Kampala, Uganda – The Association of Money Lenders in Uganda (AMLU) has joined the ranks of the few organizations opposing the government’s new directive capping monthly interest rates at 2.8%. Announced by Finance Minister Matia Kasaija on November 15, 2024, under Section 89(1) of the Tier 4 Microfinance Institutions and Money Lenders Act, the policy is meant to cushion borrowers against exorbitant rates. The AMLU, however, has argued that the cap is unsustainable and may eventually cripple their industry.

Moneylenders Complain of being Kept out of Consultation
In an extraordinary meeting reacting to the directive, AMLU Chairman Jonan Akandwanaho accused the government of leaving moneylenders out during policy formulation.

“This cap doesn’t consider business realities-operational costs, the cost of recovery and of capital. Still, banks have rates as high as 7 percent per month but are not equally fettered,” Akandwanaho declared.

This he said will drive the industry into formality as it will open a gateway for black-market lenders that have predatory practices against their borrowers.

A Pillar of Uganda’s Economy

Moneylenders are important in Uganda’s economy, as they help small business owners, traders, and market vendors who usually do not have access to traditional banking services. Akandwanaho says quick loans are important in meeting day-to-day needs, such as paying school fees, operational costs at markets, and paying for emergencies.

“Without us, many businesses won’t survive,” he added, highlighting how reduced liquidity could hurt during the busy festive season.

These reservations were shared by Bellata Kamugisha, the Secretary for Compliance and Policing at AMLU. This could, he said, ensure that the regulation derails one of its most key objectives: putting that into formality. “We have transitioned over 1,800 lenders to go into formal operations out of 60,000 moneylenders operating informally in that field. This cap risks unraveling several years of progress,” Kamugisha argued.
The moneylending industry is an integral part of the financial ecosystem in Uganda, with an annual turnover of approximately Shs 1.4 trillion. Unlike banks, which often take weeks or months to process loans, moneylenders provide bridge financing in hours, making them indispensable for small-scale entrepreneurs and households.

Banks cannot fill the gap we occupy. The cap stifles these services, leaving borrowers stranded and disrupting entire supply chains,” Kamugisha explained.

The Government’s Perspective

The interest rate capping directive is part of a broader push to protect borrowers from exploitative lending practices and foster financial inclusion. Consumer rights groups and financial analysts have praised the regulation as a step toward reducing over-indebtedness and promoting responsible lending.

Despite these intentions, AMLU argues the cap is impractical, given the high default risks and operational costs moneylenders face.

Legal Challenge on the Horizon

In response to the directive, AMLU is exploring legal options to challenge the regulation, which they claim violates the operational independence of moneylenders and undermines their ability to serve borrowers effectively.

“We are open to dialogue but will not hesitate to seek legal redress. Policymakers must recognize our contribution to the economy,” Akandwanaho said.

It also urged for policies that are in tandem with Uganda’s National Development Plan III and the Parish Development Model, both of which place financial inclusion on the front burner.

Ripple Effects on the Economy

As the debate heats up, there is growing apprehension about the broader economic consequences of the cap. Kamugisha wondered how the communities that depend on moneylenders for vital financial aid would survive if the industry were to shut operations.

This industry has educated children, financed businesses, and supported communities where banks could not. Who will fill the gap if moneylenders are pushed out?” she asked.

Government Stands Firm

Despite the backlash, the government has vowed to strictly enforce the new regulations. Non-compliance will attract penalties under the Tier 4 Microfinance Institutions and Money Lenders Act.

The Finance Minister, Kasaija, said the cap will stick since it protects the borrowers while ensuring financial stability.

The Way Forward

With the case headed to court, Uganda’s government must strike a delicate balance between protecting borrowers and maintaining a viable financial sector. The standoff is likely to have far-reaching implications for Uganda’s economy and its drive to improve access to financial services.

For now, the stage is set for a showdown between policymakers and one of Uganda’s most influential financial industries, with borrowers caught in the middle.