The business of money lending in Uganda became a menace as money lenders would end up taking over securities pledged for the money borrowed; the interests would be exorbitant and quite often compounded; and the borrowers would be forced to sign sale agreements and sign transfer documents in favor of the lender as part of the security for accessing credit.
What would largely drive borrowers down this line quite often was the high lending rates of banking institutions and the tedious process of accessing credit from banks when the credit is required urgently. These challenges were further propounded by the lack of direct supervision of the money lending business which hitherto was abandoned to Magistrate’s Courts which issued the licenses but did nothing or lacked capacity, technical skills of running money lending business. This exposed moneylenders to crook borrowers, not willing to pay and giving securities that were hard to realize. It also exposed the borrowers to the vagaries of money lending sharks all out to grab securities instead of realizing their moneys.
The Tier 4 Microfinance Institutions and Money Lenders Act 2016 was rightly enacted to provide in part for the management and Control of Money Lending Businesses. The Act repeals the Money Lenders Act Cap 273, which required moneylenders to apply for a Money Lending License from the Chief Magistrate’s court. The Act now creates the Uganda Microfinance Regulatory Authority under section 6 (hereinafter referred to as ‘the Authority’) as a body corporate with perpetual succession and a common seal with functions among others to regulate and supervise the money lending business in Uganda.
The functions of the Authority with regard to regulating and supervising the moneylending business include grant, renew and revoking of money lending licenses; keeping and maintaining a register of money lenders; sensitizing the public about the money lending business; conducting inspection and examination of books of accounts, records, returns, and other documents or premises of a money lending business; and conducting enquiry into the money lending business.
A private company registered under the legal regime in Uganda can only carry out the business of moneylending. This company must be a private company not involved in the business of banking or insurance, a society registered under the Cooperative Societies Act, or body incorporated or empowered by an Act of parliament to lend money like the Microfinance Support Centre. This means that an individual human being cannot engage in the business of lending money. This does not however bar an individual human being from lending money to any other person on a friendly basis. Such friendly moneylending, which is not done as a business, may occur without being brought under the purview of the Act or the Authority for that matter.
Applications for money lending license are made by writing to the Authority and providing the certificate of incorporation of the Company, the particulars of the directors of the Company; a resolution of the particulars of the secretary of the company; the postal and physical address of the company and the prescribed fees.
Upon application, the authority within three months after receiving an application shall consider the application and if satisfied that the applicant meets the requirements issue a license to the applicant. A license issued expires on the thirty first day of December in every year and shall specify the name, under which the address at which, the money lender is authorized to carry on business; and shall not authorize a moneylender to carry on business under more than one name.
The Authority may refuse to issue a license for money lending where shareholders and persons responsible for the management of the company or firm are not of good character; or the applicant or any person responsible for the management of the company is convicted of an offence relating to embezzlement or any other financial impropriety and failing to comply with the requirements of the Act. The Act doesn’t define what good character of a moneylending business manager means. This could turn out to be abused or even unenforceable due to the ambiguity it creates, as good character may be a subjective test.
In order for the Authority to effectively refuse to grant license on the basis of ones antecedents or criminal record, there will be need to synchronize information management systems with National Identification and Registration Authority; the security systems and the judiciary. It requires the judiciary’s records to be up-dated so that the Authority can access it. Though questions abound as to whether the authority does consider the fact that people can and do reform and change. It is likely, this will turn vindictive in that after one has served their sentence and reformed, they continue being held accountable or denied opportunities by reason of their antecedents.
The license is issued upon payment of the prescribed annual fees in respect of the money lending licensing. The renewal of a money-lending license is triggered by application for the same. The application for renewal is made yearly and the Authority may renew the license or decline to do so where the moneylender violated provisions of the law or conditions of the license. Given that it takes about three months for the Authority to consider the applications, to ensure the company has a license to continue to conduct its business, such applications should start before expiry of a running license. Alternatively, the Authority may have to consider granting a three months provisional license while processing a new one is underway. Under the Advocates Act, there is a three months period given after the expiry of a previous year’s practicing certificate for a lawyer to renew their new year’s practicing certificate. Though in practice, part of the process for renewing certificates now begins towards the end of a year with inspection of firms, this makes it easy for Advocates to renew their practicing certificates early enough in the year.
It should be noted that it is an offence for a person to carry on business as a moneylender without a moneylending license or in a name or at a place other than the name or address specified in the money-lending license. Such person on conviction may be fined two hundred currency points and on a second or subsequent conviction to four hundred currency points. Additionally court may order such person’s money lending license to be revoked or disqualify that person from engaging in money lending business.
To address the discrepancies and extortionist contracts, the Act prescribes a form of money lending contracts. A money lending contract shall be in writing and shall be signed by the money lender and the borrower and shall be witnessed by a third party. It shall state the date the loan is disbursed; the amount of the principal loan; the interest charged on the loan expressed in terms of a percentage per year; the nature of the security, if any; the duties and obligations of the borrower; the mode of repayment; the nature of guarantors, if any; and the duties and obligations of the borrower; the mode right to early repayment.
The Act also specifically outlaws compounds and provisions as to defaults. A contract is illegal and unenforceable if it directly or indirectly provides for compound interest or the rate or amount of interest being increased by reason of a default in the payment of sums due under the contract. A lender can only charge a simple interest on the sum due from the date of default till payment in full. The minister, in consultations with the authority may by notice in the Gazette prescribe maximum interest rate, which a moneylender shall charge. Charging an interest bigger than the prescribed maximum interest rate commits an offence and on conviction is liable to a fine not exceeding fifty currency points and the court may in addition order the cancellation of the money-lenders license and the money lender pays to the borrower any money paid in excess as a result of the interest rate charged.
A money lender is required to issue receipts to the borrower immediately for every repayment made on a loan and to keep a record which shall contain the date on which the loan was disbursed, the amount of the principal loan, the rate of interest, the sum repaid on the loan and the date on which the repayment is made.
The application and implementation of this Act is now operationalized. How the business of money lending will to impacted waits to be seen. The Act will hopefully bring money-lending business into the formal financial sector as the financial dealings of moneylenders can be properly tracked especially in the wake of terrorism and global money laundering schemes. Further service providers who until now weren’t governed by the bank of Uganda’s Consumer Protection Guidelines will now protect many consumers of financial services from abuse.