Commercial banks have decided to eliminate the unpopular practice of imposing penalties on customers who repay their loans ahead of schedule. The decision follows public outcry and pressure from the Central Bank.

Banks earn a portion of their revenue from interest charges or fees on loans. When borrowers settle their loans prematurely, banks miss out on the interest income they would have otherwise earned. Prepayment penalties are often used by some banks to compensate for this loss.

The matter was addressed during a meeting between the Bank of Uganda and CEOs of banking institutions in August 2023, as revealed in a letter from the Uganda Bankers Association (UBA), seen by New Vision.

The letter, signed by Wilbrod Owor, the executive director, UBA, conveyed the decision reached during the meeting, which included the abolition of prepayment penalties. It was also decided that the Bank of Uganda be promptly informed of this resolution, and individual member banks should communicate this change to their customers.

“The meeting further agreed that BOU be notified of this decision with immediate effect and that members handle applicable communication to their customers as appropriate. We thank you for your stewardship and count on your usual support,” Wilbrod Owor, the executive director at UBA, said in the letter.

Patricia Amito, head of communications and corporate affairs at UBA, confirmed the development in a phone interview with New Vision. She noted that the decision was prompted by customer requests, and member banks collectively agreed to address the matter.

“It was a request that came from customers. We sat down with our member banks and we took a decision about it,” she said.

This decision is expected to be a welcome relief for borrowers who sought to settle their loans ahead of schedule without incurring additional financial penalties.