Bad Industrial practices in the
Microfinance industry using loan
Agreements. The case of Uganda
By Flavian Zeija
Director,
Justice for Microfinance Consumers
A story in the Government Dairy
Newspaper-The New Vision
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Tuesday, 21st June, 2011
53 stuck in Luzira over money lenders; by Raymond Baguma
OVER 50 inmates stuck in Luzira Prison over failure to pay civil debts have
petitioned Chief Justice Benjamin Odoki to probe alleged corruption by
magistrates and court bailiffs.
The petitioners said the corrupt magistrates are found in Mengo, Nakawa,
Mwanga II and Makindye courts. They also said they are ready to name and shame
the corrupt court officers and bailiffs.
The spokesperson of the judiciary, Elias Kisawuzi, yesterday confirmed receipt of
the petition and said Odoki had instituted an investigation to be headed by the
chief registrar, Henry Adonyo.
Story Cont..
• The civil debtors in the petition said: “We bring to your
attention the illegal mafia-like syndicate and connivance
between magistrates, court clerks, lawyers and court
bailiffs, who have turned the above-mentioned courts into
money-minting machines for selfish interests at the
detriment of litigants who are no longer accorded the right
to fair hearing and trial as provided for in the constitution.”
• The petitioners said they were not served with court
summons to defend themselves on soft loans offered by
money lenders and banks against post-dated cheques and
loan agreements.
Industrial Practices of MFI
• Some Microfinance Companies defrauding clients -In December 2007,
the Support Organisation for Microfinance Development (SOMED), a
rural based Microfinance institution closed its doors and the directors
disappeared
• A story that appeared in the Microcapital Monitor 2007, read
“Ugandan Police are investigating four savings and co-operative credit
organizations (SACCOs) suspected of fraud. (Front Page Microfinance,
Faster Micro Finance, Savings and Credit Cooperative Society Support
Uganda Finance Limited and Stade Rugando Finance), all based in
Kampala-refusing clients to withdraw their savings
• Receiving insufficient loan funds, and sometimes the institutions
keeping loan cash collateral yet clients pay interest on full amount
• Interest calculated on Flat rate instead of reduced balance method
and changing interest rates without client’s consent
• High interest rates that sometimes goes beyond 100% in a year
Challenges Cont..
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Information Gap to Clients: Clients informed of the advantages of obtaining the
loans but had not been informed of the underlying pitfalls related to the
repayment of these loans. the loans officers do not explain to clients the effect of
the loan documents they sign
Information gap to Guarantors: Guarantors not appreciating that they are as liable
as the principal debtor
Hidden costs that are not explained to clients before taking up the loan
Multiple borrowing to clear loans of other institutions without clear benefit
Failure to appreciate the contents of the loan agreements by both loan officer and
client. Many clients only ask for a space where to sign. Loan agreements drawn by
lawyers without the intervention of local counsel
Refusal to allow clients to redeem their loans before paying a certain number of
instalments(Usually half way the loan)
Attachment of properties without recourse to court
The above issues present challenges for the continued survival of the industry.