The Road To Regulation in Uganda

Presented to The 4th AFRACA MICROFINCNCE FORUM

by D.L.Kalyango/NBFI

Uganda’s Trail Three major phases

• Formulating the Bank of Uganda Policy on Microfinance

• Formulating the Law, i.e. the MDI Act 2003

• Formulating the Implementing Regulations on Capital Adequacy, Liquidity, Asset Quality, Reporting and Licensing.

Definition of MF :The BOU Perspective

Microfinance

• Line of business

• a principal business of- – (a)    acceptance of deposits ;

– (b)   employing such deposits wholly or partly by lending or extending credit for the account and at the risk of the person accepting those deposits, including the provision of short term loans to small or micro enterprises and low-income households, usually characterized by the use of collateral substitutes, such as group guarantees or compulsory savings;

– (c)    transacting such other activities as may be prescribed by the Central Bank;

Source :MDI Act 2003

Key Issues in the Definition of MF for Uganda’s Context

• All involve offering financial services(both credit and savings) to the low income people, who face discrimination and difficulty from accessing financial services from formal financial institutions

• Emphasizes both micro savings and micro credit• Two types of Microfinance Institutions:

• Regulated (with public deposit mobilization and intermediation and supervised by BOU)

• Non Regulated (without public deposit mobilization and not supervised by BOU.)

Financial Landscape

• Financial Sector includes: a central bank, 15 commercial banks, 7 credit Institutions, 1MDI, 41 insurance and broker companies, Over 1000 registered financial organization offering microfinance

• MFI Industry is over 30 yrs of informal finance but less than 12 yrs of best practices

Importance of Micro Finance

Can be viewed under the following four Dimensions• Importance of the Micro enterprise sector to Uganda’s

economy• Importance of Financial Services for Micro

enterprises• Trends in the Micro Finance Industry• Distinctive features of Micro finance• Micro finance as part of the larger Development

Agenda

Role of Bank of Uganda • BOU Mission: to foster price stability and a

sound financial system.• The Supervision Function is charged with

regulation and supervision of the financial sector.

• Supervision Function has two departments:• 1.Commercial Banking • 2. Non Banking Financial Institutions

Bank of Uganda

• In line with BOU mission , the Key Role is to focus mainly on creating an enabling environment through policy formulation and establishment of the regulatory and supervisory framework for the micro finance deposit taking institutions in Uganda to ensure stability of the financial system

• Two major tools were developed • BOU Policy 1999 on Micro Finance and MDI Act 2003

BOU Policy on MFIs.

• Process started in April, 1996• Mainly as a consultative process• BoU policy statement on the regulation &

supervision of MFI in Uganda passed by cabinet in July, 1999

• Tiered approach debated• Drafting process commenced after cabinet

approval

BOU Policy on MFIs

– Basic features• Encourages broadening & deepening of the

financial system• Attempts to provide a linkage between

established institutions and small outreach organizations

• Key concepts: Outreach and sustainability• Tiered framework

BOU Policy on MFIs

Tiered framework• Tier 1: Commercial Banks (Min Capital -Shs.4bn)

• Tier 2: Credit institutions (Min Capital -Shs.1bn)

• Tier 3: Micro deposit-taking institutions (MDIs) (Min Capital -Shs.500m)

• Tier 4: Microfinance institutions (MFIs) that do not take deposits (No BOU Set K-requirement)

• 1US $ is approximately Shs.1800

• Capital is invested in assets approved by Bank of Uganda

BOU Policy on MFIs

• Tiered regulation– Combination of other regulatory approaches– Graduation from one tier to the next– No formal government regulation for lower end

of market

Some Principles of Regulation

– Deposit-taking from the public should be regulated

– Deposit-taking requires adequate capital

– Micro finance is a line of business

– Effective supervision requires sufficient capacity and has to be cost-effective

– Careful design of a regulatory framework takes time

– Self-regulation so far has not proven to be effective

Why not regulate Tier 4 institutions (MFIs)

• Tier 4 institutions form a legitimate and well appreciated segment of the MF sector in Uganda

• Tier 4 are crucial to further outreach of the MF industry in Uganda

• Tier 4 provides a good learning process of managing finances and developing a savings culture

Why not regulate Tier 4 institutions (MFIs)

• Tiered approach designed to give tier 4 institutions an incentive to grow and become sustainable before they upgrade to tier 3 institutions

• Regulating tier 4 institutions could stifle the innovation, growth and outreach of MF in Uganda

Structure of MDI Act 2003

• Definitions

• Licensing• Operations• Prohibitions/Restrictions and dealings by MDIs• Ownership and Governance• Supervision by Bank of Uganda • Corrective actions• Liquidation, Receivership and Exit

MDI Act 2003

MDIs can:

• Accept deposits from the public

• On-lend these deposits

MDIs cannot:

• Engage in foreign exchange transactions

• Operate current accounts

• Use the term ‘Bank’ in their name

• Onlend compulsory savings

MDI Act 2003

To qualify for an MDI license:• Company limited by shares• Proven ‘track record’ in microfinance• Minimum paid-up capital of 25,000 currency points

(currently one point is Ush20,000 or US$10)• Capital adequacy ratio of 15% of risk-weighted assets • No single owner with more than 30% shareholding • Any person holding more than 10% shares must be

approved by BOU• Senior management and board members must be vetted and

approved by BOU

Benefits of Regulation

• For institution

– Diversify sources of funding

– Decreased reliance on donor funds/ “whims”

– Increase services to clients/Professional image

– Become more efficient and financially sound

– Gain competitive advantage over non-regulated MFIs

• For clients

– Savings services

– Potential reduction in costs

• For industry

– Increased outreach to rural areas

Implementing Regulations

• Licensing Regulation

• Capital Adequacy

• Reporting

• Liquidity

• Asset Quality

Reporting Requirements• Submission of Financial Statements

• Statements to be audited and to also accurately reflect the appropriate level of provisions and proper non accrual policy

• Submitted within four months after the end of FY

• Required Returns• Weekly basis : Form MDI 110A Weekly Statement of Liquidity• Monthly Basis:

– Form MDI 100 Statement t of Assets and Liabilities,– Form MDI 100A Monthly Computation of Capital Adequacy– Form MDI 110 Statement of Income and Expenses – Form MDI 120 Provisions for Bad Debts– Form MDI 140 Loan to Insiders– Form MDI 150- Portfolio Quality Report(PQR)

• Returns submitted not later than the 10th Day of the month of the following month of reporting

• Responsibility for Accuracy : the CEO

Asset Quality Requirements• Non-performing Facilities(NPF) to be those for

which principal or interest is due and unpaid for 30days or more

• Reporting of NPF to BOU on a monthly basis

• NPF to be put on Non-Accrual Status –hence suspend interest

• Classification : three classes proposed; Substandard, Doubtful and Loss

• Substandard int.and/or principal is due and unpaid for 30days <60days

• Doubtful int.and/or principal is due and unpaid for 60days <90days

• Loss int.and/or principal is due and unpaid for >90days

Cont Regulatory Requirements• Provisions

• Substandard 25%

• Doubtful 50%

• Loss 100%

• 100% write off after six months

• Restructured credit facilities attract steeper provisions

• Substandard 50%

• Doubtful 75%

• Loss 100%

Capital Requirements• Capital Requirements

• Minimum paid up capital and unimpaired =500m

• Core capital not less than 15% RWA

• Total capital not less than 20% RWA

• Computation to be done monthly in Form MDI 100A and Submitted to BOU by the 10th day of the following month

• Form MDI 100 A to be reviewed by the External Auditor on a quarterly basis

Liquidity Requirement • Liquid Asset Requirement under section 17 of

the MDI Act

• Min. Liquid Assets defined in Section 17(2) to equal or exceed 15% total deposit liabilities

• Defines the schedule for liquid assets

• Monitor using Weekly liquidity Return form MDI 110A

• Require institution to develop policies on liquidity and funds management.

Issues to Consider

Institutional Structure

• Ownership (ideal mix – social/commercial investors /NGO/founders; exit strategies)

• Legal form (share company; finance company; bank)

• Transfer of assets (move clients or portfolio?; donor contributions; cash requirements)

• Capitalisation and leverage (minimum capital; growth plans; hurdle rate; debt/equity split of NGO investment)

• Governance (role of NGO; board seats; board constitution; voting rights; terms; committees)

Issues to Consider

• Operational Issues– Senior management

– Corporate culture – NGO vs. for-profit

– Financial management/treasury

– Risk management and internal control

– Back-office operations

– MIS

– Market, products and services

– Human resources

– Budget/costs

END