Govt sets new rules for online money lending

No digital or online money lender will be allowed to charge a defaulting customer a penalty fee exceeding 50 percent of the total amount they lent them once new operating guidelines come into play in less than six months’ time.

Daily Monitor has learnt that the Uganda Microfinance Regulatory Authority (UMRA) Digital Lending Guidelines are almost complete and will be rolled out in December.

The 10 guidelines were developed following public outcry about businesses that run online money lending applications outside the law. Officials at UMRA say they will help restore sanity in the industry, which has been hijacked by quacks and suspected criminals.

The rules were developed after a collective effort involving the regulator, the Ministry of Finance, and Bank of Uganda.

They will cover licensing, governance, credit information, place of business, digital credit, consumer protection, an anti-money laundering mechanism, and reporting of requirements.

Ms Rachael Vanesa Nakawooya, a manager in-charge of microfinance institutions at UMRA, told stakeholders during an August 9 consultative meeting that illegal online money lenders had brought shame to the sector.

“One time, the [Daily] Monitor had a front page article [Online money lenders preying on Ugandans] calling you [clients] prey which is too bad for this business. We, as regulators, promised in that same article that we shall bring out regulations and here we are about to issue. By December this year, the regulations will be up and running,” she said during the meeting held in Najjera, Wakiso District.

On April 5, Daily Monitor carried a story which showed how some online money lenders were operating illegally and charging extortionate rates.

Operators of some of the applications including Mangu Cash, Fair Credit, Redi Cash, Isente, Quick-Sente, have since registered with UMRA under one company called Volantis Co Ltd, according to the company’s legal officer, Ms Milly Nabukeera.

Ms Nabukeera, however, refused to disclose the physical address of the company saying, “when people are borrowing our money, do they ask us where we are located? Why should someone start asking after failing to pay? Just know we are legally operating now”.

But according to UMRA’s May 2023 published list of 2,132 licensed money lending businesses, Volantis Co Ltd is recorded under licence number ML2221, located in Kololo Courts P.O. Box 33913, Kampala.

Under the new guidelines, Volantis and any other similar business will be required to register and make public their physical address or risk being deregistered.

Ms Nakawooya said another loophole which will be plugged is one where a majority of the businesses licensed by UMRA only declared either one or two portals, hiding others and thereby dodging payment of necessary fees.

“We found out that some of you come and register with our companies but hide some of your products. For example some of you own over six applications, but you declared one, under the new guidelines we shall disqualify you,” Ms Nakawooya said.

She added that online lenders will be regulated under the Tier 4 Microfinance Institutions and Money Lenders Act, 2016.

In cases where the client fails to pay a loan within the agreed timeframe, the new guidelines prohibit the lender from charging more than a half of the total loan principal in penalties.

“They are supposed to register a known business name, and should avoid threats, using obscene language and avail details of the recovery agent to the client prior to executing any arrears recovery plans and the company should provide clear loan terms,” the regulations adds.

Ms Nakawoya said the lenders shall declare a monthly interest rate which they shall then divide into four weeks in case they want to recover their money in seven days.

“We don’t want to see a company charging clients 30 percent per month. And whoever fails to adhere will lead to revoking of our license,” she said.

Branding

False advertising through sending unsolicited bulk short messages to cellphone holders, social media and making random calls have been prohibited. During loan application, the loan guarantor shall also be notified by the company before issuing the loan to a prospective client.

“This has been done to avoid calling people who were not involved during the process,” she said.

The proposed guidelines further direct the digital lenders to file monthly reports with UMRA for period review. Failure to report may lead to sanctions and suspensions.

Digital lenders who attended the meeting said that the guidelines have been brought to protect the customers. But Ms Nakawooya said digital lenders have been given up to September to submit their inputs in the guidelines.

Mr Alex Ochan, the assistant director in charge of national payment systems at the BoU, said the guidelines will address most of the issues raised about the sector and eventually be made legally enforceable through regulations. 

New Guidelines

    Any digital lender shall be required to register with UMRA and get an operating licence within three months of engaging in the business. One will be required to subit all information, including the number of apps being operated, technology used, employees and physical address.

Digital lenders shall also be required to ensure that they safeguard customer information which must be treated as confidential at all times. They will be prohibited from sharing information about their customers with the Credit Reference Bureau (CRB) unless they get their consent at least 30 days before.

BoU, one of the developers of the guidelines, licenses CRBs, which gather credit worthiness information on companies and individuals which is then shared with other financial institutions such as banks to help them identify loan applicants who may have defaulted elsewhere.

For purposes of fighting money laundering and terrorism financing, digital lending companies will have to declare the source of funding for their businesses before obtaining a license.