Uganda’s over-banked financial sector has found itself in the news lately-getting some negative press. As the economy hits some turbulence and interest rates soar, attention has shifted to remedial measures that aim at treating the symptoms such as the much discussed bailout and an even more audacious proposal to cap interest rates through legislation.
Flying under the radar has been the unregulated credit market populated by the non-deposit taking institutions, SACCOs, and money lenders. Some of their predatory practices aside, these institutions play a vital role in availing micro-credit to entrepreneurs that would otherwise be unable to access it from commercial banks. It is thus a wonder and a relief that the sector has remained unregulated for so long. Until now.
The Tier 4 Microfinance Institutions and Money Lenders Act is very customer-centric and has the overarching aim of restoring some sanity by establishing a regulator for the sector – the Uganda Microfinance Regulatory Authority to license and manage tier 4 institutions. The Act bring s within its range all tier 4 microfinance institutions including SACCOs, non-deposit taking microfinance institution such as BRAC, Letshego, The Microfinance Support Centre, money lenders, self-help groups (sometimes known as village & savings loan associations) and commodity based microfinance institutions.
All these entities will now be regulated, supervised, and licensed by the UMRA with its roles akin to those of Bank of Uganda and how it regulates commercial banks. The authority is mandated to promote stability and integrity of the micro-finance sector through ensuring the stability and security of tier 4 institutions; to ensure the sustainability of the microfinance sector with a view to promoting long term capital development.
Regulation and Governance of Microfinance Institutions
The Authority is empowered to take over the management of a Tier 4 institution if it considers that such institution is of an unsound administrative and accounting practices, and procedures, adhering to proper risk management policies. Many SACCOs have collapsed with members’ savings due to bad corporate governance practices and it is hoped that that new Regulator will reign in on similarly indisciplined institutions. It remains to be seen how this provision will be implemented as the regulations to operationalize the Act are yet to be promulgated.
No SACCO shall carry on the business of financial services unless it is registered as a society under the Cooperative Societies Act andis licensed by the Authority. To that end, the Authority can determine what minimum requirements before licensing any institution. This provision will attempt to standardize these requirements across the entire sector. The Authority will vet the business plans, credit policies, and lending procedures of all institutions. Any institution that provides any misleading information commits any offence and is liable to be punished by the Authority.
All SACCOs licensed by the Authority shall be published once every year in the Gazette and in at least one newspaper of wide circulation. The public shall therefore be deemed to be put on notice and may only deal with unlicensed institutions at their peril. For good measure, only licensed institutions shall be allowed to use “SACCO” in their title/name.
The license of any institution might be revoked if it is conducting business in a manner detrimental to the interests of its members and the institution is given 14 days’ notice to show cause why its license should not revoked.
Again, the determination of what is “detrimental to the interests of its members” is left to the sole discretion of the Authority. And it appears that there are no possibilities for redress once a license is revoked save through the courts as the Authority does not enjoy any immunity for its actions.
Restrictions have been introduced on the shareholding, and borrowing caps. An individual shall not hold more than a third of the paid-up capital of SACCO, and a SACCO shall not borrow in an aggregate amount not exceeding a limit prescribed by the Authority. SACCOs are also required to contribute to the SACCO Stabilization Fund that will come to their aid in times of financial distress. There is also created a SACCO Savings Protection Fund to act as insurance for members savings. The funds are drawn from tax payers and annual contributions from the SACCO as determined by the Authority.
Transparency and Consumer Protection
The Act imposes a duty on financial institutions to be transparent by providing for consumer protection guidelines. Crucial information must be brought to the attention of borrowers before lending such as the financial costs associated with the procurement and servicing of the microloan to be met by the borrower. However, unlike Bank of Uganda-issued consumer guidelines, the Act is silent on a cooling-off period during which the borrower might change their mind about borrowing.
Lending institutions are required to make available for examination by their clients the procedures for loan application and approval, agreement, amount of the loan, and the interest rate. A template of the Agreement shall be promulgated in the Tier 4 Microfinance Regulations. The objective is to standardize market practice and avoid instances where certain clauses that may be considered predatory and detrimental are inserted into the agreement.
A customer of a tier 4 institution has a statutory right to request for, and the institution to provide full and accurate information on the procedure and conditions of micro-lending, including information on the borrowers’ financial costs associated with the acquisition and servicing of a micro-loan.
If the Authority is satisfied that a tier 4 institution has incurred or is likely to incur losses that will deplete all or a substantial amount of its capital, it may put the institution in liquidation. ‘Substantial’ is not defined, and if it remains undefined in the regulations, it will be at the sole discretion of the Authority. This too is similar to the powers of Bank of Uganda over commercial banks.
When it is eventually operationalized by the Minister through the promulgation of its regulations, the Tier 4 Microfinance Institutions Act should be read in tandem with existing laws regulating the credit market such as the Mortgage Act, 2009, the Land Act CAP 227, and the Chattels Securities Act, 2014.
Article authored by: Nimrod Muhumuza.