Court Allows Interest on Loans from Friends

Cash Torn - Court Allows Interest on Loans from Friends in Uganda
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A recent legal decision by Gulu High Court Judge George Okello has established that individuals who are not officially registered as money lenders can still charge interest on loans given to friends and relatives. The ruling, made on October 5, 2023, brings legal recognition to informal lending practices among acquaintances in Uganda.

The case revolved around a dispute between Mr. Stephen Khesmodel Omony and Mr. Denis Michael Olara. Three years ago, Mr. Olara requested a soft loan of Shs 150 million from Mr. Omony to support his construction business. The loan agreement, executed on January 10, 2020, included mutually agreed-upon terms, such as the deposit of collateral security and a fixed interest of Shs 33 million on the principal loan. In case of default, an additional 10 percent interest would apply after three months.

When Mr. Olara failed to repay the loan for an entire year, Mr. Omony sought court intervention, leading to a consent judgment for Shs 347 million. However, Mr. Olara later contested the judgment, arguing that Mr. Omony was not a licensed money lender at the time and, therefore, the interest charged was illegal.

Judge Okello’s ruling affirmed that there is no law in Uganda preventing individuals from lending money to acquaintances and charging interest, as long as both parties mutually agree to the terms. The judge clarified that money lending regulations apply to companies, not natural persons, and that good lending practices, such as using collateral, do not automatically transform a transaction into money lending.

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This decision recognizes the reality of informal lending practices in the Ugandan community, where friends and acquaintances help one another during emergencies. It also prevents the creation of an oligopoly situation in the economy, ensuring that many people can access capital quickly for various purposes.

The ruling has sparked a debate on interest rates charged by money lenders, with President Museveni expressing concerns about steep interest rates and advocating for measures to regulate them. While commercial bank lending rates have averaged 21 percent, informal money lenders have charged up to 20 percent interest monthly, according to sector practices.

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