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Money Lending as a Business

With the way the economy is moving, it’s no wonder that the money lending business is on the rise. If you have ever needed finances urgently, you have possibly considered contacting a money lender. If you are considering a business idea, and have some extra money laying around, money lending may just be the perfect business plan.

It is not uncommon for borrowers to choose this income line because of its high lending rates. Banking institutions offer a tedious process of accessing credit and yet when the demand arises, it will surely give you comfort to acquire the credit required urgently. This seems like a quick fix solution, however, money lending is not void of challenges.

While starting a money lending business may be lucrative, it has exposed money lenders to crook borrowers, not willing to pay and giving securities that are hard to realise. It has also exposed the borrowers to the vagaries of money lending sharks all out to grab securities instead of realising their money. Here is what you need to know about the business of money lending. 

Let us lend cheerfully, for the time is pretty sure to come when we will wish to borrow

James Ellis

The Tier 4 Microfinance Institutions and Money lenders Act was enacted to protect the borrowers against bad lending and unethical practices of the lenders, to build confidence in microfinance business, and promote financial inclusion. This Act repeals the Money Lenders Act Cap 273, which required moneylenders to simply apply for a Money Lending License from the Chief Magistrate’s court. The new Act however creates the Uganda Microfinance Regulatory Authority under section 6 as a body corporate with perpetual succession and a common seal with functions among others to regulate and supervise the money lending business in Uganda. 

The regulatory authority carries the following functions:

i) To grant, renew and revoking of money lending licenses

ii) To keep and maintain a register of money lenders

iii) Sensitising the public about the money lending business 

iv) To conduct inspection and examination of books of accounts, records, returns, and other documents or premises of a money lending business

v) To conduct an enquiry into the money lending business.

How to start a money lending business?

Only a private company registered under the law can start a money lending business. Individuals are prohibited from lending money in a business form but not on a friendly basis. This company must not be involved in the business of banking or insurance, a society registered under the Cooperative Societies Act, or a body incorporated or empowered by an Act of parliament to lend money. 

A company interested in venturing into this type of business can do so by making an application for a money lending license made by writing to the Authority and providing the certificate of incorporation of the Company, the particulars of the directors of the Company; a resolution of the particulars of the secretary of the company; the postal and physical address of the company and the prescribed fees. Upon application, the authority within three months after receiving an application shall consider the application and if satisfied that the applicant meets the requirements issue a license to the applicant. A license issued expires on the thirty-first day of December every year and shall specify the name, under which the address at which, the money lender is authorised to carry on business, and shall not authorise a moneylender to carry on business under more than one name. 

The Authority may however refuse to issue a license for money lending where shareholders and persons responsible for the management of the company or firm are not of good character or if the applicant or any person responsible for the management of the company is convicted of an offence relating to embezzlement or any other financial impropriety and failing to comply with the requirements of the Act. The condition of good character is ambiguous as the Act does not specify the condition that amounts to good character.

The Authority can only effectively refuse to grant a license based on one’s antecedents or criminal record where they synchronize information management systems with National Identification and Registration Authority; the security systems and the judiciary.  The license is issued upon payment of the prescribed annual fees in respect of the money lending licensing. Its renewal is triggered by an application for the same. The Authority has the discretion to renew the license or decline to do so where the moneylender violated provisions of the law or conditions of the license.

It is an offence for a person to carry on business as a moneylender without a moneylending license or in a name or at a place other than the name or address specified in the money-lending license. The court may order such a person’s money lending license to be revoked or disqualify that person from engaging in money lending business. To address the discrepancies and extortionist contracts, the Act prescribes a form of money lending contracts. A money lending contract shall be in writing and shall be signed by the money lender and the borrower and shall be witnessed by a third party. It shall state the date the loan is disbursed; the amount of the principal loan; the interest charged on the loan expressed in terms of a per cent per year; the nature of the security, if any; the duties and obligations of the borrower; the mode of repayment; the nature of guarantors, if any; and the duties and obligations of the borrower; the mode right to early repayment. 

A money lending contract is only illegal and unenforceable if it directly or indirectly provides for a compound interest or the rate or amount of interest being increased because of a default in the payment of sums due under the contract. A lender can only charge simple interest on the sum due from the date of default till payment in full. Charging an interest bigger than the prescribed maximum interest rate commits an offence.  A money lender is required to issue receipts to the borrower immediately for every repayment made on a loan and to keep a record which shall contain the date on which the loan was disbursed, the amount of the principal loan, the rate of interest, the sum repaid on the loan and the date on which the repayment is made.