Wakiso, Uganda — Formal pathways to loans in Uganda are cumbersome. Money lenders step in to fill the gap -- but at a steep price.
Fredrick Nathan Rubahimbya needed money.
It was June 2019 and his daughter's final university exams started in a week. He needed to pay 800,000 Ugandan shillings (215 United States dollars) in fees so she would be allowed to take them. He tried to borrow from relatives and friends, but nobody had the money. He contacted a local microfinance institution, but they said it would be a two- to three-week process, he says.
"I wanted money immediately. I didn't want my daughter to miss exams," Rubahimbya says.
His choices were limited and time was not on his side, so he approached a money lender who agreed to give him a loan. The following day, Rubahimbya had the money he needed.
"I was relieved after receiving the money. My daughter would be allowed to complete her exams and hopefully get a job thereafter," Rubahimbya says.
Licensed money lending businesses have nearly doubled in the last five years in Uganda. The lenders extend credit to clients within a matter of hours, unlike other financial institutions. But the loans come with high interest rates and a quick timeline for repayment. Lenders are quick to take promised collateral if the borrower is late or fails to pay, resulting in borrowers losing properties, businesses, life savings, even their national identity cards. They may also face imprisonment.
After a series of high-profile cases of members of Parliament defaulting on money lender loans, the Ministry of Finance, Planning and Economic Development announced in September 2023 that it was developing a policy to regulate interest rates charged by licensed money lenders. The policy has yet to be finalized, says ministry spokesman Apollo Benon Mughinda. Money lenders are displeased with the move, which they say will affect their profit margins.
There were 800 licensed money lenders in 2019, according to the Uganda Microfinance Regulatory Authority, a government body that licenses, supervises and regulates money lenders. As of November 2023, there were 1,500. This number does not include unlicensed money lenders, which an estimated 3% of borrowers in Uganda use, according to a 2018 survey on informal financial inclusion published by the Kampala-based nonprofit Financial Sector Deepening Uganda.
Many people prefer to borrow from money lenders because of the rigorous requirements and unfriendly structures of banks, says Augustus Nuwagaba, an economist at Makerere University. "If your mother is admitted in platinum hospital and you need 5 million shillings for her medication, banks have to do due diligence. Hence it may take two months to get the money, yet the medication can't wait for two months," Nuwagaba says.
Banks, which offer loans at lower rates with longer payoff periods, need to find a way to automate and make access more friendly, Nuwagaba says.
Nearly 77% of Ugandans borrow money, but only 31% borrow from formal financial institutions, according to a 2021 study by the United Nations Capital Development Fund.
About 90% of borrowers obtain money from both licensed and unlicensed lenders, according to a 2019 study by Nuwagaba. But often, borrowers don't understand what it means to be charged 20% interest each month, Nuwagaba says. They only realize when the lender takes their collateral.
Lenders give secured loans, where borrowers provide collateral as security in case they can't make their payments, and unsecured loans, where they don't. Some borrowers offer their national identity cards as security, which are needed to vote or open a bank account or get a driver's permit. When borrowers fail to pay, they can be imprisoned. Money lenders are not allowed to accept savings or deposits under microfinance laws.
The day he got the loan, Rubahimbya signed an agreement in front of his council chairperson, who acted as his guarantor. The agreement would give his banana plantation to the money lender if he failed to pay the loan back.
Rubahimbya missed his first payment 28 days later. He says he thought the lender would be sympathetic even if he missed some months because they were from the same village. But for every month he missed a payment, the lender charged 20% interest and a penalty fee.
Three years later, the original 800,000-shilling loan had accumulated to 7 million shillings (1,870 dollars). He was unable to pay back the amount. The money lender took his plantation -- the equivalent of 6 million shillings (1,600 dollars) -- and Rubahimbya sold his cow to pay off the remaining 1 million shillings (266 dollars).
In February 2021, Peace Mukundane received a call from her daughter. Her daughter said her boss at the financial institution where she worked as a cashier had noticed 3 million shillings (789 dollars) in losses in the department where she was the only employee. He was threatening to call the police to have her arrested if she didn't pay it back in three days.
"I needed to rescue my daughter immediately and didn't have the luxury of waiting for protocols that come with other lending institutions," Mukundane says.
After putting down her phone, Mukundane says she went to a money lender. She borrowed 3 million shillings at a 20% monthly interest rate and signed a sales agreement that pledged a storefront she rented out, worth 5 million shillings (1,333 dollars), as collateral if she didn't pay back the loan within five months.
Mukundane was able to pay her daughter's employer. But she failed to pay back the loan in five months. The money lender took her shop, which was one of her main sources of income. Although she lost the shop, Mukundane feels it would have been more difficult to get money from other sources.
In September 2023, President Yoweri Museveni issued a directive to the Ministry of Finance to write a policy regulating interest rates charged by money lenders. The directive came after Parliament, in July, canceled a memorandum of understanding with money lenders who were lending to members of Parliament at high interest rates. The memorandum was an agreement that Parliament would help lenders recover their money if the legislators failed to repay. But the methods the money lenders used to recover the monies were crude and included threats of imprisonment, endless phone calls, confiscation of properties and more, says Chris Obore, a spokesman for Parliament.
Seth Nshemereirwe, a manager at MJEL Financial Services, a licensed money lender based in the Kampala suburb of Ntinda, says the new directive will harm the business because lower interest rates will mean less profit.
"Many of us money lenders are labeled thieves. We have a challenge of unlicensed money lenders tarnishing our image. Many of us may close business. We may end up being very strict on principles such as guarantors or even renewing interest after failure to pay," he says.
Nshemereirwe says defaulting is common. One day last year in October, only 94 out of MJEL's 204 clients at the time made partial payments. In an average month, around 20 out of about 200 clients pay in full.
Edward Bindhe, a spokesman for the Uganda Microfinance Regulatory Authority, says the Authority is not mandated to protect people who default on their loans. Still, they have been educating the public through radio announcements to only borrow money from licensed money lenders.
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"We tell them to first cross-check if the money lender is licensed from certificate at their premises. Most complaints we receive is over deduction, failure to issue loan quotation, failure to give loan statement," he says.
Bindhe says the agency has mechanisms to handle complaints, where someone can report unresolved matters through its website, toll-free line, text messaging or in person at the agency office. "Most complaints from money lenders are about their recovery methods."
Bindhe adds that, as the regulatory body, the microfinance agency has already given its opinion to the Ministry of Finance, Planning and Economic Development regarding interest rates regulations for money lenders; he declined to give details.
Rubahimbya says he doesn't know if his money lender was licensed or not. He never checked. He wouldn't borrow money from a money lender again, though, given what he went through.
The plantation was a source of livelihood for his family, providing food for survival, he says. He was able to keep a small portion of the land, which he farms, and also works in other people's gardens to provide for his family.
Those who borrow from money lenders to resolve their financial woes end up poorer, he says. "We are perishing. We, the poor, are always working for the rich. Even the little we have is taken away."
Rubahimbya and some friends who have also lost properties to money lenders plan to start a savings club where they can pool money and lend to each other at low interest rates paid over long periods of time, he says. This will help them avoid money lenders when they urgently need money.
"It's a curse getting a loan from a money lender. Many of us have ended up losing even the little we had," he says.
Apophia Agiresaasi is a Global Press Journal reporter based in Kampala, Uganda.
