Uganda new law to strengthen Saccos, rein in loan sharks

Friday July 14 2017

A trading centre at Nakivubo in Kampala. Tier 4

A trading centre at Nakivubo in Kampala. Tier 4 Microfinance Institutions and Money Lenders Act 2016 that came into force on July 1, requires lending institutions in Uganda to apply for licences. PHOTO FILE | NMG 

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Ugandan borrowers can now feel safer under a new law meant to streamline the Tier 4 microfinance institutions (MFIs) and money lenders.

They are savings and co-operative societies (Saccos), non-deposit taking microfinance institutions and self-help groups.

The Tier 4 Microfinance Institutions and Money Lenders Act 2016, which came into force on July 1, requires lending institutions to apply for licences.

It stipulates the interest to be charged on loans, repayment mode and the right to early repayment. It also requires money lenders to issue a receipt and keep records of every repayment on a loan.

The law also provides for the establishment of: The Sacco Stabilisation Fund, to which an equivalent of 0.5 per cent of the total assets of the Sacco is contributed; a Sacco Savings Protection Fund and a Central Financing Facility to license money lenders.

It also provides for receivership and liquidation of a Tier 4 MFI.

Every Sacco shall subscribe to the Stabilisation Fund to be managed by the Uganda Microfinance Regulatory Authority (UMRA). UMRA will provide financial assistance to Saccos that are insolvent or are likely to become insolvent.

State Minister for Microfinance Haruna Kasolo Kyeyune said that UMRA members have already been appointed.

Falling Saccos

Although players under the Uganda Co-operatives Alliance (UCA) have poked holes in the law, saying it will suffocate Saccos, Mr Kasolo said the microfinance sector has grown but few financial institutions have graduated into microfinance deposit-taking institutions level (Tier 3) than was anticipated, and had continued operating without an effective law.

He said that there were several cases of money lenders disappearing on the due date for repayment, forcing borrowers to pay compound interest by reason of default.

Borrowers will now enjoy protection under Article 95 (1) and (2) which allows them to deposit their loan cash with the Authority in cases where the lender evades them. The Authority shall then remit the money to the lender on their behalf.

Henry Mbaguta, assistant commissioner in the Financial Services Department in the Ministry of Finance, Planning and Economic Development, said that the law will help promote financial inclusion.

“Effective regulation and supervision will ensure adequate compliance to the law and provide an important tool for financial inclusion,” said Mr Mbaguta.

He said that the government is hoping to extend financial services to more Ugandans through its seven-year project for Financial Inclusion in Rural Areas.

Only 14 per cent of Ugandans are part of the formal banking sector, less than 10 million have bank accounts and 15 per cent of the country’s adult population is still financially excluded, data shows.


Members’ savings will also be safer under the new law since Sacco managers will be required to have security in the bank worth the money they are going to handle in the Sacco.

“Saccos here need to borrow a leaf from neighbouring Kenya where the co-operatives contribute more than 30 per cent of GDP,” Mr Mbaguta said.

But Sacco players said this is not possible since co-operatives in Uganda operate in a different legal environment from those in Kenya.

For example, in Kenya, the Ministry of Industry, Trade and Co-operatives through the Department of Registration of Co-operatives is charged with the responsibility of registering Saccos, but in Uganda’s case, the new law bequeaths this responsibility on the Bank of Uganda.

General secretary of UCA Ivan Asiimwe, said the Act will kill Saccos. He cited the clause that gives the minister power to control interest rates.

“Let’s not have laws that will kill co-operatives. Co-operatives would be stronger if they were free from government control”, he said.

Mr Asiimwe also expressed discomfort with a clause that requires Saccos to be registered licensed societies, that their services be limited to members and to loans as opposed to providing a range of services including insurance and training.

Poor policies

Leonard Okello, the executive director of the Uhuru Institute for Social Development, which undertakes research on the co-operative movement, blamed the current Sacco woes on a “poor liberalisation policy.”

“The revival of co-operatives is among issues ordinary Ugandans voiced strongly in the Citizens’ Manifesto so coming up with such a law is tantamount to suppressing the voice of the people,” he said.

The Citizens’ Manifesto was developed by a group of non-governmental organisations to better monitor the democratic decision-making process.

However, a member of the Uganda Money Lenders’ Association Becky Namuddu, said that the new law would restore sanity to a tainted industry.

“The new law will sort out the bad apples from the money lending business. For example, having official premises and registered business name as well as predetermined interest rates will help kick out the thieves,” she said.