In November 2024, The Uganda Minister of Finance, Planning and Economic Development issued a Legal Notice No. 21 of 2024 under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap. 61 – Prescription of Maximum Interest Rate. The notice caps the maximum interest moneylenders can charge at 2.8% per month or 33.6% per annum. This is a significant step aimed at regulating microfinance institutions and moneylenders.
While this move has been lauded as a step toward financial regulation, business analysts argue that the capped interest rate is still relatively high for small businesses to thrive. Many contend that such rates could hinder businesses, particularly those in vulnerable sectors, from achieving profitability due to the burden of exorbitant interest repayments.
The informal financial landscape in Uganda
According to the latest FinScope Survey, approximately 13 million adult Ugandans, accounting for 52% of the adult population rely on informal financial services. Refugees, who often face additional barriers to accessing formal financial services, are even more dependent on these informal financial markets. Data from UNHCR indicates that about 95% of refugees in Uganda turn to informal financial services for business financing.
However, these informal services present significant challenges. Many moneylenders operating in refugee settlements lack legal registration or accountability. Commonly organized as Village Savings and Loans Associations (VSLAs) or informal groups, they impose unregulated interest rates that can range from 10% to 20% per month. For clarity, a monthly rate of 20% translates to an annual rate of 240%, a level that is unsustainable for any business.
Challenges in Regulating Informal Financial Markets
Uganda’s free-market economy complicates the regulation of informal financial services. Resources for enforcement of this capping are limited for example. This leaves borrowers, particularly refugees vulnerable to exploitation. Refugees often face unique barriers such as:
- Lack of collateral: Refugees are not legally permitted to own land or property in Uganda, eliminating a critical requirement for formal loans.
- Perception of temporariness: Despite evidence showing their long-term residence in settlements, refugees are still perceived as temporary residents and people on the move. This makes financial institutions hesitant to extend credit to them.
- Dependence on informal actors: Without access to formal financial services, refugees are at the mercy of unregulated lenders who impose arbitrary and often predatory interest rates.
At Kuza Refugee Business Platform (REBU), we welcome the government’s efforts to address predatory lending practices through the Tier 4 Microfinance and Money Lenders Interest Capping. While the capped rate of 33.6% per annum is still high, it represents a starting point for broader financial reforms.
Our mission is to ensure that refugee businesses not only survive but thrive. Unlike many informal lenders, REBU offers refundable business grants or business loans at 24% annual interest rate. Our goal is to uplift refugee businesses by providing fair, tailored, accessible, and sustainable financing, and funding options. Through these efforts, we aim to create an enabling environment where refugee entrepreneurs can build resilience, grow their ventures, and contribute meaningfully to Uganda’s economy.
Toward sustainable financial inclusion
To truly uplift refugee businesses, systemic barriers must be addressed through measures such as strengthening formal financial inclusion by expanding access to tailored financial services to refugees, building capacity for refugees to navigate Uganda’s financial landscape, ensuring effective enforcement of the capped interest rate to curb predatory practices, and fostering collaboration among the government, and financial institutions aimed at uplifting businesses rather than exploiting them. By overcoming these challenges, Uganda can establish a more equitable and inclusive financial system that supports both refugees and host communities, driving sustainable development for all.
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