Uganda Bankers' Association Abolishes Early Repayment Penalties

Re-published.

In the wake of Pride Microfinance Bad faith tactics around Early repayment of Loans and the fight for fair loan tactics.

In a landmark decision on October 17, 2023, the CEOs of all member banks and MDIs of the Uganda Bankers' Association (UBA) agreed to abolish early repayment penalties on loans. This decision is a significant victory for borrowers in Uganda, who have long been penalized for paying off their loans early.

Early repayment penalties are common, but that they have been criticized by advocates for being unfair the regulator is taking steps to abolish these penalties and move to more consumer-friendly policies and practices.

Why did banks charge early repayment penalties?

Banks charge early repayment penalties because they rely on interest income to make a profit. When a borrower pays off a loan early, the bank loses out on the interest income that it would have earned over the remaining term of the loan and also leads to a bank having extra cash at hand earlier than budgeted for which can be a liability to them.

Thus, because of the future interest income lost, and the extra cash at hand, banks have tended to charge a penalty on early repayment, to recover some of the lost interest income but also to deter borrowers from scheming through systems using early repayments.

Best advantage of this decision is that, for a borrower with a terrible loan agreement and terms with Bank A, you can now negotiate better loan terms with Bank B. Bank B will buy off your loan from Bank A at outstanding value without any penalty, and you will get better loan terms.

If you have a high-interest loan (high interest rates or short payment period) and you are in good credit standing, it is time to shop around for other lenders with better terms (lower interest rate and longer payment period) and get your loan bought out.

It’s a win for the Customers.

If you enjoyed this letter, please consider sharing it with your friends and families,

I hope you have a great weekend and potentially invest in Uganda’s Capital Markets.

Alex Kakande