1. REGULATION AND SUPERVISION OF SACCOs: A CASE OF MALAWI Presentation by Eldin Mlelemba 3 rd Annual SACCO Regulators’ Roundtable, Lilongwe, Malawi. December 1, 2010

2. 2 Presentation Outline Structure of the movement Existing regulatory environment Observations on existing regulatory environment The new legal and regulatory framework Entry criteria and licensing On-going supervision Permissible activities Governance and internal controls Miscellaneous Remedial measures and winding up Transition Challenges lying ahead

3. 3 Structure of cooperative movement It comprises: – Registrar of Cooperatives in the Ministry of Industry and Trade; – Malawi Union of Savings and Credit Cooperatives, (MUSCCO), an apex body; – Three chapters, regional clusters of cooperatives; – 50 active cooperative affiliates of MUSCCO; and – Numerous cooperatives not affiliated to MUSCCO. Information only available for MUSCCO affiliates.

4. Structure of cooperative movement (cont’d) Some basic statistics as at 31 st March 2010: – Total assets: USD19.0 million – Total shares: USD12.9 million – Total savings: USD1.2 million – Total loans: USD 14.5 million – YTD profits: USD0.3 million – Membership: male – 68,520; female – 23,650; and clubs/group – 2,866 – Delinquency: 2% 4

5. 5 Existing regulatory environment Cooperatives register under Cooperative Societies Act, 1998 (primary law), Cooperative Societies Regulations, 2002 (subsidiary law), own bye-laws approved by Registrar. The Registrar of Cooperatives in the Ministry of Trade administers the laws. The Registrar does not have capacity to supervise affairs of SACCOs. Delegated inspection function to MUSCCO, an apex body of cooperatives. MUSCCO monitors compliance of cooperatives with best practices. MUSCCO also conducts annual audits.

6. 6 Consequences of existing legislation No established position of the Registrar for Cooperatives in MoIT as required by law, only assumes role on a need basis. The Cooperative Societies Act is not specific to financial cooperatives. Conduct of inspections and external audits by one institution (MUSCCO) is cause for conflict of interest Cooperatives, especially those not affiliated with MUSCCO, escape regulation.

7. 7 Consequences of existing legislation (cont’d) Weak governance structures at board and management level. Weak internal controls in cooperatives evidenced by frauds, mismanagement, and embezzlement of member funds. Some cooperatives have grown significantly to require effective board oversight. Inadequate regulatory oversight to safeguard member savings. NB: Non-remittance to cooperatives of member deductions by some employers.

8. 8 The new regulatory framework The Financial Services Act (FSA), an umbrella law, gives mandate to the Registrar of Financial Institutions to regulate and supervise all financial institutions, including MFIs and cooperatives. Two-tier regulatory approach: – Registration by the Registrar of Cooperatives under the Cooperative Societies Act,1998; and – Licensing by the Registrar of Financial Institutions under FSA. To apply on all persons providing savings and credit services unless exempted by the Registrar. Provides for delegation of supervision. Recognises SROs for market conduct monitoring.

9. 9 Entry criteria and licensing Requires applicant to incorporate as a cooperative under the Cooperative Societies Act. Proposed board of directors elected from within its membership. Bylaws providing for a prudent governance in accordance with cooperative principles. Must have a minimum of: – 300 members for primary SACCO, or – 15 licensed primary SACCOs for a secondary SACCO. The Registrar may grant exemption on minimum number of members.

10. 10 Entry criteria and licensing (Cont’d) Information requirements: – Duly completed application; – Full legal names of founding members; – Minutes of general meeting approving by-laws; – Names of proposed directors and managers with educational qualifications and related work experience; – Distribution of ownership share capital; and – Feasibility study demonstrating the viability of SACCO.

11. 11 Entry criteria and licensing (Cont’d) Minimum capital comprising member shares, retained earnings, a percentage of member savings (to be set). Available management information system to perform and account for all transactions and reports. Copies of lending, administrative and internal controls policies.

12. 12 Entry criteria and licensing (Cont’d) The Registrar may grant licence: - With or without conditions; or - refuse licence – the Registrar to give reasons. An applicant may appeal to the Appeals Committee, in case refusal of licence, within 30 days. SACCO premises to be inspected for compliance with minimum standards (to be set in consultation with SACCOs).

13. 13 On-going supervision (for consultation) SACCOs to report to the Registrar on quarterly basis, e.g. balance sheet, income statement, schedules of largest borrowers and depositors, etc. Audited annual reports. Maintain minimum capital (to be determined) in member shares, 100% of retained earnings and 10% of annual savings. Maintain core capital and total capital ratios of at least 10% and 15%, respectively, of total risk weighted assets. SACCOs to operate in certified premises (esp. big ones)

14. On-going supervision (cont..) Actions requiring prior approval: – opening or closing place of business; – purchase or acquire immoveable property unless for conducting its business or acquired in default of repayment whereas the property be availed for resale as soon as possible; – Offer deposit or credit products to a non-member; – amalgamation or similar corporate restructuring transaction; – Amendment of by-laws 14

15. 15 Permissible activities Primary cooperatives to offer: – deposit services; – loans and credit facilities to members; – money transfers and chequing services; – automated teller machine and debit card services; – participatory or syndicate loans; – Leasing; and – bill payments. Shared branching among SACCOs. Insurance agency.

16. Permissible activities (cont.) Other funds not committed in loans to members may be invested in: – securities, or other debt instruments issued or guaranteed by the Government or any agency of the Government; – deposits, with banking institutions; – shares, deposits in, loans to any secondary SACCOs 16

17. 17 Permissible activities In addition to all services permissible to primary SACCOs, secondary cooperatives to offer: – Liquidity management services. – Auditing services of primary SACCOs. – Clearing services and securitization. – Participation in national payment system. – Insurance services to cooperators (upon meeting requirements).

18. 18 Governance and internal controls Board and management to pass ‘fit and proper’ test before assuming positions (standards to be set). Each director to serve maximum of 2 consecutive terms. Any compensation and travel or meeting allowances to a director of a SACCO to be disclosed to the members at the annual general meeting. A SACCO to maintain internal control systems at all times. A SACCO to elect a supervisory committee from its membership who shall report to the board. The supervisory committee also to present findings to annual general assembly.

19. Governance and internal controls (cont..) A SACCO to appoint an external auditor who shall report to the board, among others, on: – profit and loss account; – assets and liabilities of the SACCO; – cash balances, securities and accounts; – delinquent loans and loans to directors and employees and their related parties; – any violation of prudential standards or a condition of licence. 19

20. 20 Deposit protection Establishment of legal entity and public institution (Fund) under Trustees Incorporation Act. Fund to have a Board of Trustees appointed by Minister of Finance. Board composition: – the Registrar`s appointee; – the Secretary to the Treasury or his appointee; – 4 members nominated by licensed SACCOs and approved by the Registrar; and – The CEO of a national association shall be ex-officio member and secretary to the Board.

21. 21 Deposit protection (cont’d) Sources of funds: -Contributions from licensed cooperatives; -Income from investments; -Borrowings; and -Donations. The Fund to provide protection for member deposits, not shares, in amount as determined by the Trustees, from time to time, and approved by the Registrar. The funds to be invested in: – government securities; and – deposits in financial institutions as directed by the Board.

22. Deposit protection (cont..) The Board to report to the Registrar of Financial Institutions, e.g. annual report. 22

23. Miscellaneous provisions An employer to be obliged to remit deductions on behalf of members with 14 days. Failure and, upon conviction, employer will be liable to fines and imprisonment. Employer to charge commissions for effecting deductions only to recover deduction costs. Cooperatives to report to relevant authorities any transactions deemed suspicious under anti-money laundering laws. 23

24. Miscellaneous (Cont’d) Subsidiary laws to better carry out and administer Financial Cooperatives law: – Regulations by Minister of Finance; and – Directives and guidelines by Registrar of FIs. Contraventions of provisions of the Financial Cooperative law is an offence and attracts penalties. 24

25. Remedial measures and winding up The Registrar can direct a merger of SACCOs under the following conditions: – a SACCO’s capital is seriously affected and does not meet the prescribed requirements; – continuation of its activities is not in the best interest of its depositors or creditors; – Its assets and provisions are insufficient to cover its liabilities; and – a SACCO refuses to permit an inspection to be made of its business in accordance with Financial Cooperatives Act. 25

26. 26 Remedial measures and winding up (cont.) If no suitable merger partner, the Registrar may reach arrangement between the SACCO and its creditors to wind-up and appoint a liquidator. In the case of liquidation, the Registrar is given full and exclusive powers to manage and control the SACCO in liquidation including following powers:

27. 27 Remedial measures and winding up (cont’d) – temporarily continue its operations; – stop or limit payment of its obligations; – employ any necessary officers and employees; – Execute any instrument in the name of the SACCO; and – initiate, defend and conduct in the name of the SACCO any action or proceedings to which it is a party.

28. Remedial measures and winding up (cont’d) Upon liquidation or voluntary winding up of a SACCO, net assets after paying depositors and creditors to be used for: – repurchasing ownership shares at their issue price; – if the SACCO is insolvent, repurchasing at the discounted value of the insolvency; and – donating to a cooperative of members’ choice, for promotion of cooperatives. 28

29. Remedial measures and winding up (cont’d) The Registrar may refuse to make any payments to any person who had any responsibility for, or may have benefited directly or indirectly from the circumstances leading to, the SACCO becoming insolvent. 29

30. Transition All existing SACCOs to be issued a provisional licence. All SACCOs to apply and obtain a licence within 3 years. All SACCOs to comply with any outstanding requirements within 5 years. 30

31. Challenges ahead In conclusion, the new regulatory platform comes with the following challenges: – the need for capacity (numbers, skills) in MUSCCO and Reserve Bank; – calls for institutional capacities (board, management) within SACCOs; – MIS (computers, software applications) for reporting; – cooperators financial literacy (rights, obligations, business opportunities). 31

32. Comments/Questions Thank you! 32