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Players in the financial sector have cautioned Ugandans to desist from the temptation of reckless borrowing which they say continues to affect trust between the lenders and borrowers thus raising the cost of credit.

According to the Chief Executive Officer of Letshego Uganda Giles Germany Aijukwe, the rampant innovation of digital lending platforms continues to make money accessible which in turn fuels irresponsible borrowing.

He was speaking during an event held at their head offices in Kololo to reward clients who participated in the just concluded Back2School promotion that was held in four regions of the country.

“As a financial institution, we are thrilled to reward these winners. However, I want to caution Ugandans against irresponsible borrowing. One must only borrow to support a business or to invest in a project that will offer returns not borrowing for consumption and merry. Borrow with a purpose,” Aijukwe stated.

Aijukwe explained that borrowers continue to be debt-trapped because they engage in risk borrowing, urging Ugandans to acquire more financial literacy skills that will enable them to plan for the loans they take.

He adds that as the defaulting rate grows, more financial institutions become reluctant to lend which will then translate to a high cost of credit through high interest rates.

“No financial institution wants to incur losses, once borrowers don’t pay then the lenders tend to charge high rates which will in the long run affect lending to the private sector. We are ensuring that we lend to a group that understands why they are borrowing.”

According to John Walugembe the Executive Director for the Federation of Small and Medium Enterprises (FSMEs), the trend of people defaulting on their loans and struggling to manage their debts is not unique to Uganda, as many people in other countries around the world are also grappling with debts.

However, understanding the root causes of this phenomenon is critical to developing effective solutions that can help borrowers avoid default and financial ruin.

One of the primary reasons why people in Uganda are defaulting on their loans is the cost of credit. The interest rates are so high that people still have to borrow if they have to do business or move to another step.

When interest rates are high, borrowing becomes more expensive, as borrowers must pay back the principal amount along with a significant interest cost. This can be a deterrent for people who need funds for business expansion, investment opportunities, or personal reasons such as moving to the next stage in life.

The other factor responsible for the high-interest rate is the volatility of Uganda’s economy. Economic volatility refers to fluctuations and uncertainties in key economic indicators such as inflation, exchange rates, GDP growth, and government policies.

When an economy experiences significant volatility, it can increase the perceived risk for lenders, leading them to charge higher interest rates to compensate for the uncertainty and potential losses.

By empowering Ugandans with the knowledge, skills, and resources needed to manage their finances effectively, we can help reduce the incidence of loan defaults and ensure that people can achieve financial stability and security.