Microfinance regulatory and policy assessment in …

1 Microfinance regulatory and policy assessment in SADC case study of namibia , Tanzania and Zambia Prepared for FinMark Trust and GIZ December 2o14 Authors: Dominique Brouwers Bezant Chongo Altemius Millinga Frances Fraser Microfinance regulatory and policy assessment in SADC 2014 1 | P a g e Acknowledgments and disclaimer The authors would like to thank Mojgan Derakhshani, Christopher Engelhardt, Hennie Ferreira, Ruth Hoekstra, Geoff Orpen, Brendan Pearce and Nitha Ramnath for their valuable input into this process. We would also like to thank the regulators in SADC, in particular from namibia , Tanzania and Zambia and the members of the CISNA Microfinance and financial cooperatives sub-committee. Many thanks also to all the other interviewees who made themselves available and willingly provided information.

2 The names are in the appendix. The views expressed in this document, along with any errors and omissions, are solely those of the authors. For further information on the study contact: Bezant Chongo Microfinance regulatory and policy assessment in SADC 2014 i Contents Acknowledgments and disclaimer .. 1 Contents .. i Acronyms .. vi 1. Executive summary .. 1 Introduction .. 1 Key findings .. 2 Financial inclusion and Microfinance policy .. 2 Definition of Microfinance .. 2 regulatory authority .. 2 Various levels of regulation and supervision .. 3 Transformation .. 3 Interest rate limitation .. 3 Financial consumer protection .. 3 Adaption of Know Your Client (KYC) rules .. 4 Branchless banking (agency banking and mobile money) .. 4 Conclusions and general recommendations .. 4 2. Introduction and methodology ..6 Introduction ..6 3.

3 Tanzania .. 10 Introduction .. 10 The Microfinance 11 Establishment of a Microfinance policy .. 11 Description of various types of financial institutions .. 12 Products .. 14 Financial inclusion strategy .. 15 Legal and regulatory framework .. 16 Microfinance regulatory and policy assessment in SADC 2014 ii | P a g e Definition of Microfinance .. 18 Licensing process .. 19 Institutional transformation .. 19 Prudential regulations .. 20 Provisioning .. 21 Restrictive lending operations for MFCs .. 22 Loan to deposit ratio .. 22 Supervisory authority .. 22 Non-prudential regulations .. 23 Permission to lend .. 23 Preventing debt stress through specific interventions .. 23 Credit Reporting System .. 23 Reporting and institutional transparency .. 24 Consumer protection .. 25 Limitation on ownership .. 27 Secure transactions .. 27 Financial crime .. 28 Branchless banking: Agency banking.

4 28 Mobile money .. 29 Conclusions .. 30 Microfinance policy .. 30 Various levels of regulation and supervision .. 31 Prudential rules for deposit-taking institutions .. 31 Financial consumer protection .. 31 Adoption of KYC rules .. 32 Agency banking and mobile money .. 32 4. namibia .. 33 Introduction .. 33 Introduction to the Microfinance sector .. 34 Microfinance regulatory and policy assessment in SADC 2014 iii | P a g e Description of various types of institutions .. 34 NAMFISA registered lenders .. 34 Products .. 36 namibia Financial Sector Strategy 2011-2021 .. 37 Legal and regulatory framework .. 37 Legislation and regulation in development .. 38 Definition of Microfinance .. 39 Licensing process .. 39 Permission to lend .. 39 Institutional transformation .. 40 Prudential regulations .. 41 Supervisory authority .. 41 Non-prudential regulations .. 42 Permission to lend.

5 42 Credit Reporting System .. 42 Reporting and institutional transparency .. 44 Consumer protection .. 45 Limitation on interest rates .. 46 Payment system .. 47 Limitation on ownership .. 48 Financial crime .. 49 Branchless banking .. 49 Conclusions .. 50 Financial inclusion and Microfinance policy .. 50 Licensing and permission to lend .. 50 Financial consumer protection .. 51 Interest rate limitation .. 52 Agency banking and mobile money .. 52 5. Zambia .. 53 Microfinance regulatory and policy assessment in SADC 2014 iv | P a g e Introduction .. 53 The Microfinance 54 Description of various types of institutions .. 54 Association of Microfinance Institutions in Zambia (AMIZ) .. 54 Payroll lenders .. 55 Developmental lenders .. 56 Products .. 56 Zambia Financial Sector Strategy .. 58 Financial Sector Development Plan (FSDP) .. 58 National Strategy on Financial Education .. 59 Legislation.

6 59 Legal and regulatory framework .. 60 Legislation and regulation in development .. 61 Microfinance Services Bill, 2014 .. 61 Definition of Microfinance .. 61 Proposed changes in the Microfinance Services Bill 2014 .. 62 Licensing process permission to lend .. 63 Institutional transformation .. 64 Prudential regulations .. 65 Supervisory authority .. 65 Non-prudential regulations permission to lend .. 67 Credit reporting system .. 67 Reporting and institutional transparency .. 69 Consumer protection .. 70 Limitation on interest rates .. 70 Payment system .. 71 Financial crime .. 72 Branchless banking .. 73 Country conclusions .. 74 Microfinance regulatory and policy assessment in SADC 2014 v | P a g e Microfinance policy .. 74 Various levels of regulation and supervision .. 74 Prudential rules for deposit-taking institutions .. 75 Interest rate limits .. 75 Financial consumer protection.

7 75 Agency banking and mobile money .. 75 6. Comparative country analysis .. 76 7. Conclusion - next steps .. 87 Regulations and supervisory framework .. 87 Regulators engagement .. 88 91 List of interviewees .. Error! Bookmark not defined. Microfinance regulatory and policy assessment in SADC 2014 vi Acronyms AFI Alliance for Financial Inclusion AFS AfricInvest Financial Sector Ltd AMIZ Association of Microfinance Institutions in Zambia AML Anti-Money Laundering ASCA Accumulating Savings and Credit Association BAFIA Banking and Financial Institutions Act BON Bank of namibia BOT Bank of Tanzania BOZ Bank of Zambia BTA Bank of Tanzania Act CFT Combating the Financing of Terrorism CCBG Committee of Central Bank Governors CGAP Consultative Group to Assist the Poor CISNA Committee of Insurance Securities and Non-bank Financial Authorities CPFL Consumer Protection and Financial Literacy CRS Credit Reporting System DDACC Direct Debit and Credit DID D veloppement International Desjardins ESAAMLG Eastern and Southern Africa Anti-Money Laundering Group

8 FATF Financial Action Task Force FECU Financial Education Control Unit FCA Fair Competition Act FICO Financial Cooperative Societies FSDP Financial Sector Development Plan Microfinance regulatory and policy assessment in SADC 2014 vii | P a g e ID Identity KYC Know Your Client MFC Microfinance company MFI Microfinance institution MFRC Microfinance regulatory Council MLA Micro Lenders Association MNO Mobile Network Operator MOF Ministry of Finance NAMFISA namibia Financial Institutions Supervisory Authority NBFI Non-banking Financial Institution NFSS Namibian Financial Sector Strategy NGO Non-governmental organisations NMP National Microfinance policy NSFE National Strategy on Financial Education PIA Pensions and Insurance Authority RTGS Real Time Gross Settlement System SACCO Savings and Credit Cooperatives SADC Southern African Development Community SAMP Southern Africa Microfinance Project SEC Securities and Exchange Commission TAMFI Tanzania Association of Microfinance Institutions VICOBA Village Community Banks VSLAs Villages Savings and Loans Association ZECHL Zambia Electronic Clearing House Limited ZIPSS Zambia Interbank Payments and Settlement System Microfinance regulatory and policy assessment in SADC 2014 1 1.

9 Executive summary Introduction The levels of financial inclusion in SADC vary significantly due to the contrasting levels of economic and financial sector development across the fifteen countries. Similarly, Microfinance also has varying degrees of penetration. In some countries, Microfinance is the primary means of delivering financial services to the masses while in others, which might have a more developed banking sector, Microfinance is one of the means of providing access to financial services for low income clients. The difference in the structure of the Microfinance sector affects the type of institutions that provide the Microfinance products and services and also the type products and services that they offer. The institutions range from SACCOS to commercial banks, and products include, credit, savings, insurance and remittances. The significance of the Microfinance sector in the provision of financial services in a country, the types of institutions involved and the products and services they offer has a direct bearing on the regulatory environment and the regulatory authority.

10 In SADC, with the exception of South Africa, and Botswana, the Central Bank is involved in the regulation of Microfinance . For these two countries, non-prudential Microfinance regulation and supervision is the responsibility of a non-bank regulator. This study and report focuses on an in-depth analysis of the Microfinance regulations and policies in three countries; Tanzania, namibia and Zambia, which were deemed to illustrate different aspects of Microfinance markets that can be found in SADC: namibia has a thriving commercial micro-lending sector with a solid regulatory framework, and a strong focus on consumer protection compared to the others. The micro-enterprise lending sector is still very small. Tanzania has seen the development of a more classical, enterprise focused Microfinance sector which includes NGOs, SACCOs, licensed deposit-taking MFIs and Microfinance banks.