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a) Give a detailed account of how the following institutions are managed regarding; licensing
them, branching, nature of business, and liquidation.
i) Commercial banks
ii) Insurance companies
iii) Savings and Credit institutions.
Introduction
The financial sector is categorised in a tiered framework where institutions
are classified as:
Tier 1: Commercial Banks,
Tier 2; Credit Institutions,
Tier 3: Microfinance Deposit Taking Institutions (MDIs) and
Tier4; Non Deposit taking financial institutions such as Credit only
NGOs, SACCOs and MFIs.
The Tiered Structure
The regulatory and supervisory framework for Financial institutions in Uganda is
formulated under a tiered approach. The tiered approach reflects the concept
of microfinance as a line of business.
sound microfinance sector and it does not constrain the numerous valuable
microfinance activities in the country.
a)
Category 1 (Tier 1)
The first category of institutions is composed of banks. Banks
are licensed under the provisions of the Financial Institutions
Act 2004. Microfinance is treated as a new financial product
in their lending portfolio.
Minimum paid in
b)
c)
d)
institutions. Consultation
is
taking
place
regulate
between
these
the
Criteria
Banks
Deposit-
Regulated
taking
and
Yes under
BoU
FIA 2004
Credit Inst.
Yes under
FIA 2004
BoU
Micro
Deposit
Yes Under
Taking
MDI Act
Institutions
2003
BoU
(MDIs)
Non-BOU Regulated
No
Umbrella
Body
Institutions
Micro finance is a product cutting across all tiers.
the
Non-Banking
Financial
Institution
(NBFI)
sub-sectors
indebted; there are also long-term benefits such as reduction in lending rates
and reduction of Non- performing Asset ratios of lending institutions.
The CRB market was opened up to competition on October 1, 2012 for any
other potential provider who meets the eligibility criteria.
The tiered structure guides the conclusions on how to regulate savings and
credits. A core principle is that the benefits should exceed the costs of
regulation (to the MFI as well as the regulator). Saving products for the public
can legally be offered only by financial institutions in Tiers 1, 2 and 3 that are
licensed by BOU. BOU provides prudential supervision to verify the
compliance of these institutions with specific regulations that are intended to
assure their financial soundness and the safety of the savings. While such
supervision is costly, it is justified by the public benefit of ensuring the
stability of the financial system and the safety of savings, which in turn
facilitate growth of the Ugandan economy.
Extending this logic to Tier 4, however, is not straightforward because of the
conditions under which some mobilise savings, the focus of many on credit
only, and their small, decentralised nature. Registered SACCOs can legally
take savings from and lend to their member-owners. Members of SACCOs
(and small informal savings and credit groups) are considered to have
primary responsibility for the management of their funds, making it
extremely important that they have adequate internal controls and
governance structures - which regulations governing the registration of
SACCOs and requiring an annual audit are intended to ensure. Furthermore,
many NGO MFIs take only compulsory savings as part of their microfinance
methodology. These are not prohibited of long as they are held only as
security
(or
loan
insurance
funds)
and
not
used
for
lending
to ensure that they do not mobilise and intermediate savings from the public.
Concerning credit, the number of institutions is too great for direct
supervision to be cost-effective. Therefore, the Subcommittee considered
two positive approaches. One is for MFIs of a common type to subscribe to a
self-regulatory framework or code of conduct that defines standards, in
particular for credit procedures and dealing with the public. Another
(complementary) approach is to empower the consumers of financial
services to understand both their rights and their responsibilities. Consumers
making informed decisions will drive MFIs to improve the quality of their
products. Effective implementation of such a framework would indirectly
result in negative sanctions by educated consumers for those MFIs that fail
to live by the standards or to join branded self-regulatory bodies.
A key implication of the above findings is that, for the vast majority of Tier 4
MFIs and their clients, the critical issue is capacity building rather than
regulation per se. No amount of external supervision can substitute for good
governance, internal controls, and proactive members who are aware of their
rights and responsibilities in SACCOs and other member-based groups.
Furthermore, even basic monitoring of the performance of MFIs requires
significant improvements in the current ability of most of them in terms of
accounting, auditing, management information systems, and reporting.
Likewise, codes of conduct and regulations for disclosure are effective only to
the extent that consumers understand them and how to exercise their rights.
An important principle for designing a strategy for both regulation of MFIs
and building their capacity to comply is that supervision should be separated
from providing capacity building. Effective external supervision requires
independence and avoidance of conflict of interest with promotional roles.
On the other hand, monitoring and self-regulation may, to some extent, be
carried
out
alongside
capacity
building
given
as
an
incentive
for
interest
both
among
Government
officials
and
some
other
required
with
the
capacity
of
the
potential
regulators,
recognising that the costs of regulatory failure are usually much higher in the
case of strict prudential supervision requirements than for voluntary selfregulatory mechanisms.
There has been a wide consensus that government should be the regulator
of the last resort, i.e., that option (1) above should be considered only if any
other would fail to achieve the desired objectives. The idea of regulation by
an independent agency (option 2) has so far not been discussed explicitly,
due to strong reservations regarding establishing a new regulatory body
from scratch and to the absence of either a legal basis or interest from
BOU to become engaged with SACCOs at this stage.
Hence, the subcommittees discussion has focused on options (3) and (4).
Three national apexes can be taken into consideration for a regulatory role:
AMFIU, UCA and UCSCU are all private sector, voluntary member-based and
member-driven organisations. The Association of Microfinance Institutions of
Uganda (AMFIU) is the national apex of MDIs and MFIs, and the voice of the
MF-industry in Uganda as a network open to all stakeholders. Its
membership covers microfinance providers from all four tiers, and from all
categories within Tier 4. The co-operative apexes, Uganda Co-operative
Alliance (UCA) and Uganda Credit and Savings Co-operative Union (UCSCU),
are AMFIU-members. By collecting, analysing and sharing information on
performance and other data, by disseminating of and capacity building
towards sound practices and by establishing consumer education, AMFIUs
strategic goal is to establish its membership as a quality mark throughout
the MF-industry. Thus, its mission includes self-regulatory functions of
monitoring and setting standards, though not supervision of the operations
of its members.
UCA promotes the general welfare of co-operatives in Uganda as the
apex body for all co-operative organisations, providing advocacy, resource
mobilisation and capacity building to its members. Among its members are
over 700 SACCOs. UCSCU is the apex specifically for registered SACCOs, of
Services
Formal
Semi-formal
Provided
(licensed by
(Tier 4) (regis-
BOU) Tiers 1,
2&3
licensed by
Informal
BOU)
Savings &
Financial
Credit
Co-operative
Small, local
member-based
Statute
groups (e.g.,
(SACCOs)
ROSCAs,
Credit
n.a.
Moneylenders
Non-registered
only Act
individual
moneylenders
NGO
Registration
Statute
Company Law
External Regulation
Two types of regulation external to a financial institution (i.e., established by
the Government or the industry) can be distinguished: (a)
Prudential
Way Forward
The major focus for going forward is on establishing an orderly system of
progression to different levels of regulation, differentiating between:
(a)
in
principle,
There
should
regulation (BOU),
be
but
unitary
some
regulatory
authority
for prudential
The study concludes that tier four MFIs should be subject to non-prudential
regulation focusing on performance monitoring. Such a regulatory system
would neither be pure self-regulation nor direct government regulation, but
self-regulation backed by statutory powers of government agencies.
The following are recommendations with regard to institutions in tier four:
(a) SACCOs: Preferably, SACCOs are brought under the Ministry of Finance.
Even if the decision is taken to leave them under the current Ministry (MTTI),
supervisory tasks could be delegated to an existing umbrella body (such as
UCA or UCSCU), while some statutory powers (e.g. to deregister errant
members) and the authority to conduct on-site inspections would remain
with the Ministry.
(b) Non-Coop MFIs: Our findings suggest that neither the NGO Board nor the
Registrar of Companies is well positioned to effectively monitor non-coop
MFIs. Supervision should therefore be delegated to a Self-Regulatory
Organisation (SRO). As for the power to close down non-complying members,
this could either remain with a government agency or also be delegated to
the SRO. It would be essential to have mandatory membership with the SRO
to ensure the effectiveness of this approach. Rules and a code of practice of
the SRO are to be approved by a government agency. The government could
also be represented on the Board of the SRO. At least as an interim solution,
a specialised department in AMFIU could take over the role as SRO.
Possible Mechanisms to Regulate Saccos
To implement these recommendations, the following laws would have to be
amended:
(a) NGO Statute and Companies Act: In both laws, a provision would be
included that companies or NGOs engaged in microcredit business must be
registered with an SRO and that a still to be specified government agency is
authorised
under this
Act.
Conclusion
Discussion of regulation often tends to focus on institutions, because they
are what are licensed or registered. The rationale for supervision of financial
institutions is based on protecting the financial system and the savings of
depositors. This means that, in designing a regulatory system, distinctions
may be made between the treatment of savings and credit products,
regardless of the institution providing the service. In this context, financial
institutions can be categorised according to how they are (or are not) legally
constituted to engage in savings and/or credit activities, as follows :
(a) Formal institutions = those licensed to engage in financial activities
(under FIS and MDI Acts);
(b) Semi-formal institutions = those
some
regulatory
requirements
associated
with
registration, even though not under BOU supervision e.g., annual audit
requirement for SACCOs] ;
(c) Informal institutions = neither registered nor licensed, but engaging in
financial activities.
References
Bikki Randhawa, and William F. Steel (World Bank Africa Region Financial
Sector Group and Financial Sector Operations and Policy Department,
Africa
Region
Working
Paper,
2005).
downloaded
from:
www.worldbank.org/afr/findings.
Micro Finance Deposit-Taking Institutions Act (MDI) Act 2003. Laws of
Uganda, UPPC, Entebbe
The Financial Institutions Act 2004. Laws of Uganda, UPPC, Entebbe