In an effort to bring some order and authoritative oversight in the microfinance sector, the government of Uganda has taken some positive steps in enacting legislation to regulate microfinance institutions (MFIs) and bring accountability and security of public funds deposited to MFIs by creating a framework for Microfinance Deposit taking Institutions (MDIs). The government introduced the Microfinance Deposit taking Institution (MDI) bill in 2002 after years of consultative process with all the stakeholders: microfinance practitioners, Association of Microfinance Institutions of Uganda (AMFIU), the central bank, the ministries of finance, planning and economic development, legislators and donor agencies. The bill was enacted as law by the parliament in 2003.
The microfinance sector in Uganda has seen tremendous growth since 1994. Currently there are over 500 MFIs operating in 52 of the 56 districts. Of the estimated 600,000 clients of the MFIs, 70% are women and 20% are in the rural areas.
Financial institutions in Uganda have been regulated by two major laws: the Financial Institution Statute (FIS) of 1993 and Bank of Uganda (BoU) Statute of 1993. Both these acts were designed to regulate commercial banks, insurance companies and credit institutions. MFIs were not recognized by these acts. MFIs were registered and regulated as companies limited by guarantees and NGOs.
The void in legal clarity over MFIs left the funds deposited by public to various MFIs unsupervised by any government agency and vulnerable to the whims of those with ill-intent. The government stated this as a threat to the wellbeing of the “financial industry” of the country.
The government of Uganda took pro-active steps to create a legal framework for MFIs and enacted the Microfinance Deposit Taking Institution (MDI) Act in 2003. The law defined roles for MFIs and MDIs and created a legal mechanism for them to accept deposits. It categorized organizations engaged in monetary transactions involving deposits, savings and lending of public funds in four tiers [See: Table 1]. The law also introduced licensing requirements and regulatory oversight procedures for MDIs.
Under the new act an MDI must be incorporated as a limited company with issued shares, have a minimum capital of US$ 285,000 and a capital adequacy ratio at least 15% of weighted assets at any time. MDIs cannot grant credit facility of more than 1% of share capital to individuals and no more than 5% of core capital to a group. No group or individual can own more than 30% of the MDI in the initial stage. In five years, groups or individuals will be limited to only 20% ownership of an MDI. Wholly owned microfinance subsidiaries of licensed commercial banks and MFIs that are owned by BoU, approved publicly held companies that also have similar businesses in other countries, are exempted from this ownership restriction. Operations and management of MDIs must be run by a staff with considerable experience in the banking sector. The MDIs will have to acquire a license to operate and transact in microfinance and will be governed and supervised by the BoU.
|Table 1: Tiers of Financial Institutions Defined by MDI Act 2003
||Commercial Banks, licensed under the Financial Institutions Statute 1993
||Credit Institutions, licensed under the Financial Institutions Statute 1993
||Microfinance Deposit-taking Institutions (MDIs), to be licensed under the Micro Deposit-Taking Institutions Act 2002
||Institutions involved in the microfinance business that do not qualify for Tiers 1, 2 or 3, and will therefore not be regulated by the Bank of Uganda. All these institutions are legally registered entities, e.g. NGOs, companies limited by guarantee, savings and credit co-operatives or community based organizations
Obtaining a license will enable the MDI to accept deposits from public, lend credit and short term loans to micro-enterprises and low income households, transmit local currencies, perform payroll services, and deal with utilities and school fees payments. Under the new law, only Tier-4 MFIs can accept compulsory savings from its clients, while only user-owned Tier-4 MFIs are allowed to take voluntary savings from clients for on-lending purposes.
While clearing up some legal ambiguity, these frameworks have created new challenges for existing MFIs. Organizations who wish to obtain a MDI license must now satisfy several new requirements. Only about five to nine current MFIs can meet the Tier 3 requirements of MDI Act 2003. To become an MDI, an MFI will have to change its name, mission statement, human resource capacities, organizational structure and culture, to reflect its new status. Transformation from MFIs to MDIs will require MFIs to become sort of mini banks, threatening the peculiar social aspect of MFIs.
It is very important to safeguard public funds. As with all legislative acts and their enforcement in practice, a balance must be struck to encourage the MFIs, as MDIs stay focused on the peculiar needs of the less privileged and reach out to the poorest. There also should be extensive exchange of information and experience between countries with similar laws in the books or in the pipeline so that everyone can benefit from the growing process and avoid reinventing the wheel.
Presented by Olivia Kayongo, Program Coordinator, Micro Credit Development Trust (MCDT), Uganda, at the Grameen Trust Associated Session for Grameen Global Network at MEARMS. MCDT has been a Grameen Trust partner since 2000.
Report by Tamim Islam