POLICY AND REGULATIONS FOR MICROFINANCE Mtchaisi Chintengo Reserve Bank of Malawi at Legal and Regulatory Workshop

Outline  Highlights of Microfinance Act  Microcredit Agencies:  Licensing and entry requirements  Reporting requirements  Non-Deposit MFIs  Licensing and entry requirements  Reporting requirements  Compliance and Enforcement  Exit Administration

Highlights of Microfinance Act  The following are exempt from the provisions of the Act (S4)  SACCOs  Small member based institutions  Those below threshold to be determined by the Registrar

Highlights continued ……  Microfinance Service Providers have to be (5):  Registered as a microcredit agency; or  Licensed as a non-deposit taking MFI; or  Licensed as a deposit taking MFI; or  Approved licensed financial institution.  Microfinance Service Providers shall not engage in any other business other than the business specified on certificate/licence (s8)

Highlights continued ……  Microfinance Service Providers shall conduct business at place specified on licence/certificate (s9)  Change/ closing of place of business requires giving prior notice to Registrar  A Microfinance Service Providers whose licence/certificate/approval is suspended or revoked shall not continue top conduct any microfinance business (s12)

Highlights continued ……  A microfinance institution has as its primary funtion the provision of microfinance services i.e. no more than

MCAs Directive  Rationale – establish requirements for registration; supervision; and minimum market conduct  Objectives: To register MCAs To ensure adherence to high standards of market conduct

MCAs Registration Requirements Legal status – not restricted Application – Schedule 1 Viable business plan Clean CVs for chief executive/directors Resolution of parent company – foreign owned only By-laws reflecting corporate governance – how to appoint directors/senior management Application fees of K50,000 – non-refundable

Supervision of MCAs  Reporting:  Biannual reports (Schedule II) – qualitative/financial reports within 6 weeks after half year  Audited (by certified auditor) annual accounts – 4 months after end of year  MCAs to apply for licence as non-deposit taking upon attaining: Assets worth K100.0 million Annual turnover of K300.0 million  Other Directives may be introduced

Non-Deposit Taking Directive  Rationale – establish requirements for licensing; supervision; and minimum market conduct standards  Objectives: To license all NDTIs To ensure adhere to high standards of market conduct and corporate governance

NDTIs Licensing Requirements  Legal status – restricted to companies (guarantee or shares)  Capital or guarantee of K75.0 million  Application supported by: Business plan - scope of operations, description and rationale of services and capacity; Projected balance sheet and income statement for 3 years stating assumptions basing on feasibility analysis; Written risk management systems; and Name and address of applicant’s auditors.

NDTIs Application Support Clean CVs for CEO, directors, as well as shareholders information; In case of foreign-owned: Consent letter from shareholders’ home supervisory authority allowing applicant to invest in Malawi; and Resolution of the applicant approving establishment of subsidiary in Malawi A memorandum of association and articles of association or byelaws – focusing corporate governance; and Non-refundable application fee of K100,000

NDTIs Supervision  Reporting: Quarterly reports of operations (Schedule II) - not later than 6 weeks after the end of each quarter; and audited annual accounts – 4 months after year end  Prudential supervision: Asset base of K500 million; or Annual revenues in excess of K600 million To comply with directives for prudentially-regulated MFIs !!!

NDTIs Compliance Matters  Minimum governance standards: Management comprising a CEO and at least 1 other senior officer, e.g. chief financial officer or head of operation; and Minimum qualification of diploma in relevant fields plus at least 3 years experience in financial sector  An NDTI to: Establish internal audit unit or committee; and Appoint external auditor  Other directives to be introduced as we go

Cross-Cutting Compliances: MCAs and NDTIs Inspection of books of account and records Reporting to credit reference bureaus Accessing credit report to ascertain credit status of loan applicants Reporting suspicious transactions to FIU Maintaining confidentiality of dealings and relation with clients Exceptional disclosure granted when required by law, court order or Registrar

More Cross-Cutting Compliances  Transparent pricing:  Disclosures – prices, other charges, insurance premiums, loan processing fees, etc.  Collateral requirements – savings, assets Take-home pay requirement as per Employment Act Interest calculation basing on reducing balance method – straight line method outlawed!! Partial or total loan prepayment allowed – penalties, if any, to be described in contract Compulsory savings allowed - but not for intermediation!!!

More Cross-cutting Compliances Display registration certificate/licence, interest rates/other charges, rights and obligations, etc. Penalties for offences, e.g. late submission of returns, other non-compliances Complaints resolution  Complaint receiving channel – designate staff  Complaint resolution – designate staff or committee to investigate and resolve issues with clients  Open register of complaints and resolutions  Report to Registrar resolved/unresolved complaints  Advise clients to report unresolved complaints to Registrar

Challenges of MFI Supervision Human capacity – skills, knowledge, etc. Management information systems Operational infrastructure, e.g. computers, network, electricity, etc. High default, high operating expenses Compliance – governance, prudential, etc Fear of the Invisible Hand - Registrar

Other Thoughts to Reflect on Possible membership of money-lending institutions – institutionalization and enhancement of best practices in industry Industry image Resource mobilization – financial strengthening of Network Downscaling of banks – threat or complementary??

Thank you for your attention Questions/Comments?