Financial sector is under siege from loan sharks

Author: Francis Muhire. PHOTO/FILE

What you need to know:

  • Interest rate is one of the critical indicators to scan the overall health state of an economy. The President recently expressed concerns over high interest rates charged by loan sharks.

Show me your financial sector, and I will tell you where your economy is headed. The financial industry is the heart of any economy and thus requires adequate attention by the government through regulation.

According to the Uganda Bureau of Statistics (Ubos) Uganda National Survey Report 2019, only 0.4 percent of the total population uses bank loans as a source of capital.

The rest use their own savings and loan sharks. According to the World Bank’s world development indicators 2023, Uganda’s domestic credit to the private sector by banks (percentage of GDP) stood at 13.3 percent in 2020 compared to 6.4 percent in 1960, and only 8.1 percent of total firms use banks to finance their investments.

Interest rate is one of the critical indicators to scan the overall health state of an economy. The President recently expressed concerns over high interest rates charged by loan sharks.

Uganda’s financial sector is currently under capture by loan sharks. Loan sharks are individuals or entities who lend at excessively high interest rates. 

Currently, there is an increasing number of individuals and entities charging interest rates as high as 30 percent per day, even licensed money lenders who charge 10 percent per month (120 percent per annum) or 20 percent per month (240 percent per annum) and not forgetting some commercial banks charging as high as 40 percent per annum, all fall under loan sharking.

Currently, loan sharking is the country’s most lucrative and growing business. Loan sharks are evenly distributed across the country and well-structured up to deep in the villages. 

Loan sharks are flourishing simply due to the loopholes within and poor implementation of the current financial and legal instruments such as the Tier 4 Microfinance Institutions Act and Money Lenders Act, 2016.

The high appetite for government borrowing from the domestic market, outcompeting or crowding out the private sector and individuals; stressful and bureaucratic bank processes, and financially illiterate, impoverish desperate borrowers. 

Victims find it easy and fast to access loans from loan sharks whose process is swift and has flexible collateral security requirements ranging from National Identification cards to sales agreements.

Only a few irrational borrowers seek loans from loan sharks for investing while the majority of the borrowers are looking for money for school fees, medical bills, food, housing and mortgages, and not forgetting the politicians to fund their campaigns.

Whereas Uganda adopted a fully liberalised financial sector in the 1990s, it does not mean the government should leave this critical sector entirely in the hands of the market. Government holds too much power through rational regulation. 

Policy recommendations

The President should look at building strong, transparent, effective, independent and well-staffed structures to coin new and implement existing acts, laws, policies and strategies rather than issuing presidential directives.

Optimal regulation should be a must. An interest rate cap should not be even thought about, for it will exacerbate the problem through the emergence of the black market.

Government should increase per capita expenditure on the basics such as education, health, and housing, among others.

A national financial literacy drive through mass sensitisation is highly required.

Last and most importantly, government should reduce its appetite for domestic borrowing, which has crowded out the private sector and individual borrowers and thus sky rocketing the lending rates.

Mr Francis Muhire is a lecturer at MUBS