Lessons from Ugandan Moneylenders

This paper discusses the operations of moneylenders in Uganda, from which it attempts to derive lessons. It discusses

• The legal context of money lending in Uganda;
• The diverse ways in which money lenders in Uganda operate;
• Their position in the market;
• The manner in which they select their clients;
• Their intuitive calculation of three variables: the loan size, the period and the interest;
• The obscurity of legal documents;
• Their methods of dealing with repayments, late payments and defaults;
• The low profitability of money lending as a business;
• The way in which moneylenders compare with other business providers.

Some interesting points to note are:

• Moneylenders cut the cost of operations by sharing offices and the services of lawyers;
• Large moneylenders are good at debt management and lend only to salaried people with better guarantees;
• Moneylenders select clients by assessing the client's capacity to pay. In case of a non-salary earner, they ask for collateral equal to two to four times the value of the loan;
• Lenders are aware that the interest rates they charge are both illegal and socially unpopular. Therefore written documents are deliberately kept obscure;
• They are tolerant when it comes to late payments.

The paper concludes that it would be useful for other financial providers to notice that many people continue to borrow from moneylenders, despite their extremely high rates and poor business ethics. The main advantages of borrowing from a moneylender are rapidity, administrative simplicity and low total cost of borrowing.