What the new interest rate cap means for Ugandans

The government’s decision to cap annual interest rates at 33.6%  for money lenders and Tier 4 microfinance institutions is set to have far-reaching effects on borrowers and lenders alike.

Published in the Uganda Gazette on  November 15, 2024, the directive from Finance Minister Matia Kasaija limits monthly interest rates to 2.8%. The measure seeks to protect borrowers from exploitative lending practices while promoting financial inclusion.

“This regulation will help curb predatory lending practices and support the financial stability of our citizens,” said Kasaija, underscoring the government’s commitment to ethical lending.

The cap directly addresses a widespread problem of unsustainable borrowing costs, which have trapped many Ugandans in debt.

Before the cap, money lenders often charged interest rates exceeding  100% annually, leaving borrowers struggling to repay loans. The new regulation slashes this rate significantly, offering financial relief to low-income earners and small business owners.

“This change will particularly benefit borrowers who depend on microloans to sustain their livelihoods,” said financial expert Dr. Jane Tumwesigye. “It will ensure they can access credit without falling into a debt spiral.”

The reduced rates are also expected to encourage more Ugandans to seek loans from regulated institutions, shielding them from the higher costs and aggressive recovery tactics of informal lenders.

For money lenders and microfinance institutions, the cap poses challenges. Many lenders may become more risk-averse, reducing loans to high-risk borrowers or those without collateral.

“The cap will force lenders to rethink their strategies,” Dr. Tumwesigye noted. “While it protects borrowers, it might limit access to credit for those most in need, especially individuals without a credit history or collateral.”

The Uganda Microfinance Regulatory Authority (UMRA) will play a key role in ensuring compliance with the cap. Increased oversight will be crucial to preventing violations and educating the public about the benefits of borrowing from registered lenders.

However, experts warn that the effectiveness of the cap will depend on robust enforcement mechanisms. Borrowers are also being encouraged to verify their lenders’ registration status and report non-compliance.

Beyond its immediate impact, the interest rate cap aligns with Uganda’s broader goals of promoting financial inclusivity and protecting vulnerable citizens from exploitation.

The regulation could level the playing field in Uganda’s lending market, reducing dependence on informal lenders while fostering trust in the formal financial sector.

“The cap is not just about lowering interest rates; it’s about creating a lending environment that is both fair and sustainable,” said Kasaija.

As the new rates take effect, Uganda moves closer to achieving a transparent and borrower-friendly financial system—one where credit access supports rather than undermines economic stability.