Beware of Kampala’s ‘Shylocks’
Nov 02, 2004
In the ideal world, one borrows money from the banks. But getting money from the banks can be tricky because of the bureaucracy involved in securing a bank loan. This bureaucracy makes the banks of little help to a prospective borrower in desperate need of cash.
By Asuman Bisiika
In the ideal world, one borrows money from the banks. But getting money from the banks can be tricky because of the bureaucracy involved in securing a bank loan. This bureaucracy makes the banks of little help to a prospective borrower in desperate need of cash.
Suffice to say that many people have resorted to borrowing money from informal moneylenders. However, borrowing from the informal moneylenders is like jumping from the frying pan to the fire. Testimonies reveal a picture of usurious and heartless loan sharks who will do anything to recover their money.
Jane Nankya, a married woman, borrowed sh1m from a moneylender. After depositing her car logbook and signing transfer forms as security, Nankya agreed to pay the sh1m and an interest of 20% in 30 days. When the period expired, Nankya was not able to pay the money. After the second month, the money had attracted 0.728 in interest. She was forced to sell a plot of land she had inherited from her father to clear the loan before her husband could learn of it.
Since Nankya had borrowed sh1m, she was expected to pay sh1.2m after 30 days. Since she did not pay in the 30 days, she was required to pay the principal amount of sh1.2m plus 20% interest accruing (that is sh1440,000) in the second month. When she eventually paid in the third month, she had to pay the principal of sh1,440,000 and a 20% interest which brought the amount to sh1,728,000.
For John, the story was quite different. John and Peter were childhood friends and who regarded each other as brothers. John borrowed sh2m from Peter, who was then a moneylender. John issued a post-dated cheque as security. He was not able to pay back the money at the agreed time and the principal amount attracted a hefty interest. Peter threatened to take the matters to Court and no amount of pleas could stop him, until their families intervened.
A former moneylender says the system in Kampala has now become real business. “The money involved is so much and goes untaxed. The moneylenders offer ‘loans’ at usurious interest rates,†says the former moneylender.
But Juma Walusimbi, Bank of Uganda’s public relations officer says the moneylenders may be necessary because they give some people easy access to money. “There may be some justification for the existence of informal moneylenders but I think what is needed is a regulatory mechanism like that governing micro-finance institutions. After that, then Uganda Revenue Authority would come in to tax,†says Walusimbi.
A senior banker in one of the largest banking institutions in Kampala says the informal moneylenders distort and negatively impact on the culture of saving and banking in the country. “And the Government does not have to regularise them because they encourage consumerism with little thinking for saving. You will find most of the borrowers do not use the money on the purchase of consumer goods,†the banker who preferred anonymity said.
However, the banker says the emergency of these moneylenders is a challenge to the traditional banks. He said, “I think the banks should popularise loan schemes for salary earners. And non-salary earners should be able to access short-term loans on simple terms. The way I see things now,, traditional banks will have components of micro-finance schemesâ€.
In spite of the huge amounts of money involved, the moneylenders do not pay income tax.
A moneylender on Jinja Road says his business is legitimate. He says his is a registered company with a certificate issued by the Chief Magistrate’s Court under the Money Lenders Act 2002. “We pay corporation tax to URA, an annual trading licence fee to Kampala City Council and an annual fee to the Judiciary,†he says.
Moneylenders take collateral and sign an agreement with the borrower, indicating the amount equivalent to the principal amount and interest accruing.
It is a simple agreement between the lender and the borrower, which does not indicate the interest. For instance, if you borrowed sh1m at a 20% interest rate, the agreement would indicate that you owed the company or the individual Shs1.2m without referring to the interest accrued.
Some of the collateral security preferred by the moneylenders is car logbooks, laptop or desktop computers and in some circumstances vehicles. The preferred clients are the salaried workers and politicians, especially Members of Parliament who can be intimidated into paying because of their public image.
In the ideal world, one borrows money from the banks. But getting money from the banks can be tricky because of the bureaucracy involved in securing a bank loan. This bureaucracy makes the banks of little help to a prospective borrower in desperate need of cash.
Suffice to say that many people have resorted to borrowing money from informal moneylenders. However, borrowing from the informal moneylenders is like jumping from the frying pan to the fire. Testimonies reveal a picture of usurious and heartless loan sharks who will do anything to recover their money.
Jane Nankya, a married woman, borrowed sh1m from a moneylender. After depositing her car logbook and signing transfer forms as security, Nankya agreed to pay the sh1m and an interest of 20% in 30 days. When the period expired, Nankya was not able to pay the money. After the second month, the money had attracted 0.728 in interest. She was forced to sell a plot of land she had inherited from her father to clear the loan before her husband could learn of it.
Since Nankya had borrowed sh1m, she was expected to pay sh1.2m after 30 days. Since she did not pay in the 30 days, she was required to pay the principal amount of sh1.2m plus 20% interest accruing (that is sh1440,000) in the second month. When she eventually paid in the third month, she had to pay the principal of sh1,440,000 and a 20% interest which brought the amount to sh1,728,000.
For John, the story was quite different. John and Peter were childhood friends and who regarded each other as brothers. John borrowed sh2m from Peter, who was then a moneylender. John issued a post-dated cheque as security. He was not able to pay back the money at the agreed time and the principal amount attracted a hefty interest. Peter threatened to take the matters to Court and no amount of pleas could stop him, until their families intervened.
A former moneylender says the system in Kampala has now become real business. “The money involved is so much and goes untaxed. The moneylenders offer ‘loans’ at usurious interest rates,†says the former moneylender.
But Juma Walusimbi, Bank of Uganda’s public relations officer says the moneylenders may be necessary because they give some people easy access to money. “There may be some justification for the existence of informal moneylenders but I think what is needed is a regulatory mechanism like that governing micro-finance institutions. After that, then Uganda Revenue Authority would come in to tax,†says Walusimbi.
A senior banker in one of the largest banking institutions in Kampala says the informal moneylenders distort and negatively impact on the culture of saving and banking in the country. “And the Government does not have to regularise them because they encourage consumerism with little thinking for saving. You will find most of the borrowers do not use the money on the purchase of consumer goods,†the banker who preferred anonymity said.
However, the banker says the emergency of these moneylenders is a challenge to the traditional banks. He said, “I think the banks should popularise loan schemes for salary earners. And non-salary earners should be able to access short-term loans on simple terms. The way I see things now,, traditional banks will have components of micro-finance schemesâ€.
In spite of the huge amounts of money involved, the moneylenders do not pay income tax.
A moneylender on Jinja Road says his business is legitimate. He says his is a registered company with a certificate issued by the Chief Magistrate’s Court under the Money Lenders Act 2002. “We pay corporation tax to URA, an annual trading licence fee to Kampala City Council and an annual fee to the Judiciary,†he says.
Moneylenders take collateral and sign an agreement with the borrower, indicating the amount equivalent to the principal amount and interest accruing.
It is a simple agreement between the lender and the borrower, which does not indicate the interest. For instance, if you borrowed sh1m at a 20% interest rate, the agreement would indicate that you owed the company or the individual Shs1.2m without referring to the interest accrued.
Some of the collateral security preferred by the moneylenders is car logbooks, laptop or desktop computers and in some circumstances vehicles. The preferred clients are the salaried workers and politicians, especially Members of Parliament who can be intimidated into paying because of their public image.