REGULATING AND SUPERVISING FINANCIAL COOPERATIVES IN MALAWI Presentation by Noel Mkulichi Financial Co-operatives Regulators Roundtable, Pretoria November 24-25, 2008

Historical Background of SACCOs in Malawi Historical Background of SACCOs in Malawi Overview of SACCO Movement in Malawi Overview of SACCO Movement in Malawi Regulatory Environment for SACCos Regulatory Environment for SACCos Roles of the National Association Roles of the National Association Observations on SACCOs Regulatory Environment Observations on SACCOs Regulatory Environment Consequences of the Regulatory Environment Consequences of the Regulatory Environment Regulatory Direction for SACCOs Regulatory Direction for SACCOs Broad objectives of the Regulation Broad objectives of the Regulation Strengthening Governance and Internal Controls Strengthening Governance and Internal Controls Regulation and Supervision of SACCOs Regulation and Supervision of SACCOs Regulatory Relationships Regulatory Relationships Concluding Thoughts Concluding Thoughts Presentation Outline

Historical Background of SACCOs in Malawi SACCO philosophy was introduced by Catholic Fathers in 1962 SACCO philosophy was introduced by Catholic Fathers in 1962 In 1968 an African Body called ACCOSCA was formed in Nairobi in order to facilitate development of SACCOs. In 1968 an African Body called ACCOSCA was formed in Nairobi in order to facilitate development of SACCOs. In 1969 leadership of ACCOSCA visited Malawi and discussed with Government officials on SACCOs in the country. In 1969 leadership of ACCOSCA visited Malawi and discussed with Government officials on SACCOs in the country. In 1971 three nuns went to Swaziland to study SACCO philosophy. In 1971 three nuns went to Swaziland to study SACCO philosophy. In 1973 first SACCO was registered in Malawi. In 1973 first SACCO was registered in Malawi. In 1979/80 SACCO feasibility studies were done. In 1979/80 SACCO feasibility studies were done. In 1980 MUSCCO was registered as a National Association. In 1980 MUSCCO was registered as a National Association.

Overview of the SACCO Movement The Movement is still at its nascent stage, but relatively developed compared to other movements in the region The Movement is still at its nascent stage, but relatively developed compared to other movements in the region Comprises: Comprises: The Regulatory Authority (Registrar of cooperative societies) The Regulatory Authority (Registrar of cooperative societies) A national association (MUSCCO) with 60 affiliates A national association (MUSCCO) with 60 affiliates Three chapters (regional groupings of SACCOs) Three chapters (regional groupings of SACCOs) Individual SACCOs (about 90 of which about 70 are active) Individual SACCOs (about 90 of which about 70 are active) Total membership of SACCOs stands at about 74,000 against adult population of about 5 million Total membership of SACCOs stands at about 74,000 against adult population of about 5 million Outstanding loans amount to 232,500 with value totallingK1. 04 billion ($7.4 million) Outstanding loans amount to 232,500 with value totallingK1. 04 billion ($7.4 million) Deposits stand at K1.09 billion ($7.7 million) of which: Deposits stand at K1.09 billion ($7.7 million) of which: K116.6 million ($0.8 million) are savings and K116.6 million ($0.8 million) are savings and MK974.0 million (6.9 million) are share deposits MK974.0 million (6.9 million) are share deposits

Regulatory Environment for SACCOs SACCOs are registered under Cooperative Societies Act, 1998 (primary law), and Cooperative Societies Regulations, 2002 (subsidiary law) SACCOs are registered under Cooperative Societies Act, 1998 (primary law), and Cooperative Societies Regulations, 2002 (subsidiary law) The Registrar of cooperative societies in the Ministry of Industry and Trade (MoIT) administers the laws The Registrar of cooperative societies in the Ministry of Industry and Trade (MoIT) administers the laws Each SACCO is further guided by its own bye-laws approved by Registrar Each SACCO is further guided by its own bye-laws approved by Registrar The Registrar does not however supervise affairs of SACCOs on account of capacity The Registrar does not however supervise affairs of SACCOs on account of capacity Delegated the inspection function to the National Association to ensure safety and soundness of SACCOs Delegated the inspection function to the National Association to ensure safety and soundness of SACCOs MUSCCO is also mandated to conduct external audits in SACCOs to ensure compliance with statutes MUSCCO is also mandated to conduct external audits in SACCOs to ensure compliance with statutes

Roles of the National Association MUSCCO was set up to develop, promote and safeguard a safe and sound network of SACCOs in Malawi MUSCCO was set up to develop, promote and safeguard a safe and sound network of SACCOs in Malawi In addition to inspections and external audits, MUSCCO: In addition to inspections and external audits, MUSCCO: Operates a central finance facility which assists SACCOs in liquidity management Operates a central finance facility which assists SACCOs in liquidity management Operates in-house financial protection plan, an insurance scheme for SACCO members targeting life savings and loan protection Operates in-house financial protection plan, an insurance scheme for SACCO members targeting life savings and loan protection Provides technical support on accounting procedures and systems, management information systems, and data base development, etc Provides technical support on accounting procedures and systems, management information systems, and data base development, etc Lobbying and dialogue Lobbying and dialogue

Observations on SACCOs Regulatory Environment No established position of the Registrar for cooperative societies in MoIT as required by law, only puts on the hat in times of need No established position of the Registrar for cooperative societies in MoIT as required by law, only puts on the hat in times of need Both the primary and subsidiary laws are not enabling for financial cooperatives development Both the primary and subsidiary laws are not enabling for financial cooperatives development Conduct of inspection and external audits by one institution (MUSCCO) is cause for conflict of interest Conduct of inspection and external audits by one institution (MUSCCO) is cause for conflict of interest Both inspection and external audits may not be independent (principal – agent dilemma) Both inspection and external audits may not be independent (principal – agent dilemma)

Observations on SACCOs Regulatory Environment (Cont’d) Some SACCOs, especially those not affiliated with MUSCCO can escape regulation Some SACCOs, especially those not affiliated with MUSCCO can escape regulation Some SACCOs have registered growth overtime thereby requiring stringent input and involvement of board Some SACCOs have registered growth overtime thereby requiring stringent input and involvement of board Weak governance structures at both board and management level Weak governance structures at both board and management level Weak internal controls within SACCOs Weak internal controls within SACCOs

Consequences of the Regulatory Environment The office of the Registrar for cooperative societies has no budget and hence depends on the ministry The office of the Registrar for cooperative societies has no budget and hence depends on the ministry The Registrar reports to the Minister through the Principal Secretary, hence has no final say. The Registrar reports to the Minister through the Principal Secretary, hence has no final say. Weak governance arrangements and internal controls have led to frauds, insolvency and ultimately, failure of SACCOs Weak governance arrangements and internal controls have led to frauds, insolvency and ultimately, failure of SACCOs Loss of confidence by members Loss of confidence by members SACCOS lack formal recognition among non-members as portrayed by low membership SACCOS lack formal recognition among non-members as portrayed by low membership

Regulatory Direction for SACCOs Introduce a specific and enabling legislative framework for SACCOs Introduce a specific and enabling legislative framework for SACCOs Create a Regulatory Authority that is independent, has capacity to regulate; and Create a Regulatory Authority that is independent, has capacity to regulate; and Strengthen governance and internal controls Strengthen governance and internal controls

Broad Objectives of the Regulation Place the regulatory authority under the Registrar for financial institutions to ensure effective oversight Place the regulatory authority under the Registrar for financial institutions to ensure effective oversight Create a prudential, proportional and predictable legal and regulatory framework for SACCOs in Malawi. Create a prudential, proportional and predictable legal and regulatory framework for SACCOs in Malawi.  One central piece of legislation recognizing the banking, cooperative and microfinance aspects of SACCOs  Protect deposits and shares of members while preserving ability to serve the members Limit the scope of regulation so the regulator is not overburdened Limit the scope of regulation so the regulator is not overburdened Balance interests of regulation and supervisory capacity through delegation of regulatory powers to an independent body. Balance interests of regulation and supervisory capacity through delegation of regulatory powers to an independent body. Put in place effective governance and internal controls in order to gain public recognition Put in place effective governance and internal controls in order to gain public recognition

Strengthening Governance of SACCOs Registrar to introduce minimum standards for board of directors Registrar to introduce minimum standards for board of directors The Registrar to subject directors to ‘fit and proper’ test before rising onto the board The Registrar to subject directors to ‘fit and proper’ test before rising onto the board Also to determine composition, frequency of meetings, rules of appointment, responsibilities and additional qualifications for directors Also to determine composition, frequency of meetings, rules of appointment, responsibilities and additional qualifications for directors

Strengthening Governance of SACCOs (Cont’d) SACCOs to be managed by a CEO and another senior management officer SACCOs to be managed by a CEO and another senior management officer CEO to pass ‘fit and proper’ test CEO to pass ‘fit and proper’ test Must also have hands-on experience Must also have hands-on experience

Strengthening Internal Controls Strengthening Internal Controls SACCOs shall be expected to SACCOs shall be expected to conduct business with integrity, prudence and professional skill conduct business with integrity, prudence and professional skill engage only in bona fide transactions engage only in bona fide transactions truth in lending by disclosing terms of any credit or savings product offered truth in lending by disclosing terms of any credit or savings product offered Comply with minimum standards of good practice Comply with minimum standards of good practice

Strengthening Internal Controls (Cont’d) Strengthening Internal Controls (Cont’d) Registrar to issue directives on Registrar to issue directives on minimum capital or loan fund requirements minimum capital or loan fund requirements Aging and provisioning of loans Aging and provisioning of loans Insider lending Insider lending Certain classes of credit facilities, investments and risk-bearing commitments Certain classes of credit facilities, investments and risk-bearing commitments Any other transactions affecting the solvency or liquidity of a SACCO Any other transactions affecting the solvency or liquidity of a SACCO

Strengthening Internal Controls (cont’d) Strengthening Internal Controls (cont’d) SACCOs to appoint external auditors for production of audited financial statements SACCOs to appoint external auditors for production of audited financial statements

Regulation and Supervision of SACCOs Registrar to determine threshold for placing a SACCO under prudential supervision Registrar to determine threshold for placing a SACCO under prudential supervision SACCOs to submit periodic returns to Registrar SACCOs to submit periodic returns to Registrar SACCOs to submit annual financial statements to Registrar SACCOs to submit annual financial statements to Registrar

Regulation and Supervision of SACCOs (Cont’d) Regulation and Supervision of SACCOs (Cont’d) Minister shall issue regulations on administration of the Act Minister shall issue regulations on administration of the Act Remedial measures and winding up covered under the umbrella law, the Financial Services Act Remedial measures and winding up covered under the umbrella law, the Financial Services Act

Regulatory relationships The Registrar for cooperative societies shall maintain registration of cooperative societies according to Cooperative Societies Act The Registrar for cooperative societies shall maintain registration of cooperative societies according to Cooperative Societies Act The Registrar for financial institutions shall consider application from registered societies for licensing under the Financial Cooperatives Act The Registrar for financial institutions shall consider application from registered societies for licensing under the Financial Cooperatives Act The Registrar for financial institutions may delegate the supervision function to MUSCCO (non-prudential) The Registrar for financial institutions may delegate the supervision function to MUSCCO (non-prudential)

Concluding Thoughts Access to financial services by the poor is likely to accelerate economic development and poverty eradication Access to financial services by the poor is likely to accelerate economic development and poverty eradication An enabling cooperative law is likely to: An enabling cooperative law is likely to: reform and modernize the functioning of the SACCOs reform and modernize the functioning of the SACCOs create a strong foundation for regulation and supervision of SACCOs create a strong foundation for regulation and supervision of SACCOs provide a platform for prudent growth and innovation in financial cooperatives industry provide a platform for prudent growth and innovation in financial cooperatives industry provide a level playing field provide a level playing field

Asante Sana! Yebo! Merci! Thank You!