Why money lending thrives
Jun 01, 2011
JULIUS (not real name) prefers borrowing for his printing business from money lenders popularly referred to as ‘loan sharks’ as opposed to commercial banks. He claims that the process of securing loan money from the money lenders is “fast and less complicatedâ€.
By Samuel Sanya
JULIUS (not real name) prefers borrowing for his printing business from money lenders popularly referred to as ‘loan sharks’ as opposed to commercial banks. He claims that the process of securing loan money from the money lenders is “fast and less complicatedâ€.
“I have clients that make large orders that require more capital than I have in my printing business. I just go to a money lender in the morning with my land title as collateral security and in the evening I walk away with the money. It is better than going to a bank since they take a minimum of two weeks to process a loan request,†he says.
Julius says money lenders usually require only a clear identification as well as bank statements for three months from first-time borrowers. Occasionally, a guarantor, someone to recommend the borrower will be required. Frequent clients do not need these requirements.
Julius has been fortunate he has not had any problems borrowing from the money lenders since most of his customers pay him on time and the money lenders give him a week's grace period when he delays to make payment.
“The problem comes only when one gives the money lenders a post–dated cheque and the money is not there on the bank account on the agreed date,†he explains.
Joseph Kwizera a one-time borrower from money lenders rues the time he approached them for a loan, since, he says, they nearly imprisoned him for defaulting on a loan repayment in addition to confiscating his laptop, printer and an unspecified amount of collateral.
“I got a sh1.25m loan for a business venture from a money lender but business did not go as I had planned yet the interest payments were just too high,†he told Business Vision. He says that he gave the money lender, popularly known as “Money Joeâ€, a post-dated cheque at the time getting the loan, but the business projections did not work out by the time of paying back.
“It is hell. Here you are with no money and the ‘guys’ want their money. Some of them connive with security operatives to arrest you,†he added.
He says the money lenders are very ruthless when it comes to collecting their payments but very calm when lending. He, however, concedes that being ruthless is perhaps a quality that is necessary to succeed in the trade.
What kind of people are in the money-lending business?
Salaried workers have increasingly taken up money-lending as a business option owing to the increased demand for personal and business loans in the midst of rising commercial bank interest rates currently averaging around 22% per annum.
A rapid study by Ernest Kaffu and Paul Rippey in 2003 on financial deepening in Uganda attempted to capture the scale and magnitude of the money lending business amongst salaried workers in Kampala.
The study discovered that one prominent money lender in Kikuubo is also an accountant in a large enterprise dealing in real estate, transport and wholesale trade. The money lender operates from his employer’s office.
Another, in the study is a manager of a Savings and Credit Cooperative society (SACCO). He operates his money lending business in the premises of the SACCO alongside two women who double as workers in the SACCO and the money lending business.
One particular case of interest was that of a full-time Kampala City Council employee who rents an office in town where he offers consultancy services in addition to his money lending business.
In comparison to the previous two cases, he is rather sophisticated. He uses computerized accounting software to track loans, compute portfolio at risk and follow financial performance unlike the previous two who use their intuition when lending.
“Once you have sh3m lying idle on your Bank account, why not lend to your workmates at an interest. At this point it is essential to hire a business manager to handle collections, get a license and start lending to people outside the workplace,†says a money lender in an interview with Business Vision on condition of anonymity due to the secrecy that surrounds the money lending trade.
Money lending is legal under the Money Lenders Act of 1952 in Uganda; however, the same act that legalizes the trade also places a cap on the interest chargeable by money lenders at 24% annually, something that they have regularly not adhered to.
Julius says that the money lenders charge 25% monthly interest for first time borrowers while repeat customers, like him, go on to pay 15% interest per month for a maximum of three months. He estimates that there are over 1,000 money lenders in the country.
The money lender’s view
Aggrey, a money lender says that in order to ensure that their money is repaid they have to demand for collateral which is usually always worth much more than the value of the loan.
“We know that the interest we charge is high but we have not stopped anyone from going to the commercial banks where the interest is lower,†he explained.
He said that the target market of the money lenders are the businessmen who require quick loans for their businesses and are sure of receiving big lump-sum payments from their clients to repay the loans in a short spell.
One money lender who asked not be named says that despite the availability of many borrowers, few of them are committed to following through with the loan repayments.
This, he said, meant that the money lenders have to use shrewd methods to ensure repayments such as using security operatives, asking for high value collateral and charging high interest rates.
“Much as we need to lend, the business is not easy. Three out of every four borrowers do not want to repay,†he said.
Edward Tenywa, an economist in the research department of the Bank of Uganda (BoU) the supervisory body of all financial institutions in country says that the money lenders, popularly known as “loan sharks†are not covered by any BoU supervisory provisions at the moment.
“Currently, Bank of Uganda’s regulation and prudential supervision covers only Commercial banks, Micro deposit institutions, Credit Institutions, Forex bureaus and money remittance companies. Money lenders or loan sharks are not under the supervision of BOU,†he explained in an interview with Business Vision.
The money lenders do not seem to have a clear regulatory body under the Money lenders Act of 1952; however, by definition they qualify to fall under tier 4 financial institutions which are not subject to licensing by BoU.
The colonial law gives Magistrates the power to issue annual licences to the money lenders, therefore aggrieved clients have to address their concerns to the courts of law." he explained.
JULIUS (not real name) prefers borrowing for his printing business from money lenders popularly referred to as ‘loan sharks’ as opposed to commercial banks. He claims that the process of securing loan money from the money lenders is “fast and less complicatedâ€.
“I have clients that make large orders that require more capital than I have in my printing business. I just go to a money lender in the morning with my land title as collateral security and in the evening I walk away with the money. It is better than going to a bank since they take a minimum of two weeks to process a loan request,†he says.
Julius says money lenders usually require only a clear identification as well as bank statements for three months from first-time borrowers. Occasionally, a guarantor, someone to recommend the borrower will be required. Frequent clients do not need these requirements.
Julius has been fortunate he has not had any problems borrowing from the money lenders since most of his customers pay him on time and the money lenders give him a week's grace period when he delays to make payment.
“The problem comes only when one gives the money lenders a post–dated cheque and the money is not there on the bank account on the agreed date,†he explains.
Joseph Kwizera a one-time borrower from money lenders rues the time he approached them for a loan, since, he says, they nearly imprisoned him for defaulting on a loan repayment in addition to confiscating his laptop, printer and an unspecified amount of collateral.
“I got a sh1.25m loan for a business venture from a money lender but business did not go as I had planned yet the interest payments were just too high,†he told Business Vision. He says that he gave the money lender, popularly known as “Money Joeâ€, a post-dated cheque at the time getting the loan, but the business projections did not work out by the time of paying back.
“It is hell. Here you are with no money and the ‘guys’ want their money. Some of them connive with security operatives to arrest you,†he added.
He says the money lenders are very ruthless when it comes to collecting their payments but very calm when lending. He, however, concedes that being ruthless is perhaps a quality that is necessary to succeed in the trade.
What kind of people are in the money-lending business?
Salaried workers have increasingly taken up money-lending as a business option owing to the increased demand for personal and business loans in the midst of rising commercial bank interest rates currently averaging around 22% per annum.
A rapid study by Ernest Kaffu and Paul Rippey in 2003 on financial deepening in Uganda attempted to capture the scale and magnitude of the money lending business amongst salaried workers in Kampala.
The study discovered that one prominent money lender in Kikuubo is also an accountant in a large enterprise dealing in real estate, transport and wholesale trade. The money lender operates from his employer’s office.
Another, in the study is a manager of a Savings and Credit Cooperative society (SACCO). He operates his money lending business in the premises of the SACCO alongside two women who double as workers in the SACCO and the money lending business.
One particular case of interest was that of a full-time Kampala City Council employee who rents an office in town where he offers consultancy services in addition to his money lending business.
In comparison to the previous two cases, he is rather sophisticated. He uses computerized accounting software to track loans, compute portfolio at risk and follow financial performance unlike the previous two who use their intuition when lending.
“Once you have sh3m lying idle on your Bank account, why not lend to your workmates at an interest. At this point it is essential to hire a business manager to handle collections, get a license and start lending to people outside the workplace,†says a money lender in an interview with Business Vision on condition of anonymity due to the secrecy that surrounds the money lending trade.
Money lending is legal under the Money Lenders Act of 1952 in Uganda; however, the same act that legalizes the trade also places a cap on the interest chargeable by money lenders at 24% annually, something that they have regularly not adhered to.
Julius says that the money lenders charge 25% monthly interest for first time borrowers while repeat customers, like him, go on to pay 15% interest per month for a maximum of three months. He estimates that there are over 1,000 money lenders in the country.
The money lender’s view
Aggrey, a money lender says that in order to ensure that their money is repaid they have to demand for collateral which is usually always worth much more than the value of the loan.
“We know that the interest we charge is high but we have not stopped anyone from going to the commercial banks where the interest is lower,†he explained.
He said that the target market of the money lenders are the businessmen who require quick loans for their businesses and are sure of receiving big lump-sum payments from their clients to repay the loans in a short spell.
One money lender who asked not be named says that despite the availability of many borrowers, few of them are committed to following through with the loan repayments.
This, he said, meant that the money lenders have to use shrewd methods to ensure repayments such as using security operatives, asking for high value collateral and charging high interest rates.
“Much as we need to lend, the business is not easy. Three out of every four borrowers do not want to repay,†he said.
Edward Tenywa, an economist in the research department of the Bank of Uganda (BoU) the supervisory body of all financial institutions in country says that the money lenders, popularly known as “loan sharks†are not covered by any BoU supervisory provisions at the moment.
“Currently, Bank of Uganda’s regulation and prudential supervision covers only Commercial banks, Micro deposit institutions, Credit Institutions, Forex bureaus and money remittance companies. Money lenders or loan sharks are not under the supervision of BOU,†he explained in an interview with Business Vision.
The money lenders do not seem to have a clear regulatory body under the Money lenders Act of 1952; however, by definition they qualify to fall under tier 4 financial institutions which are not subject to licensing by BoU.
The colonial law gives Magistrates the power to issue annual licences to the money lenders, therefore aggrieved clients have to address their concerns to the courts of law." he explained.