January 7, 2019

The Microfinance Act 2018

In this month’s legal briefing, we focus on the Microfinance Act 2018 and recent public notices issued by the Bank of Tanzania on Supervision of Microfinance Service Providers.

BOT's Notice

In December 2018 the Bank of Tanzania (BOT) issued a public notice (the Notice) stating that it is preparing regulations for various categories of microfinance service providers (MFIs) identified in the Microfinance Act 2018 (the Act), and for licensing purposes. Furthermore, the Notice required MFIs to submit to BOT certain information regarding their business before 11th January 2019. On 5th January 2019 BOT revised the Notice to extend the deadline to submit information to 31st January 2019 and exempt Savings and Credit Cooperative Societies (SACCOS) from complying with the Notice.

The following information must be submitted to BOT as guided by the Notice:

  1. Certificate of Incorporation
  2. Business License issued by Business Registration and Licensing Agency
  3. Place of business and contract details
  4. List of owners, Board of Directors, Chief Executive Officer and their respective citizenship
  5. All types of microfinance service products offered
  6. Statement whether the business is audited annually or not
  7. Description of accounting system and information and communication technology in use
  8. Financial statement details on total assets, total liabilities and owners’ equity.

The Notice does not specify what measures will be taken by BOT if a person operating microfinance business fails to submit to BOT the information as required by the Notice.

Key legislative highlights in the Act

Following our previous legal update in November 2018 on the Microfinance Bill, the Act was passed into law on 16th November 2018 and was assented by the President on 21st November 2018. As of the date of this legal briefing, we understand that a publication of the commencement notice will be issued in order for the Act to become operational.

Highlights Summary and comments
Section 2: Scope of application

This section provides that the Act shall apply to Mainland Tanzania only. Notably, this is a departure from other legislation in the financial sector which apply across both Mainland Tanzania and Zanzibar.

Clarification may need to be sought from the BOT or Ministry of Finance on whether there will be similar legislation passed to regulate MFIs in Zanzibar.
Section 4: Microfinance business

This section provides a comprehensive definition for the term microfinance business to include receiving money by way of deposits or borrowing, providing micro credit, micro savings and micro insurance services, as well as providing loans and credit facilities to small enterprises and low income households.

The aim is to capture all formal and informal micro credit / finance service providers without exception.
Section 5: Categorization of microfinance services

The Act stipulates that there shall be four tiers of MFIs:

  • Tier 1 is comprised of deposit taking MFIs;
  • Tier 2 is comprised of non-deposit taking MFIs such as individual money lenders;
  • Tier 3 is comprised of SACCOS; and
  • Tier 4 is comprised of community microfinance groups.
This categorisation allows BOT to regulate institutions and/or individuals based on the nature of their microfinance business and their respective financial capacity.
Part III: Administrative provisions

Part III empowers BOT to supervise and regulate MFIs. These powers extend to issuing or revoking licences, evaluating the performance of MFIs and protecting consumers from malpractice in the sector.

In fulfilling its statutory duties, BOT has the mandate to investigate microfinance operations, inspect books of accounts and other records. Additionally, so long as it is within reason, BOT can access strong rooms and safes in order to retrieve information required to perform its regulatory responsibilities.
Licensing of Tier 1 microfinance service providers to be under the Banking and Financial Institutions Act 2006

Section 5(2) of the Act stipulates that Tier 1 MFIs shall be regulated in accordance with the Banking and Financial Institutions Act 2006 (BFIA). This is due to the deposit taking nature of Tier 1 MFIs which requires closer monitoring by BOT.

There already exists the Banking and Financial Institutions (Microfinance Activities) Regulations 2014 which were amended in 2015, therefore it would appear that licensing of Tier 1 MFIs will be regulated under these regulations unless BOT subsequently issues new regulations under the BFIA.
Part IV: Licensing of Tiers 2 and 3 microfinance service providers

Part IV lays out the procedure for application for a licence and registration of MFIs under Tiers 2 and 3.

Consequently, Part IV prohibits operating a microfinance business without a licence. Contravening this provision attracts fines of up to TZS 100 million or imprisonment of up to five years or both, depending on the category of the MFI.
Part V: Licensing of Tier 4 microfinance service providers

Part IV lays out the procedure for application for licence and registration of MFIs under Tier 4. Licensing of Tier 4 MFIs may be done by BOT or a delegated authority as may be prescribed by the regulations.

BOT has yet to issue regulations under the Act; the regulations may shed some light on which delegated authority shall be designated for this purpose.
Section 43: Sharing of credit information This provision of the Act requires MFIs to provide the BOT as well as the credit reference bureau with credit information on customers. MFIs will be able to access this database to analyse the creditworthiness of a borrower; which may benefit them in terms of reducing non-performing loans.
Section 50 and 51: Consumer protection and debt collection and recovery

MFIs are required to ensure utmost transparency and fairness throughout a transaction with a customer. This includes:

  • instilling complaints handling and dispute resolution mechanisms;
  • upholding the rights and interests of consumers;
  • educating consumers;
  • vetting standard contracts;
  • full-disclosure of relevant information on products and services, including interest rates, fees or penalties; and
  • disposing of property of a debtor (or any relevant collateral) as a final resort.
Section 52: General penalty for offences Breaching a provision in the Act, (other than those with specific penalties), attracts a fine of up to TZS 20 million or imprisonment of up to five years or both, depending on the category of the MFIs.
Part X: Consequential amendments of other laws

Part X provides for amendments to certain banking and finance sector laws so that they are in line with the Act. The following laws have been amended by the Act:

  • the Banking and Financial Institutions Act (Cap. 342)
  • the Bank of Tanzania Act (Cap.197)
  • the Cooperative Societies Act (Cap. 211)

Other noteworthy provisions in the Act

  • Existing MFIs must apply for the relevant licence and register within 12 months of commencement of the Act.
  • BOT may delegate to another public institution (delegated authority) some of its powers and functions under the Act.
  • The Act subjects MFIs to minimum capital adequacy regulations.
  • The Act requires MFIs to comply with the Anti-Money Laundering Act 2006.
  • The Act requires MFIs to comply with applicable laws on local content including employment and training of Tanzanians.
  • Tier 4 MFIs to be exempted from certain provisions of the Act.

Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. Further advice should be taken before relying on the contents of this summary. Clyde & Co Tanzania accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co Tanzania.