By Julius Businge
Bank of Uganda to introduce consumer protection mechanism
What would make you borrow Shs 500,000 from a money lender at an interest rate between 15% and 30% per month? Many reasons but at the heart of each is on common feature; desperation – you want money badly.
Unfortunately, if an interesting case Chief justice Benjamin Odoki is handling says anything, such desperate borrowing is usually the start of real trouble.
The case the CJ is handling involves about 48 inmates of Luzira Prison claiming money lenders, court bailiffs, and magistrates are colluding to extort money from borrowers by locking them up in an “illegal mafia-like syndicate”.
According to them, the dirty deal starts with a sweet hook. All the lender asks you for is a postdated cheque or simple loan agreement. Trouble starts when, as the lender knows already might happen, you fail to pay according to the stipulated terms. Without you being summoned to explain, bailiffs raid your home, office, or business.
Since you, like most people, believe you have a name to protect, you will quickly try to hush up any scandal by agreeing to pay quickly. No way. In the example the prisoners give, the case will be taken to a magistrate in their racket who will order you to pay the principal Shs 500,000 plus interest, lawyer’s fees of Shs 1 million, and bailiff’s fees of Shs 2.5 million. For the simple loan of Shs 500,000 they give you, the racket will squeeze up to Shs 4 million from you.
Unfortunately, there is nothing really new in the prisoners’ story. In fact, they might have read similar stories before getting that loan that got them in trouble. Desperate borrowers tend to get trapped in a cycle of debt. Commercial banks understand this. That is why they lend money basing on the borrower’s business plan, especially its cash flow element, and not on the borrowers problem or the collateral. Informal money lenders understand this too. But, unlike established banks, they are not interested in your business plan but in your assets. They ask you to stake movable and immovable property and sign transfer deeds. At the slightest default, they proceed to grab a borrower’s assets.
Such dangerous borrowing has come under focus recently because there is a new batch of MPs in town, most of them believing they have finally hit the jackpot. It is feared they will fall prey to money lenders.
“Members have urgent issues to solve and banks can’t easily help,” says Barnabas Tinkansimire, who has been an MP for Buyaga County and has seen it before, “Unfortunately, the money lenders are not patient and so they end up grabbing security of the borrower.”
Apprehension over the money lenders is so bad that as part of their induction, the Speaker of Parliament, Rebecca Kadaga held a closed door meeting to advise new MPs about the danger of what she called “conmen and manipulative money lending institutions.”
“Some MPs call me to get them out of prison and this time I am not ready to do this and that’s why we had to warn them,” Kadaga told journalists.
Helen Kawesa, the Public Relations Officer of Parliament says although parliament does not have any formal agreement with money lenders or commercial banks to transact business with any MP, the House accounts section often gets involved when the “parties involved sign their transfer deeds and do their business.”
Unsurprisingly, however, some money lenders like Timothy Sali, the Director of Tim Tim Investments Ltd told The Independent that the MPs and not the lenders are the cause of the problems.
“One MP failed to clear my money,” he told The Independent, “I warned him several times but the fellow could not respond. He lost the car which he staked as security to the business.”
MPs are particularly vulnerable because they are `honourable’ and fear to lose their dignity and will usually keep quiet about such scandals. Others who are targeted are salaried workers of prestigious organizations, and business people with collateral.
However, not all clients of money lenders are unhappy.
Patrick Bacurana, says money lenders have aided his breakthrough in business, especially when he needs to solve urgent problems.
“The system is friendly because I sign an agreement with the lender and put security and in just a few minutes I get the money I want and the bussiness goes on.
“It is cheap for me to obtain a loan from a money lender who is a friend of mine. It only takes me a phone call and the money is availed to me. Prior to that I had tried a bank they asked for a land title which I didn’t have,” Bacurana said.
Bacurana, who does mobile money, graphics design and sell clothes at City Centre Complex Kampala in a business he values at over Shs 25million, says most of the equipment he uses comes from the money borrowed from informal lenders.
“I pay my loans slowly by slowly, some lenders are my friends they give me time. Others threaten to retain my property due to late payment but I talk to them and here I am,” he says, proudly pointing at his shop.
In Kikuubo, the busy business trading lane in downtown Kampala, the money lending business has attracted foreigners, including Chinese and Indians, who lend big money.
Usually they use local front men like Muhonge, to get customers for a commission.
“We can even lend Shs500million to a client as long as collateral that almost doubles the money being lent is staked,” Muhonge, who is an agent for Chinese lenders, said. They charge 15% percent interest per month which is many times higher than the official rate but Muhonge says they often negotiate in case of defaulters. But the bottom line is the same.
“A customer who fails to pay the interest and the principle after the agreed period loses his security,” Muhonge said.
Annet Atukunda, who has been operating her business in the Seguku suburb of Kampala city for six years, has clients from all classes; rich businessmen, members of parliament and poor teachers and civil servants.
In her business, instead of indicating the asset staked as collateral for a loan, money lenders often require customers to sign transfer forms indicating that they have sold the asset to the money lender. In case of securities like cars or other vehicles, they require the customer to park the vehicle at an agreed parking yard till the money lent is paid back.
Atukunda says business is good.
“We have many plots of land in Kampala and upcountry, many vehicles are packed at our home, we pay school fees for our children through this business, we have many houses constructed around town and more good things are yet to come,” Atukunda said.
She says the biggest sum she has ever lent out is Shs 80 million and charges a monthly interest between 15% and 20% depending on the customer.
This means that if you borrow Shs 50million from her, Atukunda expects to earn up to Shs10 million in a month. If you default, the interest is compounded. In effect, although her rate is low compared to most money lenders, Atukunda charges an annual interest rate of 240 percent. That is 10 times higher than the 24% maximum mandated by the Money Lenders Act as amended in 2000. Commercial banks currently charge between 18 to 20% per annum but there is obviously very little consideration among money lenders for the contents of Section 7 of the Money Lenders Act 2000 that prohibits charging of compound interest rate by virtue of default in repayment of sums due by the borrower.
Many MPs, among them Rubanda South MP, Henry Banyenzaki, who is also the Minister of State for Economic Planning, want to change that.
“There is need to amend the money lenders Act to prevent money lenders from overcharging borrowers,” Banyenzaki told The Independent.
Unfortunately, the MPs have tried that before and it appears not to have worked. The Money Lenders Act as amended in 2000 is clear on the responsibilities of a money lender. They include obtaining a certificate from a magistrate who has jurisdiction over their area annually, obtaining a license from their local authority annually, lending at interest not exceeding 24 percent annually, and writing contracts between the lender and the borrower for legal purposes.
But as The Independent found, none of the above are strictly followed.
Guma Davis Banda, the Managing Director and an Advocate of Guma & Co Advocates told The Independent that the provisions in the Act are as good as nothing since none of them today applies. “The ministry of Finance needs to urgently draw up guidelines to monitor the operations of money lenders,” he said.
Already, Bank of Uganda (BoU) is working on a new regulation; the Consumer Protection Mechanism (CPM) to protect borrowers from being cheated or exploited by money lenders.
Robert Mbabazize, BoU’s Assistant Director Financial Stability, says as of now however, the central bank has no mandate to regulate money lenders. It only deals with commercial banks and other microfinance institutions.
Another way out would be for commercial banks and microfinance institutions to embrace new technologies, like mobile banking, that move credit to customers far away from formal lending institutions and speed up the borrowing process.
BoU’s Deputy Governor Louis Kasekende, made this point at the annual conference of the Association of Microfinance Institutions in May. He blamed the reliance on money lenders for quick money on two problems; the large segment of the population that persists outside the formal banking sector and the sectors failure to provide innovative products fit for the purpose.
He said only 26 per cent of the adult population above the age of 16 have ever used the formal banking sector like commercial banks, credit institutions and microfinance deposit taking institutions (MDIs).
He said, however, even those Ugandans with bank accounts take loans from informal credit institutions or individuals because bank loans are inaccessible and have lots of red tape. A senior official of one of the commercial banks conceded that the strict rules and procedures that commercial banks demand from customers to get a loan could be helping informal lenders to take off.
“You need to be a customer having an account with us in order to access a loan. You also need to be with business alongside security which would pay back the loan to us. If you don’t have the above we advise you to get them and be served,” the official said. That needs to change, because as everyone knows, all of us at one point might need to borrow money quickly. We should be able to get it safely from our bank and not be left at the mercy of a loan shark.