IMPROVEMENTS AND CHALLENGES OF THE TIER 4 MICROFINANCE INSTITUTIONS AND MONEY LENDERS ACT IN UGANDA.
The Tier 4 Microfinance Institutions and
Money Lenders Act, 2016 (the “Act”) was passed on 4th May 2016 and
assented to on 5th July 2016. The Act commenced on 1st
July 2017 after it publication in the Uganda gazette.[1] According to section 2,
the Act applies to money lenders and tier 4 microfinance institutions. Tier 4 microfinance institutions
include; (a) SACCOs; (b) non deposit taking microfinance institutions; (c) self-help
groups; and (d) community based microfinance institutions[2].
However, the Act does not apply to microfinance institutions regulated by the
central bank[3].
According
to its long title, the Act is intended to establish the Uganda Microfinance
Regulatory Authority; to provide for the licensing and management of tier 4
microfinance institutions; to provide for management and control of money
lending business; to establish the SACCO Stabilization Fund; to establish a
SACCO Savings Protection Scheme; to provide for a Central Financing Facility;
to provide for licensing of money lenders; to provide for self-help groups and
commodity microfinance; to provide for receivership and liquidation of a tier 4
microfinance institution; to repeal the Money Lenders Act, Cap. 273.
Prior to
the enactment of the Tier 4 microfinance Institutions and Money Lenders Act, Microfinance
institutions were regulated under the Microfinance Deposit-Taking Institutions
Act, 2003. However, fewer institutions had transformed into Microfinance
Deposit-Taking Institutions than earlier anticipated. As such, microfinance
institutions that were not deposit taking had to be registered or licensed
under the Cooperative Societies Act Cap 112, the Money Lenders Act Cap 273, or
the Non-Governmental Organizations Act Cap 113. These regimes were inadequate
to regulate tier 4 microfinance institutions and money lenders. The cooperative
Societies Act applied to all cooperatives and was not tailored to SACCOS that
render financial services. Although SACCOS are cooperatives, they differ from
other cooperatives given that they facilitate financial intermediation of
deposits or savings and as such are fundamentally similar to financial
institutions. Yet the legal regime under which they were operating was
different from that of other financial institutions. As a result, there had
been some loss of trust by the population in SACCOS due to rampant fraud and
mismanagement leading to the collapse of several SACCOS thus causing negative
publicity for the whole micro finance industry. Therefore, there was a need for
a new legislation. Prior to the enactment of the 2016 Act, there was no
streamlined law regulating tier 4 microfinance institutions. Therefore, the
legislation of Tier 4 microfinance institutions and Money Lenders Act comes as
a timely reform in sector. . The Tier 4 Microfinance Institutions and Money
Lenders Act 2016 also repealed the Money Lenders Act which was considered
obsolete and outdated.
The Act defines
microfinance activities as extending
micro-loans, accepting savings and providing other financial services as
provided for in this Act. A money lender is defined to mean a company licensed
under section 79 whereas financial services are, in the case of a SACCO,
accepting savings from and providing loans to members, and in the case of a non-deposit
taking microfinance institution, providing micro loans to individuals, small
and medium sized businesses. Therefore, from the above definitions, SACCOs are
microfinance institutions because they provide loans, accept savings from
members. The same can be said of non-deposit taking microfinance institutions. This
essay will identify the improvements in legislation that have been introduced
by the Act to regulate tier 4 microfinance institutions and money lenders
vis-à-vis the old regime, the challenges with the new law, and the solutions to
alleviate those challenges.
The Tier 4 Microfinance Institutions and Money Lenders Act
2016 establishes the Uganda Microfinance Regulatory Authority under section 6
which is an autonomous body corporate and independent in its functions[4]. Section 8 provides that
the Authority is responsible for regulating, licensing and supervising tier 4
microfinance institutions and moneylenders. Previously, there were weak
regulatory and supervision mechanisms for tier microfinance institutions and
money lenders. For microfinance institutions like SACCOs, the Registrar of
Co-operative Societies was responsible for monitoring, supervising and auditing
of SACCOs as an auditor of last resort.[5] The Registrar and only two
staff in his office had limited capacity to monitor the performance of SACCOs
country wide. Furthermore, sections 21 and 22 of the Co-operatives statute
imposed a duty on every society to subject its account to audit at least once
every year by an auditor approved by the registrar. The requirement for
approval by the registrar was not practicable due to the huge number of
co-operatives country wide. The registrar did not receive all audit reports
from Co-operatives on a regular basis and lacked the capacity to follow up on
this requirement[6].
The Office of the Registrar was also not specialized on financial services
business engaged in by Co-operative societies which were SACCOs. However, under the 2016 Act, the board which
is the governing body of the Microfinance Regulatory Authority is constituted
of 7 members most of whom are specialized in financial services. They include a
representatives of the Bank of Uganda, ministry responsible for finance;
ministry responsible for cooperatives and three persons with experience in
microfinance. The Board is responsible for the general direction and
supervision of the Authority[7] and is appropriated funds
by parliament to carry out its functions[8]. Therefore, the 2016 has
put in place a much better regulatory mechanism for regulating, licensing and
supervising microfinance institutions.
Section 3 of the Tier 4 Microfinance Institutions and Money
Lenders Act states the purpose of the Act as, inter alia, establishing
prudential standards for microfinance institutions in order to safeguard the
deposits of members, prevent financial system instability of the funds of
depositors and ensure stability of the financial system. One of the functions
of the Microfinance Regulatory Authority is to promote transparency and
accountability by applying non prudential standards[9]. Non prudential regulation
means establishing rules and guidelines about appropriate behavior and business
practices in dealing with customers and monitoring the performance of financial
institutions. This is achieved in section 32 of the Act by requiring tier 4
microfinance institutions to furnish the Authority with periodic reports of the
operations of the institution at such times and in such forms as it may
prescribe. A tier 4 institution that fails to submit a report required under
the section commits an offence and is liable to a fine not exceeding 20
currency points. Section 54 also provides for the establishment of a SACCO
stabilization fund managed by the Authority to which every SACCO shall
subscribe. The object of the SACCO is to provide financial assistance to SACCOs
that are insolvent among other things. SACCOs are also required to submit
quarterly financial reports to the Authority under section 55(2). These forms of non-prudential mechanisms of
regulation are a huge development in regulating tier 4 microfinance institutions
and money lenders.
Section 40 of the 2016 Act provides that a SACCO which is
licensed under the Act shall include the words “Savings and Credit Cooperative
Society” or “SACCO” in its name. The section prohibits an unlicensed SACCO from
including “Savings and Credit Cooperative Society” or “SACCO” in its name. It
further provides that any unlicensed SACCO that includes the words SACCO in its
name commits an offence and is liable on conviction to a fine not exceeding
twenty five currency points and where the contravention continues, shall be
liable to pay an additional ten currency points for each day for which the
contravention continues[10]. Criminalizing the
improper use of the word SACCO will protect the public from being defrauded by
unscrupulous schemes. This is a new development that will improve the
regulation of the microfinance institutions sector.
Furthermore, the law requires the Authority to gazette all
Tier 4 Microfinance institutions that are licensed in a newspaper of wide
circulation[11].
This will threaten a number of illegal and unregistered money lenders and
microfinance institutions from illegally transacting thus regulating. It will
also make the vigilante public less prone from conducting business with illegal
institutions that are not gazetted.
Under the repealed Money Lenders Act, there was no
recognized supervisory authority over money lenders. The law did not require
the Magistrates Courts to monitor the performance of money lenders and no
annual returns were submitted. Instead of a supervisory authority, the only
recourse open to aggrieved customers was to direct their complaints to the
courts. However, under the Tier 4 Microfinance Institutions and Money Lenders
Act 2016, the Uganda Microfinance Regulatory Authority is mandated to regulate,
licence and supervise microfinance institutions and money lenders. Its
supervisory function over money lending business is provided under section 77
of the 2016 Act. Under that section, the Authority is donned with the powers to
grant, renew and revoke money lending licences, conduct inspection and
examination of books of accounts, records, returns, and any other document or
premises of a money lending business, keeping and maintaining a register of
money lenders, and sensitizing the public about the money lending business. This
is tremendous improvement in the regulation of money lending business in
Uganda.
Where a money lender seeks to evade payment or is
unavailable to receive payment from the borrower as and when the payment of the
loan is due, the Authority has the power under section 95 (1) of the Act to
receive the loan monies from the borrower. The money received is transmitted by
the Authority to the lender. This reform is essential in addressing the
practice of lenders evading payment of the loan with the goal of foreclosing
the security of the loan or increasing the amounts payable by applying default
interest rates. Also many people had also lost property because of the money
lenders being mobile. The 2016 Act criminalizes and prescribes a fine of 200
currency points in case anyone carries on business in a name or at any other
place other than the name or address specified in the money licence. These
provisions taken together protect the public from unscrupulous money lenders
and provide better regulation of Money lending business.
Section 85(1) of the 2016 Act states that a money lending
contract shall be in writing and signed by the money lender and the borrower
and shall be witnessed by a third party. In the repealed Act, the law under
section 6 (1) only required that the note or memorandum be personally signed by
the borrower. However the new position of the law requires that the lender and
borrower must sign the contract and the same must be witnesses by a third
party. The wording of the provision is couched in mandatory terms as shown by
use of terms like “…shall be signed…and shall be witnessed…” This therefore
means that it is a mandatory compliance. These provisions promote better
transparency and enforceability of money lending contracts.
Section 90 of
the Act empowers the Minister responsible for finance to control interest rates
chargeable in contracts of money lending. The Minister is vested with powers to
prescribe the maximum interest rate which a money lender can charge. Subsection
(2) of the section makes it an offence to charge a higher interest rate than
one prescribed by the minister. On conviction, the money lender is liable to a
fine not exceeding 50 currency points (one million Uganda shillings), and the
court has the discretion to order the cancellation of the money lender’s
licence in addition to the fine. The money lender will further be required to
refund to the borrower any money paid in excess as a result of the interest
rate charged. This is a new development intended to protect customers. Also the
power given to the minister to determine the maximum interest rate introduces a
degree of flexibility in regulating money lending since the rate may vary
depending on the economic situation. The flat rate of 24% per annum under the repealed law
was rigid and static[12].
Under s. 3, the repealed Money Lenders Act did not authorize
money lenders to carry on business at more than one address or under more than
one name. In the 2016, under the corresponding provision[13], the Act recognises that
a person can have many addresses under one name. By eliminating the restriction
to have one address, the Act has promoted the tier 4 microfinance and money
lending industry allowing people to open more branches for their businesses.
Section 13 of the repealed Money Lenders Act put
restrictions on advertising. The 2016 Act is liberal towards advertising by
money lending business. It states that a money lender may publish in a
newspaper or exhibit at an authorised address of the money lender, a notice
which contains the authorized address at which the money lender carries on
business, the particulars of the address at which the money lender carries on
business, a statement that the moneylender lends money with or without
security. This will encourage the growth of the business The Committee on
finance, planning and economic development
observed that it would be unfair to allow banks to advertise and restrict
money lending businesses from doing the same.
Fines under repealed the Money Lenders Act were outdated.
For example, the Act prescribed a penalty of two thousand shillings if any
person was convicted for the offence of taking out a money lenders licence in
any name other than his or her true name or carried on business as a money lender
without having in force a proper money lenders licence authorizing him or her
to do so[14].
This penalty was too low to have any prohibitive effect. However, section 84 of
the 2016 Act prescribes a fine of two hundred currency points if a person is
convicted of the offence of carrying on business as a moneylender without a
money lending licence; or carrying on business in a name other than the name specified
in the money lending licence. Two hundred currency points converted into Ugandan
currency amounts to four million shillings. This fine has a greater prohibitive
effect on those who contravene money lending licence provisions and thus make
the sector safer and well regulated.
The repealed Act also created offences under s. 14 and 15
of the Money Lenders Act. The Act stipulated that it was an offence for a money
lender to make false statements in order to induce any person to borrow from
them. The Penalty imposed was a term of imprisonment not exceeding two years or
a fine not exceeding 10,000 Ugandan shillings or both. When compared to S. 92 of
the 2016 Act which prescribes a fine of 50 currency points or imprisonment of
two years or both for the same offence, it can therefore be observed that the
fines under the repealed act were too low and outdated.
Although it can be argued that stronger regulation in the
tier 4 microfinance institutions and money lenders sector has long been
overdue, there remains challenges despite the improvements in regulation
brought about by the Tier 4 Microfinance institutions and Money Lenders Act
2016. This segment will discuss the challenges with the new law and how they
can be alleviated.
The 2016 Act under section 78, expressly states that a
person intending to carry out money lending business shall be a company.
However, the Act also envisages a money lending business being a partnership by
adding the word or “firm” in section 80. The section states that the authority
shall not issue a licence for money lending where the authority is not
satisfied that the shareholders and persons responsible for management of the
company or “firm” are of good character. These two sections are contradictory
and ambiguous. In addition to that, not allowing partnerships to operate as
money lenders under the 2016 Act is irrationally restrictive since there is no
justification for restricting the form of incorporation of money lending
business to companies.
The Act does not define money lender or money lending
business. However Audley CJ’s definition of ‘business’ in Shivabhai G Patel v.
Chaturbhai M Patel[15] can be guiding in that
regard. The learned Justice, citing a number of authorities held inter alia
that the word business imports the notion of a system, repetition and
continuity. He states that;
“…the word
‘business’ in this context imports the notion of system, repetition, and
continuity; and the number of the money-lending transactions, as well as their
nature must be considered.”
“…a man who carries on a money-lending business is one who
is ready and willing to lend to all sundry, provided that they are from his
point of view eligible.”
Without proper definition of a money lender or money lending business,
enforcement of money lending provisions under the 2016 Act would be difficult.
Section 8(n) of the 2016 Act empowers the Authority to set
minimum capital requirements for Tier 4 Institutions which include money
lenders. Whereas this is applicable for SACCOs, it is not practical to set
minimum capital requirements for money lenders since they are not deposit
taking institutions.
The Microfinance Regulatory Authority is comprised of only
7 members who may not be enough to regulate and supervise SACCOs and money
lending businesses all over the country. This lack of enough institutional
capacity may affect the implementation of the provisions of the 2016 Act.
Section 9 provides that the Authority may, in the discharge
of its functions investigate or inquire into the operations of tier 4
microfinance institutions; inspect and examine books of accounts, records,
returns and any other document of the tier 4 microfinance institutions;
While this may necessary for a SACCO, it is not necessary
for the Authority to inspect and examine books of accounts for money lenders
and returns because this is a private business and returns are filed with
Uganda Revenue Authority, rather the Authority may conduct inspection and
examination of records or documents relevant to money lending business.
Section 54 establishes a SACCO Stabilization Fund to which
every SACCO must subscribe. The fund is intended to provide financial
assistance to SACCOs that are insolvent or are likely to become insolvent,
advance loans and grants to SACCOs that require financial assistance, purchase
the assets of insolvent SACCOs or take over all or any portion of the
liabilities of the SACCO and supervise, administer and reorganize the affairs
of SACCOs that is likely to become insolvent. However, the stabilization fund
is likely to promote mismanagement of SACCO business. The requirement of SACCOs
to make annual contributions of 1% of their assets towards the stabilization fund
amounts to a tax levy that would substantially reduce the assets of SACCO over
a period of time.
Section 76 states that a non-deposit microfinance
institution may, with the approval of the authority, merge with one or more non
deposit microfinance institutions. However, it should be observed that mergers
and acquisitions are consensual in nature and therefore cannot be directed by
the authority. The spirit of ensuring that the authority manages affairs of a non-deposit
microfinance institution which is in financial distress is covered under
section 33. Section 33 provides that where an authority considers that a tier 4
microfinance institution is in an unsound financial condition and is not
operating in accordance with sound administrative and accounting practices and
procedures, fails to comply with minimum capital requirements, refuses to be
inspected, the continuation of the business of a tier 4 microfinance
institution is detrimental to the interests of its depositors, the authority
may take over management of the tier 4 microfinance institution for a period
that, in the opinion of the authority, permits the institution’ financial
condition to be remedied. However, the problem is occasioned by section 35
which provides that the costs of management of a tier 4 microfinance
institution shall be payable by the authority. This can encourage mismanagement
by microfinance institutions and it is equally a waste of tax payer’s
money.
Having stated the challenges with the
2016 Act, the following solutions are recommended in order to alleviate those
challenges.
Section 78 that restricts money lending
business to companies should be amended to accommodate other forms of
incorporation for example partnerships. Alternatively, the Act can use a more
neutral term such as firm instead of company.
The lack of clear definition of the word
‘money lender’ can be solved by adopting the old definition stipulated by the
repealed Act under section 1 of the interpretation section where a money lender
is defined as every person whose business is that of moneylending or who
advertises or announces himself or herself or holds himself or herself out in
any way as carrying on that business whether or not that person also possesses
or earns property or money derived from sources other than the lending of money
and whether or not that person carries on the business as a principal or agent.
The lack of institutional capacity to
regulate and supervise microfinance institutions and money lenders all over the
country can be remedied by working closely with apex organizations like the
Association of Microfinance Institutions of Uganda, the Uganda Co-operative
Savings and Credit Unions and other umbrella bodies for money lenders.
The challenge with the provision that Act
empowers the Authority to set minimum capital requirements for Tier 4
Institutions which include money lenders can be solved by eliminating that
provision in respect of money lending business since it serves no purpose.
Money lending business does not involve taking deposits from the public. In
addition, a money lender is under no obligation to lend money. Therefore,
minimum capital requirements are unduly burdensome to money lenders and should
be eliminated from the act.
The requirement for every SACCO to
contribute to the stabilization fund in order to provide financial assistance
to insolvent SACCOs should be abolished altogether. This is because members’
savings are already secured by the SACCO savings protection fund under section
57. There is no reason to unduly burden SACCOs with more expenses.
Merging and acquisitions by microfinance
institutions should be left to the institutions without approval or direction
from the authority since it is consensual matter. In additional to that,
section 35 that provides that costs of management after takeover of a
microfinance institution shall be payable by the Authority should be amended to
require the institutions to pay the costs of management rather than utilizing
tax payers’ money. This would encourage mismanagement of microfinance
institutions.
[1]
The Tier 4 Microfinance Institutions and Money Lenders Act commenced on 1st
july 2017 under the Tier 4 Microfinance Institutions and Money Lenders
(Commencement) Instrument, 2017 (SI No. 19 of 2017), published in the Uganda
Gazette Vol. CX No. 24 of 28th April, 2017.
[2]
Section 4.
[3]
Section 2(2).
[4]
Section 10 of Tier 4 Microfinance Institutions and Money Lenders Act 2016.
[5]
Tier 4 Technical Working Subcommittee, Regulating and Strengthening Tier 4
Microfinance Institutions in Uganda. Pg. 43.
[6] Tier
4 Technical Working Subcommittee, Regulating and Strengthening Tier 4
Microfinance Institutions in Uganda. Pg.121.
[7]
Section 15 of Tier 4 Microfinance institutions and Money Lenders Act 2016.
[8]
Section 22 of Tier 4 Microfinance institutions and Money Lenders Act 2016.
[9]
Section 8(2) (c] of Tier 4 Microfinance institutions and Money Lenders Act
2016.
[10]
Section 40(4) of Tier 4 Microfinance Institutions and Money Lenders Act 2016.
[11]
Section 43 for Publication of licensed SACCOs and section 64 for publication of
licensed non deposit microfinance institution.
[12]
Section 12 of the repealed Money Lenders Act Cap 273.
[13]
Section 79 of Tier 4 Microfinance Institutions and Money Lenders Act.
[14]
Section 2 of the repealed Money Lenders Act Cap 273.
[15]
[1961] 1 E.A. 361.
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