The Minister of Finance in Uganda has issued a legal notice setting a maximum interest rate for money lenders at 2.8% per month (or 33.6% per annum). The legal notice, issued under the Tier 4 Micro Finance Institutions and Money Lenders Act (Cap. 61), applies to money lenders and not to other licensees under the Act such as non-deposit-taking micro-finance institutions or SACCOs.
Charging interest above the prescribed interest constitutes an offence, and on conviction, a money lender is liable to a fine of up to UGX 1,000,000/=. Additionally, a court may order cancellation of the money lender’s licence and require that the money lender repay the borrower any excess interest charged.
Money lenders provide financing to borrowers who typically have urgent needs that cannot be addressed by banks. The capped interest rate is below the current market rates of between 4% - 12% per month, which reflect the cost and risk associated with financing in Uganda. Setting the cap below market rates is likely to discourage money lenders and will potentially drive this type of credit supply underground, increasing risks for the very borrowers that the cap aims to protect. In 2016, a similar scenario played out in neighbouring Kenya as they unsuccessfully attempted interest rate caps across their financial sector.
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