The Ugandan government capped the interest rate that microfinance institutions may charge. According to New Vision Kampala, the new rule sets rates at or below inflation, which stood at 8.1% in 2005. Microfinance institutions in Uganda currently lend at rates of 18 to 100 percent.
Interest rate caps tend to reduce the supply of microcredit, as fewer microfinance institutions enter the industry and existing ones scale back operations, reports Eric Duflos of The Consultative Group to Assist the Poor (CGAP). Uganda’s President, however, stated August 7, 2006 that “the aim of microfinance is to boost the productivity of the rural poor rather than turn a profit”. Consistent with that belief, he recently criticized the “high interest rates” in the country (MicroCapital Blog: August 24, 2006).
In 1999, the government of Uganda recognized microfinance “as a line of business”, reports the CGAP, with interest rates “set at market levels”. The recognition followed the failure of its 1998 subsidized microloan scheme, Entendikwa, in which $193,000 was repaid out of loans totaling $5.1 million. This latest interest rate cap is an example of how the government has again politicized the microfinance industry in Uganda, to its detriment over the long run.
Additional Resources:
1) New Vision Kampala: Uganda: “Government to Limit MFIs Lending Rates”
2) World Factbook: Uganda inflation rate
3) Asian Development Bank: “Smart Subsidies for Sustainable Microfinance” (based on a paper by New York University professor Jonathan Morduch)
4) CGAP: Donor Brief No. 19
5) Uganda Microfinance Limited: Loan products
