Micro credit reforms ought to run deeper

It is apparent that sub-prime lenders and payday lenders alike have taken advantage of a perfect storm in consumer credit to sell high-cost credit. While this set of circumstances has transpired for a protracted period, it has become more pronounced thanks to the current cost of living crisis.

High Court judge Esta Nambayo’s September 20 ruling is expected—or, more accurately, hoped—to rattle the sub-prime loans market dominated by illegal lenders. The justice stopped short of calling a lender who hoped to earn an almost eightfold increase on loan a shylock.

She nevertheless made clear that the lender’s operations were deemed illegal because they aren’t licensed under Tier 4 Microfinance Institutions and Money Lenders Act, 2016. Consequently, the justice issued “permanent injunction … restraining the [lender], her agents or anyone acting on her instructions from enforcing and or making any attempts to recover any money arising from the [principal sum borrowed].”

Justice Nambayo’s ruling affirms what the Uganda Microfinance Regulatory Authority (UMRA) has for years been warning illegal loan sharks about insofar as delinquency management is concerned. Even possession of operational licences—which payday lenders pride themselves on—doesn’t give lenders carte blanche to deal with collateral as they so wish. After issuing a demand notice within 60 days, the borrower still has first refusal on prospective purchasers of their collateral.

UMRA—the government agency responsible for licensing, supervision and regulation of Tier 4 microcredit institutions, lenders as well as savings and cooperatives—has not been vocal enough to quieten the angst of borrowers in Uganda. Few, for instance, know about the existence of the consumer protection bureau thanks to the regulator’s quietude and passivity amid the microcredit tumult.

We hope Justice Nambayo’s ruling helps stop illegal lenders who are targeting vulnerable people in their tracks. That notwithstanding, we are mindful of the fact that a lot still needs to be done to protect borrowers. For one, more socially responsible options—such as credit unions and nonprofit community development finance institutions—should be scaled up.

Responsible authorities should also step up engagements, helping consumers look at judicious debt management plans on any existing borrowing. Above all, rather than push for a reboot of the payday lending market, the government of Uganda should strive to provide support for struggling families.

State actors should spare no effort in turning the tide against both legal (including the vast bulk of the 1,500 lenders that have registered with UMRA) and illegal loan sharks. They should show exceptional energy and an iron will in ensuring borrowing is affordable for all. The number of people in debt to both legal and illegal loan sharks keeps spreading so rapidly and damagingly. Whilst an age-old adage reminds us that numbers don’t bleed, the one in question should alert state actors to the fact that something of the gravest nature has occurred. Inaction will have dire consequences.

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