INTRODUCTION
The Central Bank of Tanzania (Bank of Tanzania) has finally issued the regulations governing Microfinance Business in Tanzania. The regulations come in trio containing, Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations 2019 (GN No. 679 of 2019), Microfinance (Savings and Credit Cooperative Societies) Regulations 2019 (GN No. 675 of 2019), The Microfinance (Community Microfinance Groups) Regulations 2019 GN No. 678 of 2019.
These regulations are in response to the enactment of the Microfinance Act, Cap. 407 (Act No. 10 of 2018). According to the Microfinance Act, Microfinance business in Tanzania is classified into 4 tiers being:
Tier 1 –Banks and microfinance Banks (Deposit Taking Microfinance institutions).
Tier 2 –Credit companies and financial organizations (Non-Deposit Taking Microfinance Service Providers).
Tier 3 –Savings and Credit Cooperatives Societies (SACCOS)
Tier 4 –Community microfinance groups
The set of these three new Regulations is meant to provide the operational guidance for the management, supervision and administration of each Microfinance business under Tier 2, Tier 3 and Tier 4. It is important to note that, Section 5(2) of the Microfinance Act requires Microfinance Business under Tier 1 i.e. Deposit taking microfinance institutions to be regulated in accordance with the Banking and Financial Institutions Act, Cap. 342.
This update highlights the regulatory requirements brought by new regulations on Tier 2 Microfinance Regulations covered under the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations 2019 (GN No. 679 of 2019). As such, according to the regulations, Tier 2 Microfinance Business has been defined as category of non-deposit taking microfinance service providers including credit companies, financial organizations, housing microfinance companies, individual money lenders and digital microfinance lenders. The Review and highlights of other regulations will be covered in our other publications.
LICENSING
According to the Regulations the Central Bank has laid down the prerequisite for registration of the Microfinance Business in Tanzania. Regulation 4 requires that a person who intends to undertake microfinance business under Tier 2, must be established under the Companies Act or relevant laws, and incase for an individual money lender, register as a Sole proprietor. It is as well mandatory on registering such entity to include either of the words “microfinance”, “finance”, “financial services”, “credit” or “microcredit” in the name of such Microfinance entity.
To operate as Tier 2 Microfinance business, an entity must obtain license from the Central Bank. Application for license to the Central Bank must be accompanied by a nonrefundable application fee. According to Regulation 6, an application for license by a foreign owned entity must be accompanied in addition to the regular required documents, a training plan and succession plan the extent to which Tanzanian staff shall occupy senior management positions in the microfinance service provider.
In reviewing and evaluating the application for license under Tier 2, Regulation 7 and 8 requires the Central Bank to among others consider:-
- the history of the proposed shareholders, reputation and integrity in the past and present business practices; and
- the financial capacity of the applicant through the Net worthy, potential financial support that can be made available when microfinance requires additional capital and also, the source of funds is not from borrowed money.
Furthermore, regulation 10 requires the Central Bank to evaluate the proposed members of the Board of Directors and Chief Executive Officer of the Microfinance on their suitability, experience and ability to manage microfinance business. In doing so, the Central Bank may interview the proposed board members, Chief Executive Officer and depending on the circumstance, enquire on the past performance, reputation and skills. The regulations also require the Board Members and Chief Executive officer to fill in a specific questionnaire as part of assessment.
Regarding the place of business, the regulations require the microfinance service provider under Tier 2 to maintain the place of business with proper address and always to prominently display its business name at the place of business. To relocate the place of business a microfinance service provider must seek and obtain prior approval of the Central Bank, failure of which is an offence.
For existing Microfinance Business, Regulation 12 provides for a transition period of 12 months to comply with the new licensing requirements from the date of entry into force of the act i.e. on 01st November 2019 (pursuant to GN No. 784 of 2019). A Microfinance business that fails to comply is required to close and cease its business to operate as microfinance. Failure to do so is an offence punishable by fine of up to 100Million or imprisonment of up to 5 years or to both fine and imprisonment.
MANAGEMENT OF MICROFINANCE SERVICE PROVIDERS UNDER TIER2
Board of Directors: Management of Microfinance Entities udert Tier 2 is now required to be formal including embracing corporate Governance. Hence, Microfinance Entities under Tier 2 must be governed by the Board of Directors (Governing Body). In setting up the Board of Directors Regulation 18 requires the appointment of at least 2 Tanzanians in the Board of Directors. Moreover, the Functions of the Board of Directors are clearly enshrined by the regulations by putting responsibility on the Board of Directors to include, appointment of chief executive officer, approval of business plans, strategies and policies, monitoring management’s conduct and performance.
Employment of Non-Tanzanians: The Regulations have restricted employment of Non-Tanzanians only upon obtaining prior approval from the Central Bank. The restrictions also extend to limit the number of Non-Tanzanians who can be employed to a maximum of 5 people at any given time. However, in exceptional circumstances and upon thorough consideration, the Central Bank may authorise employment of non-Tanzanians in additional to 5.
Permissible Activities to be carried by Microfinance Entities: The regulations stipulate the permissible activities that can be carried out by the Microfinance Entities under Tier 2 to include among others: –
- Issuing microfinance loans to individuals, groups of individuals, micro and small enterprises, including microfinance guarantees;
- issuing housing microfinance products to individuals;
- maintenance and operation of various types of accounts with banks and financial institutions in Tanzania
- operation of micro leasing facilities, microfinance related hire-purchase and arrangement of consortium lending and supervision of credit schemes
- provision of professional advice to customers regarding investments in small businesses; rendering managerial, marketing, technical and administrative advice to customers
- microinsurance as an agent of insurers
- equity investment
- agency banking
Prohibited Activities to be carried by Microfinance Entities: Regulation 22 has laid down the activities that are prohibited and not to be conducted by Microfinance Entities. These includes:
- accepting any type of deposits from the public
- foreign exchange business
- foreign trade operations
- trust operations
- credit and debit cards payment orders and transfer of funds
Books of Accounts: The Microfinance Service Provider is required to prepare and keep proper books of accounts and other records in relation to its operations, which are sufficient to show and explain its transactions and financial position. Such Books of Account including annual audited accounts and audit report must be submitted to the Central Bank within four months from the end of financial year
Internal Auditor: It is the requirement of Regulation 27 for Microfinance Entities to appoint an Internal Auditor who shall be responsible to evaluate the adequacy and effectiveness of internal controls, risk management and governance processes. The internal auditor is required to be independent and must report directly to the Board of Directors.
External Auditor: Microfinance Service provider is required to appoint a competent and registered External Auditor. Upon appointment, a Microfinance Service Provider is bound not to change such External Auditor in the course of performance of the audit work, unless such change is approved by the Central Bank. However, the duration and rotation of External Auditor is limited to 3 years. More importantly, the regulations impose a duty to the External Auditor to report to the Central bank any breaches or noncompliance by Microfinance Service Provider of Anti Money Laundering, fraud or losses incurred which has caused the microfinance service provider to be undercapitalized.
Credit Reference: The Regulations lays the requirements of the Microfinance Service to comply with the requirements of the Credit Reference in Tanzania on the use and access of credit information through the Credit Reference Bureaux. In using the Credit Reference Bureaux Microfinance Service Provider required to submit credit information for all existing and new credit facilities granted to customers. To ensure confidentiality and protection of information, the regulations require a microfinance service provider to obtain written consent to allow such a microfinance service provider to obtain from, exchange with or disclose all credit information relating to the borrowers to lenders or Credit Reference Bureaux.
LENDING OPERATIONS
The regulations require a Microfinance to maintain and have on record a Lending (Credit) Policy which must be reviewed at least once yearly. (Regulation 37). The Loan Application and Loan Agreement must follow the prescribed requirements as laid or under the regulations including the requirement for the Loan Applicant to provide consent and declaration that his credit information may be shared.
Moreover, the regulations allow the Microfinance to require and maintain collateral for securing loan, in any form being Mortgage or any other form of security. However, upon default, Microfinance is required to follow prudent recovery measures including issuing of sufficient notice before a sale, and in event of sale such collateral must be valued and sold by way of public auction or private arrangement. The Loan Recovery must also ensure Customer Protection and shall not harass, abuse, oppress or threaten to use violence against the borrower, guarantors or any person during recovery (Regulation 56).
SUPERVISION OF MICROFINANCE SERVICE PROVIDERS
Capital Requirements and adequacy: The regulations stipulate the minimum Capital Requirements for Microfinance to be 20 Million or such higher amount as the Central Bank may prescribe. But, the Central Bank may require higher minimum capital where Microfinance; is likely to incur losses resulting in a capital deficiency, has significant exposure to risk or is without adequate capitalization and risk management.
The Regulations also allows the Central Bank to perform an onsite and offsite inspection of microfinance to ascertain compliance with laws, regulations, policies and procedures in carrying out its operations or to examine operations and financial position of a microfinance service provider or to assess the effectiveness of the internal controls of Microfinance among others.
Acting on its supervisory role, the Central Bank may impose any administrative measures to a Microfinance such as revocation of license, prohibition from declaring or paying dividends or prohibition from opening or establishing new branches or suspension of lending and investment activities or suspension from office of the defaulting director, employee or proprietor (regulation 60).
CONSUMER PROTECTION
To ensure Customer protection the regulations require Microfinance to have full disclosure and transparency of its products and services, in particular, the loan agreements must be legible and written in a simple and understandable language but also contain terms and conditions that are transparent, fair and protect the rights of the borrower.
Protection of Guarantors: The Regulations require Microfinance to provide a disclosure statement in writing to the Loan guarantors indicating its liability for the loan guaranteed. Such a statement must include full details of the Loan and must be signed by the Guarantor.
Consumer protection also extends to debt collection whereby a Microfinance or an engaged debt collector is required to ensure sufficient notice is issued before recovery but also forbid from any illegal recovery measures.
The regulations also puts obligations to Microfinance o conduct Financial Education through trainings, seminars, workshops, media or fliers/brochures to its Clusters to cover at minimum key features of products and services offered, terms and conditions of loans, cash flow management, record keeping, financial decision making, management of loans usage and repayment, business planning, importance of saving or any other aspects considered relevant.
FIN & LAW -Client Update- October 2019 -Banking -Regulation of Microfinance Business in Tanzania
DISCLAIMER: THIS PUBLICATION HAS BEEN PREPARED FOR GENERAL INFORMATION ON MATTERS OF INTEREST ONLY. IT DOES NOT CONSTITUTE LEGAL OPINION OR PROFESSIONAL ADVISE ANYHOW. YOU SHOULD NOT ACT UPON THE INFORMATION CONTAINED IN THIS PUBLICATION WITHOUT OBTAINING SPECIFIC PROFESSIONAL ADVISE AND GUIDANCE. NO REPRESENTATION OR WARRANTY (EXPRESS OR IMPLIED) IS GIVEN TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS PUBLICATION. FIN & LAW DOES NOT ACCEPT OR ASSUME ANY LIABILITY, RESPONSIBILITY OR DUTY OF CARE FOR ANY CONSEQUENCES, LOSS OR INCONVENIENCE FOR ANY CONSEQUENCES OF YOU OR ANYONE ELSE ACTING OR REFRAINING TO ACT, IN RELIANCE ON THE INFORMATION CONTAINED IN THIS PUBLICATION OR ANY DECISION BASED ON IT.
