GOVT SHOULD APPLY BASIC ECONOMICS TO CAP LENDING RATES

Uganda’s money lenders are appealing to President Yoweri Museveni not to assent to a law that will have government control lending rates.

A few weeks ago parliament passed the Tier 4 Microfinance Institutions and Money lenders Bill, 2024, which among other things, will have the finance minister setting the limits of what money lenders can charge as interest on their loans.

Ever since biblical times the money lender has not been a popular figure. The sin of usury or charging interest for lending money was on the books in medieval times. The church thought all loans should be interest fee, they of course did not factor in the risk to the lender and his right to some compensation for making money available to those who don’t have it...

I suspect too, that the church was being populist, trying to shore up its political muscle at the same time frustrate this new class of capital owners, who were threatening the church’s  power as major landowners.

Interestingly this thinking is what led to the growth of the Jews as controllers of the global financial system.

The kings of Europe and the church, banned them from owning land as punishment for betraying Jesus Christ –antisemitism. The Jews, unshackled by laws against usury, went into finance and the rest, as they say, is history.

Fast forward to the 21^st century money lenders are still getting a bad rap. The arm chair economists complain that lending rates are high and have set aside a special place in hell for money lenders who are unashamed to lend at more than 120 percent a year.

"Government, having forgotten the lessons of the economic reforms of the last 40 years, is jumping behind efforts to arbitrarily cap lending rates. As night follows day, this will only create the very situation they are trying to control, which is high lending rates...

But first some background.

In the late 1980s some central planners in the new NRM government called on government to not only stop landlords from charging rent in dollars, but also put a cap on rent. Government refused at the time, arguing that the “high” rents were caused by a shortage of housing stock. The way to bridge the deficit was to make the sector attractive to investors and by the law of supply and demand, rents will become more affordable.

As a result of this correct application of high school economics, there has been an explosion in the housing sector, which has made not only rents more affordable and stopped most landlords from charging in dollars.

If government had listened to the central planners, the housing market would not have grown as fast as it has and it is not inconceivable that we would now be paying a million shillings for the privilege of living in someone’s garage.

If some landlords are still charging rent in dollars it is often because they borrowed money in dollars to build and are passing on the exchange risk to the tenants. They borrow in dollars because it is “cheaper”.

To lower lending rates government need only enable a greater supply of cash available for lending and voila, lending rates will come down.

Similarly, to lower money lender rates, government just has to look at the demand and supply equation, ask the question how can we increase the supply of credit so even money lending rates can fall?

We have seen this happen in our life time.

The story is told of these money lenders who used to offer credit to market vendors at 10 percent a day. The business model was such that they would lend the vendors money in the morning to buy produce and collect at the end of the day. It made sense for the vendors and for the money lenders.

The money lenders’ dreams of infinite wealth were dashed by the entrance of mobile money lending, which was offering the same money at around 10 percent a month.  Some people would complain that this is still too high, but it was a no brainer for the vendors who can now borrow at 120 percent a year compared to 3,650 percent.

"By legislating to cap lending rates, law abiding moneylenders will take their money elsewhere, lowering supply of credit, pushing the money lenders underground, where prices will be even more unrestrained and collection methods will be more brutal...

A neighbouring country, has seen a reemergence of a black market in forex, the kibanda market, a relic of the pre-liberalised economy days. Their attempts to control foreign exchange flows has created the very situation they were trying to prevent – a shortage of forex.

Increasing the supply of loanable money is what government needs to do. And not by going out and handing money out at street corners, but by creating an environment where capital can see it fit to invest in the sector.

Government might want to start by finding a way to lower its appetite for borrowing from the public.