UGANDA’S LOOMING DIGITAL DEBT TRAP

Digital lending in Uganda—fast, frictionless, and seemingly harmless, has become as easy as sending airtime.

But behind the sleek USSD codes and app interfaces lies a new kind of financial pressure cooker: one where convenience masks crippling interest rates, and the cost of borrowing can quietly spiral out of control.

According to a 2023 report released last year by the Uganda Bankers’ Association and Asigma Capital—Digital Lending in Uganda: Series 1 – Unravelling the Demand Side—the demand for digital loans is exploding, especially among youth and informal workers. These loans, offered via mobile apps and codes, promise speed. But the trade-off is steep. Most digital lenders—licensed under the Tier IV Microfinance and Moneylenders Act—charge between 5% and 10% interest per month, with some even higher. That dwarfs the typical 2% monthly rate from traditional bank loans.

The UBA-Asigma report found that most digital borrowers don’t fully understand what they’re signing up for. The repayment terms aren’t always clearly spelled out, and hidden charges lurk behind every screen. For students, market vendors, and gig workers with irregular income, it often feels like they’re borrowing from a system designed for them to fail. And yet, because banks remain inaccessible—slow, rigid, full of forms—they keep coming back. Because when the landlord is calling and the fridge is empty, a fast loan now outweighs any regrets later.

The irony is that digital lending is meant to solve exclusion. But when borrowers are hit with sky-high charges and poor transparency, it becomes a new kind of exclusion—one where access doesn’t equal fairness. The sector is growing, but so is the risk of widespread over-indebtedness, especially in a population where financial literacy remains low.

Kenya’s experience should serve as a lesson. As the birthplace of M-Pesa and a pioneer of mobile money-driven credit, Kenya has seen an explosion in digital lending services over the past decade. At one point, over 120 lending apps were operating in the country, many of them unregulated. The result? Millions of Kenyans blacklisted on credit reference bureaus for defaulting on small digital loans—some as little as KSh 200.

The outcry forced the Kenyan government to step in. In 2021, the Central Bank of Kenya amended its laws to bring digital lenders under its supervision, mandating licensing, consumer protection rules, and interest rate transparency. Kenya’s experience is a cautionary tale: digital credit without strong guardrails can wreak more financial havoc than it prevents.

Meanwhile, traditional banks in Uganda are watching the fintech storm from across their mahogany desks. According to J. Samuel Richards’ Uganda Banking Sector Performance 2024, the sector has grown steadily, reaching UGX 54 trillion in total assets. But the top five banks control more than 55% of those assets and over 66% of profits. It’s a club with few members and a high barrier to entry. What’s more, 11 banks have non-performing loans that exceed 10% of their equity, a sign that not everything is as solid as it seems behind the polished branch counters.

If traditional banks are feeling cornered, it’s because they are. Not just by fintech lenders, but by telecoms—especially mobile money giants like MTN. MTN Mobile Money made UGX 250 billion in after-tax profits in 2024. That’s more than Absa Bank, with far fewer assets. With 13.8 million active users, mobile money has leapfrogged traditional banking, becoming the default financial tool for millions of Ugandans.

That shift is no longer theoretical. It’s real. The financial sector is finally starting to understand that access, not marble floors and leather chairs, is what really matters. The telecoms didn’t just offer products—they offered proximity...

In our rush to digitise credit, we’ve skipped a few crucial steps. Like making sure people understand what they’re borrowing. Like regulating lenders who operate in the digital shadows. Like ensuring that the promise of inclusion doesn’t become a trap wrapped in an app.

So what do we do?

Start with transparency. Borrowers should never have to guess how much they owe. Digital lenders must display interest rates, fees, and penalties in plain language—not buried in terms and conditions that nobody reads. Then there’s pricing. It’s time to move toward risk-based lending. If someone has a clean borrowing record, they deserve better rates. The data exists—use it to reward good behaviour, not punish it.

Financial literacy can’t be an afterthought either. Borrowing money should come with clear, digestible information—delivered in the same channels the loans are offered. If we can sell loans by SMS, we can educate by SMS too.

And regulators need to step up, fast. The Uganda Microfinance Regulatory Authority and Bank of Uganda must enforce rules that protect borrowers without stifling innovation. Sandboxes are one option—safe spaces for fintechs to test products under oversight. But more than tools, regulators need urgency. Because the digital debt clock is ticking.

Uganda is riding a digital finance wave that’s reshaping everything—from how we buy chapati to how we pay school fees. But if we don’t steer the ship, we may end up drifting into a financial storm. The revolution has arrived, but without fairness, transparency, and education, we risk replacing one set of barriers with another.

Yes, access matters. But access to a trap is not progress. Uganda’s digital lending boom must work for the many—not just the few who built the platforms. The money may come fast. But if we’re not careful, so will the regret.