A friendly loan is a financial arrangement where individuals borrow money from family, friends or acquaintances, typically during a financial emergency or need. These loans are usually given out in good faith and based on trust. Friendly loans can be either one-time transactions or repeated occurrences, depending on the circumstances and they may, or may not involve giving something valuable as security. Under Uganda’s Law, such private arrangements are not illegal and are governed by the rules of Contract law.
Where collateral is pledged to secure a friendly loan and the loan is not duly repaid, the lender has the liberty to decide to recover that loan or not to recover the loan at all and count his or her losses. If the lender decides to recover that loan, he or she is still at liberty to decide whether to enforce the security or to pursue recovery through court.
A friendly loan agreement is not a money lending agreement governed by the Tier 4 Microfinance Institutions and Money Lenders Act, 2016 which require money lenders to have licenses. Engaging in money lending business without a license can lead to serious consequences, as any loan offered is illegal and cannot be enforced. While court has the authority to compel the return of the money, it may refrain from doing so if both parties are aware of the illegality involved.
Determining if a company or person is a money lender depends on the specifics of a situation; some clearly present themselves as money lenders, while in other cases, it may be inferred from repeatedly giving out loans to different people, but even one transaction can count as doing business.
Under Uganda’s Law, a person who carries on a money lending business is one who is ready and willing to lend to all and sundry, provided that they are from his/her point of view eligible for a loan. If there is a dispute, Court first examines if lending money was the person’s main business when the loan was made. If not, they’ll check if the person portrayed themselves as a moneylender. Even if someone has a bigger business, they could still be seen as a moneylender. Also, lending at an interest does not necessarily mean one is in the business of money-lending.
How to set up a friendly loan
- For a positive experience for both the lender and borrower in a friendly loan, it’s beneficial to take the loan seriously and establish a formal loan agreement or promissory note especially if it is 500,000 Ugandan Shillings or more.
- Write down the details of the loan, including how much money is changing hands, what that money can be used for, and how and when the money will be paid back.
- Both parties should sign the agreement, and it’s advisable to have a witness sign as well.
- Additionally, it’s prudent to make three copies of the agreement
Authored by Isabella Pedun