SPECIAL REPORT ON MICRO FINANCE
Disagreements between SACCO executives and Bank of Uganda to delay its implementation
The end of an era of lawlessness and chaos that has characterised the micro-finance sector for years could come to an end in the coming few months with the commencement of the implementation of the new Tier 4 Micro Finance and Money lenders Act 2016.
According to the Minister of Micro-finance Haruna Kasolo, the Tier 4 Micro-finance Institutions and Money Lenders Act 2016, will come into force July 2017 at the beginning the next financial year.
In an exclusive interview, he told The Sunrise that his ministry is finalising the process of developing regulations that will give force to provisions of the act and help regulate the increasingly important sector in the lives of many Ugandans.
“We are working on regulations and we expect this law to start with effect from 1st July, next financial year. It will result in the creation of Uganda Micro-finance Regulatory Authority. This authority will regulate all the financial institutions categorised under as Tier 4, (category of financial services providers categorisation by the Bank of Uganda.) Under this categorisation, the Tier 4 financial players include, Non-Deposit Taking Micro-Finance Institutions, Savings and Credit Cooperative Organisations (SACCOs), Community Savings Groups and Money Lenders,” minister Kasolo said.
If the ministry sticks to this target, the law will restore long-desired order to the micro-finance sector by establishing an oversight body that regularly monitors and supervises the operations of Savings and Credit Cooperative Organisations (SACCOs), across the country, supervise community self-help groups, aspects that were largely unregulated. The commencement of the law will also repeal sections of the Money Lenders Act Cap. 273 and bring them under stricter and regular monitoring by the new entity.
But the minister’s target appears too ambitious, judging by comments by some officials involved in the process of putting together the regulatory framework.
According to Steven Bongonzia, an expert in micro-finance development and one of those involved in designing new regulations, the government is yet to carry out country-wide consultations with stakeholders in the industry not only to sensitize them but also to generate consensus on proposed regulations that will help in enforcing the Tier 4 Micro finance act.
Gaps to fill
One of the most anticipated changes to the industry, according to people close to the reforms, will be the introduction of punitive sanctions against mismanagement of the SACCOs by errant staff or the board of directors. Such provisions will replace the existing largely weak legal regime that emphasises arbitration even when millions or billions of members savings get misappropriated by the leadership and staff of the SACCO.
The other likely sources of delay for the implementation of the new microfinance law surrounds the disagreements on which institution will regulate the big SACCOs.
Although Bank of Uganda has maintained a hands-off eyes-on approach to most SACCOs in the past, the increasing popularity of the financial institutions, and consequently the burgeoning size of savings and loans being managed by some of the SACCOs across the country, has generated the central bank’s eagerness to want to supervise the transactions in the SACCOs.
For example, the new Microfinance and Money Lenders Act provides for amendments to the Micro-finance Deposit Taking Institutions Act 2003 through which BoU regulates MDI institutions with the view to giving Bank of Uganda ultimate control over big SACCOs.
The new Tier 4 micro-finance Act states that: “The MDI Act will be amended to include sections like: “A registered which intends to provide financial services among its members shall apply in writing to the Bank of Uganda for a license if- a) the voluntary savings of the registered society are in excess of one billion five hundred million shillings and, b) the institutional capital of the registered society is above five hundred million shillings.”
Spiting control over SACCOs because of their portfolio size hasn’t gone down well with some of the players who believe this will weaken the proposed regulatory body for SACCOs as one for weak institutions.
Steven Bongonzia revealed that the insertion of the article on amending the MDI act to capture big SACCOs was ‘smuggled into the Tier 4 Act’. He revealed that in coming meetings, there is growing consensus among the SACCO community “to ensure that no SACCO will be forced to be under BOU.” He said: “Instead, we want to build the capacity of the proposed Tier 4 regulatory authority.
At the same time, other experts believe the central bank may not accept to keep away from increasingly important financial segment of SACCOs because it would be reneging on its core mandate of ensuring macro-economic stability.
The proposed Tier 4 micro-finance act has sparked a sense of optimism as a source of confidence among many existing and potential members of SACCOs.
Colin Agabalinda, the SACCO Development Manager at the Project for Financial Inclusion in Rural Areas (PROFIRA), under the Ministry of Finance, argues that the new law will empower the new Authority to prevent problems in SACCOs from killing the institutions through regular supervision. The law also provides for the creation of a SACCO stabilisation fund and a SACCO Savings Protection Fund.
“The current law on theft for example, does not trap people who misuse their power as managers who lend to relatives well knowing the money will not be paid. In most SACCO members cry that managers took their money and ran away. And when members take them to police, the suspect is released for lack of a specific provision in the law on mismanagement.
From the provisions of the law, it is expected that the minister will make regulations on conditions of lending, operations of self-help groups, money lending, accounting and financial reporting.
No more super profits for Money lenders
But perhaps some of the most affected sector by the new law, will be the money lenders business.
Apart from the registration requirement, money lenders are facing more stringent new restrictions for their businesses.
For example, the law empowers the Uganda Microfinance Regulatory Authority to conduct inspection, examination of books of accounts, records, returns and any other document or premises of a money lending business.
Section 90 (2) of the Act states that: A money lender who charges interest that is higher than the maximum interest rate prescribed by the Minister commits an offence and on conviction is liable to a fine not exceeding fifty currency points (Ushs1million) and the court may, in addition to the fine order that the money lenders license be cancelled and the money lender pays the borrower any money paid in excess as a result of the interest rate charged.
Gov’t grants for savings groups
Besides the proposed tougher new regulations on SACCOs and Money lenders, Minister Kasolo revealed that the government has plans to inject some Ushs5m into each Village Savings and Loan Associations (VSLA). The minister reveals that the move would avail credit to poor people but also help the groups to expand by providing loanable funds.
The proposed plan has however received hostile reception from some of the stakeholders in the micro-finance industry with many arguing that it will not only kill member’s motivation to save but also politicise the groups, similar to what has happened to most SACCOs that have received government’s grants.
“In the past, such credit schemes failed.
They discourage savings and are certainly a distortion,” said Bongonzia, one of the founders of Shuuku micro-finance in Bushenyi but also a person with experience in micro-finance development in Uganda.
Fred Iga Luganda, a consultant in micro-finance development and a lecturer at Makerere University Business School (MUBS) also argues that village savings and loan groups would benefit more through capacity-development than through direct government donations.