A landmark ruling at a court in northern Uganda has revealed that private individuals who are not lawfully registered as money lenders can also charge interest on loans they extend to friends or relatives.
The ruling that was delivered ten days ago by Gulu High Court judge George Okello handed down the precedent-setting decision, which now provides legal cover for what has, until now, been a largely informal transaction between acquaintances when in need.
The ruling upheld an earlier consent judgement in which one of the parties to a suit must pay Shs347 million as reimbursement for a loan taken, on top of costs to be set out in due course.
Judge Okello declared that the courts must consider the reality of daily life where people step in to help friends and family during personal emergencies.
“Courts should be alive to the reality of the Ugandan community where acquaintances or friends give money to their own, to satisfy urgent needs.
“It would defeat common sense and the doctrine of freedom of contract if it were to be suggested that friendly loan advances should be interest-free, and that no security deposit is required. Such a postulation, with respect, would tantamount to an erroneous understanding of the current regime on lending money,” he ruled.
The decision arose from a matter in which a Mr Stephen Khesmodel Omony dragged his long-time friend, one Mr Denis Michael Olara, to court for failing to pay money he borrowed from him. Mr Olara had tried to hide behind the law regulating the formalised money-lending business to justify his default.
So, in making his determination, the judge dismissed a counterclaim by the defaulting party, who tried to wiggle out of paying his debt on grounds that Mr Omony was not a licensed money lender.
“There is no law in Uganda that bars individuals from lending to their acquaintances, friends, or persons belonging to a group, among others and charging interest on a loan, as may be mutually agreed. I, therefore, see nothing wrong with an individual giving credit on friendly terms to persons they choose to give,” the judge’s decision dated October 5, reads.
The judge further observed that existing laws on money lending business do not remove the freedom of persons to obtain quick and easy loans from acquaintances at a fee.
“In my view, to think otherwise, would create an oligopoly situation in Uganda’s economy for licensed money lenders, with the adverse consequences of locking out many people from quick access to capital for production,” the judge observed, adding, “In my considered view, it should only be wrong for a person to operate or purport to do money-lending business when not registered as a company. There, the law should bite.”
Case Background
Three years ago, Mr Olara, a businessman in Gulu City, approached his long-time friend, Mr Omony for a soft loan of Shs150 million to help him complete a project he was working on under his construction business.
The two friends executed a memorandum of agreement for a loan on January 10, 2020. Under the terms set out in the memorandum, Mr Omony would lend this amount of cash to his friend on certain mutually agreed terms.
The terms included that Mr Olara would deposit collateral security comprising of the original certificate of title for his mailo land in Wakiso District; original copies of the sales agreement for his developed property in Ariaga Ward, Laroo Division in Gulu City; and a sales agreement for a vacant but surveyed piece of land on Plot 12 Otema Alimadi Road, Laroo Division, Gulu City.
It was also agreed that Mr Olara would pay a fixed interest of Shs33 million on the principal loan. The memorandum said in the event that Mr Olara defaulted by a week after the loan’s three-month duration (January 10, 2020 to April 10, 2020) ran out, both the principal sum and fixed interest would attract an additional interest of 10 percent.
“The parties stated that they were entering the agreement voluntarily and freely agree to be bound by the terms. They signed the document in the presence of a witness for each side. The applicant’s spouse, who apparently doubled as his witness, duly consented to use the securities,” documents tendered in court said.
During the hearing, the court established that for a whole year, Mr Olara did not pay up, resulting in Mr Omony seeking court’s intervention. He argued that his friend was in breach of their contract and that what he was owed now amounted to more than Shs500 million.
Mr Omony told court that he had suffered great personal loss, being unable to use his money which had been drawn from business and he would, therefore, seek interest at the prevailing market rate.
Along the way, the friends settled for a consent judgement before the registrar of the court. Under this judgement, Mr Olara agreed to pay Mr Omony Shs347 million. But in yet another twist, Mr Olara instead decided to file a fresh application before a judge, saying the consent judgement had misrepresentations and concealment of facts.
Mr Olara argued that he had discovered that at the time be borrowed the money, his friend was not a licensed money lender and, therefore, was not entitled to the huge interest.
“The applicant (Mr Olara) has since learnt that the respondent (Mr Omony) was not a licensed money lender at the time he lent the money. The applicant (Mr Olara) believes the interest charged on the principal sum is illegal and thus should not have been included in the consent judgement,” Mr Olara contended in his application before the High Court.
It is these, among other arguments tendered by counsel for Mr Olara, which were thrown out by Judge Okello.
Ruling explained
The question facing the judge was whether Mr Omony was entitled interest and whether he was a licensed money lender.
Mr Olara’s lawyers had argued that Mr Omony should not have charged any interest at all, quoting Section 84(1)a of the Tier 4 Microfinance Institutions and Money Lenders Act, 2016, which stipulates that it is an offence to carry on a money lending business without a license.
They also referred to Section 84(1)b of the same law, which sets out a penalty of two hundred currency points (Shs4 million) for first conviction and on a second conviction, four hundred currency points (Shs8m).
“Learned counsel claimed the respondent (Mr Omony) did not rebut the fact that he is not a licensed money lender and thus the applicant’s claim was true,” the judge observed.
In his analysis, the judge outlined that a money lender within the definition of the said law can only be a company, which must be licensed and must comply with certain legal requirements, meaning the description did not apply to Mr Omony given the context within which the money was lent.
“Section 78(1) provides for application for a money lending license. It thus provides that a person intending to engage in money lending business shall be a company. In the instant case, the respondent (Mr Omony) is not a company but a natural being. Thus, references to him by the applicant (Mr Olara) as a money lender, simply because the respondent allegedly did not rebut the applicant’s averments to that effect, is flawed,” ruled the judge
Adding: “Money lending is a matter of law, to begin with, thus facts must be adduced to prove the respondent’s money-lending business status when he executed the impugned consent judgement. None was adduced.”
Upon making the finding that a money lender has to be a company, the judge decided that: “…in the present case, being a natural person, the respondent (Mr Omony) cannot be said to have been a money lender.”
“Learned counsel for the applicant also submitted that since the parties’ agreement had a security clause, then that means the respondent was a money lender. That argument is faulty, because that is not a legal test for money lending. In my view, when parties adopt good practices in their lending arrangements, some of which may have been borrowed from legal provisions, with modifications, it does not transform their transactions into what it is not…
“It is for the a foregoing reasons that I found the applicant’s reference to Section 84(1) of the 2016 Act, which creates an offence of carrying money lending business without a license, irrelevant in the present context. I find no evidence that the respondent ever represented himself to the applicant as a money lender. On the contrary, the applicant approached his long-time friend for money. That was the best he could prove. He did not prove that his long-time friend was doing money lending business.”
This story has been sourced from Monitor
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