.
This legislation presents an opportunity for the banking sector to reassess its role in providing accessible, affordable credit to Ugandans, offering hope for a more equitable financial landscape
