The Mbale Money Lenders Association has raised concerns over a directive by the Uganda Microfinance Regulatory Authority (UMRA) to cap interest rates at 2.8% per month, describing it as harmful to their operations.
In a meeting chaired by Emma Ijjo, chairperson of the Elgon Money Lenders Association, at the Mbale City Chambers, members discussed plans to petition President Museveni to reverse what they called an "abnormal" interest rate cap.
Ijjo criticised the Ministry of Finance’s enforcement of the 2.8% interest rate, arguing that it is unsustainable.
“We feel neglected as citizens contributing to Uganda’s economy. This directive disregards the operational costs and risks we bear as lenders,” he said.
The association emphasised its role in supporting Uganda’s economy, citing the significant taxes paid and the financial assistance provided to borrowers, particularly in rural areas. They warned that the new rate would drastically reduce their earnings.
“For instance, under the new guidelines, we are only allowed to collect Shs 280,000 in interest on a Shs 10 million loan. This amount is insufficient to cover operational costs, let alone generate profit,” a member lamented.
UMRA issued the directive last week, warning money lenders to comply immediately or face penalties.
The Mbale Money Lenders Association fears that implementing the policy could lead to widespread business closures, increased unemployment, and reduced access to quick loans for Ugandans.
The association is urging President Museveni to intervene, claiming that the decision was made without consulting key stakeholders and does not consider the realities of the money lending sector.
Recently, the government officially capped the maximum interest rate for money lenders at 2.8% per month, equivalent to 33.6% annually.
This directive was issued by Finance Minister Matia Kasaija on November 15, 2024, through a legal notice published in the Uganda Gazette. The notice, based on Section 89 (1) of the Tier 4 Microfinance Institutions and Money Lenders Act, Cap. 61, followed consultations with UMRA.
“This notice may be cited as the Tier 4 Microfinance Institutions and Money Lenders (Prescription of Maximum Interest Rate) Notice, 2024,” the document stated.
The policy applies to the principal or actual sum advanced by money lenders, effectively regulating lending rates across the country.
The government explained that the move was aimed at protecting borrowers from exploitative interest rates, a persistent issue in the informal and semi-formal financial sectors.
While consumer rights advocates and financial analysts have praised the regulation for promoting financial inclusion and reducing over-indebtedness, money lenders argue that the 2.8% cap is impractical due to high operational costs and the risk of default.
Despite the criticism, UMRA has emphasised the strict enforcement of the directive, warning that penalties for non-compliance will be implemented in accordance with the provisions of the Tier 4 Microfinance Institutions and Money Lenders Act.