November 20, 2018

The Microfinance Bill 2018

In this month's legal briefing we focus on the Microfinance Bill 2018 (the Bill) in anticipation for when the Bill ultimately becomes law, and discuss some of the key highlights of the legislation. The benefits Tanzania may derive from a comprehensive legislative framework governing the microfinance sector are appetising to say the least. The Bill was recently tabled before the National Assembly under a certificate of urgency in a bid to formalise and regulate microfinance business. This move will ultimately stimulate and legitimise inclusive financial services for Tanzanians.

The Bill contains an array of provisions pertaining to registration and licensing, supervision of the sector, minimum consumer protection standards and penalties for non-compliance. Some of the more noteworthy provisions and parts of the Bill are explored in the table below. 

Legislative Highlights

Highlights Summary and Comments
Section 4: Microfinance Business This section of the Bill provides a comprehensive definition for the term microfinance 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 in this regard is to capture all formal and informal micro credit / finance service providers without exception.
Section 5: Categorisation of microfinance service providers

The Bill stipulates that there shall be four tiers of microfinance service providers (MFIs):

• Tier 1 is comprised of deposit taking MFIs such as banks and microfinance banks;
• Tier 2 is comprised of non-deposit taking MFIs such as credit companies and financial organisations;
• Tier 3 is comprised of savings and credit cooperative societies (SACCOOS); and
• Tier 4 is comprised of community financial groups, individual money lenders and community based organisations. 

This categorisation allows the Bank of Tanzania (BoT) to regulate, supervise, institute guidelines and penalise institutions or individuals based on the nature of their microfinance business and their respective financial capacity. 

Part III: Administrative Provisions

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

In fulfilling its statutory duties, the BoT has the mandate to investigate microfinance operations, inspect books of accounts and other records, and, so long as it is within reason, access strong rooms and safes in order to access information required to fulfil their responsibilities. 

Part IV: Licensing and Registration of Microfinance Service Providers Part IV lays out the procedure for a licence application and registration in order to commence a microfinance business. Consequently, Part IV prohibits operating a microfinance business without a licence. Contravening this provision attracts fines of up to TZS 100 million for tier 1 and 2 institutions, and TZS 50 million for tier 3 and 4 institutions. 
Section 42: Sharing of credit information This provision of the Bill requires MFIs to provide the BoT as well as the credit reference bureau with credit information on customers. A credit reference bureau is an entity specialised in collecting and selling credit performance information of individuals and entities. 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 49 & 50: Consumer protection principles & Debt Collection 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 openly; and 
• disposing of property of a debtor (or any relevant collateral) as a final resort.

Section 51: Offences and Penalties Breaching a provision in the Bill, (other than those with specific penalties), attracts a fine of u8p to TZS 50 million or imprisonment of up to five years or both. 

Other noteworthy provisions in the Bill:  

  • require MFIs to comply with the Anti-Money Laundering Act;
  • subject microfinance institutions to minimum capital adequacy regulations; and
  • amend or repeal various banking and finance sector laws to be in line with the current Bill.

The Bill appears to be comprehensive and adequate, as it practically elevates the MFIs to the status of banks in terms of regulatory requirements and statutory obligations. Also, the provisions of the Bill as currently drafted will likely improve financial inclusion and economic development for small to medium sized credit suppliers. For instance, regulations expounding on the requirement for MFIs to educate customers, particularly vulnerable consumers, could potentially include comprehensive programmes on basic financial concepts in a bid to promote financial literacy. This programme, coupled with the credit sharing provisions, may yield positive results in terms of reducing non-performing loans, containing unscrupulous lending practices and increasing confidence in credit consumers.

All in all, Tanzania has taken a step in the right direction with this Bill since the Bill is long overdue and hopefully once the Bill is passed in to law, this will revolutionise the microfinance sector.

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