In 2016, Uganda reformed its laws by the enactment of the Tier 4 Microfinance Institutions and Money Lenders Act, 2016 (the Act). The purpose of the Act was to legitimize and build confidence in microfinance institutions (SACCOS, self-help groups, non-deposit taking, and community-based microfinance institutions) and money lenders who had for a long time remained outside the radar of any regulator. The enactment of the Act was not just a recognition of the important role that informal lending arrangements play in promoting financial inclusion by reaching Uganda’s large unbanked population but was also meant to streamline the laws relating to borrowing and lending in Uganda. Section 112 of the Act empowers the Minister of Finance to make regulations for the better carrying out of the provisions of the Act. In exercise of those powers, the Minister has now passed the Tier 4 Microfinance Institutions and Money Lenders (Money Lenders) Regulations, 2018 (the Regulations). The Regulations provide for the licensing and operation of money lending business in Uganda.
The key highlights of the Regulations are:
1. Licensing of money lenders
A company wishing to undertake money lending business is required to apply for a license from the Uganda Microfinance Regulatory Authority (UMRA) by submitting its incorporation documents, the particulars of its directors and secretary and paying the requisite fee. A license issued to the moneylender is valid until 31st December in every year and may be renewed annually. The license is not transferable or assignable. Once issued, the license must be displayed at all premises in which the moneylender transacts money lending business.
UMRA is currently fully constituted and operational and sits at Rwenzori Towers in Kampala city.
2. Records to be kept by money lenders
The Regulations require money lenders to maintain a physical address and maintain and retain records relating to their business for a period of 10 years. This is the same period required of financial institutions under the Anti-Money Laundering Act. In addition, money lenders are required to display interest rate charges at all times in a conspicuous place at their premises and maintain proper books of account, including a register of securities and debtors. This will enhance transparency in the business and promote confidence in money lenders.
UMRA is also required to keep a register of all money lenders which can be inspected by members of the public at a fee.
3. Management of money lenders
The Regulations require UMRA to evaluate the fitness and propriety of the management and board of a money lender and of any person who will be employed by or associated with the moneylender. This is akin to the fit and proper test that is carried out on the board and management of a financial institution. Although the criteria are likely to be far less stringent for money lenders, it is comforting to know that the management and board of money lenders will be scrutinized in order to ensure that the business is not carried out by undesirable persons. In addition, any change in the directorship or other management of a money lender must be authorized by UMRA, following a similar evaluation of the proposed candidate by UMRA.
4. Collateral for money advanced
The Regulations seek to curb the hitherto unorthodox practice of money lenders withholding important documents of a borrower in order to guarantee repayment, essentially holding the borrower hostage. The Regulations provide that a money lender may not demand the following documents as collateral for money advanced: IDs or passports, ATM cards or security codes for ATM cards or deposit account books or any instrument of transfer of property or assets signed prior to the disbursement of the loan. The borrower does not also face the risk of a money lender losing his or her documents. In addition, where a money lending transaction is disguised as a sale or transfer of property, such a transaction is liable to nullification by the court and may result in revocation of the money lender’s license.
A money lender cannot dispose of collateral unless 60 days have elapsed since the demand for payment was made on the borrower. Once the 60 days have elapsed without payment, the moneylender may dispose of the collateral by public auction or private treaty without recourse to the court. The rules on disposition of the collateral in this instance are less stringent than those imposed on banks undertaking dispositions of collateral. Nonetheless, a money lender has an obligation to sell the collateral for not less than its forced sale value unless he is unable to do so in the first two attempts at the sale.
The Regulations also provide for the waterfall of payment upon sale of collateral akin to the waterfall prescribed for a sale of mortgaged land.
3. Deposits of repayment with UMRA
The Regulations provide that a borrower may deposit any sum in repayment with UMRA in circumstances where the money-lender refuses to accept such sum or where it is impracticable for the borrower to find the money lender in order to make the payment. This provision will hopefully cure the vice of money lenders frustrating repayment of a loan by the borrower in order to extract additional interest or in an effort to sell the borrower’s collateral.
A streamlined and structured money lending practice will no doubt create a safer and more conducive environment for money lenders to practice their trade and for borrowers to obtain credit. However, given that money lending is meant to provide affordable loans to the low-income segment of the population as an alternative to conventional institutional lending, it is critical that the Government find the right balance between creating a safe and conducive environment for money lending and reining in on rogue and unscrupulous money-lending practices. Overregulation could be defeatist as it could potentially increase the cost of providing credit thereby rendering the business uncompetitive and spurring non-compliance by money lenders.
While the enactment of the Regulations is a welcome development, it remains to be seen whether the Government has invested the resources and created the structures necessary to follow through on the enforcement of the Regulations and the Act. Uganda is not lacking in good laws. The devil is always in its enforcement.