On 5th of November 2018, Parliament of the United Republic of Tanzania enacted a Microfinance Act/Bill to provide for the licensing, regulation and supervision of microfinance institutions. The act is popularly known as the Microfinance Act 2018, and it illustrates the framework under which microfinance institutions operate.
The microfinance sector, including SACCOs and other informal financial groups, serve a huge chunk of the population looking for financial services. Majority of the people in Tanzania do not have access to formal banking services and continue to avail services informally. According to a report Assessment of IFGs in Tanzania by FSDT, “10.6 million Tanzanian adults continue to access finance informally.” Such informal or less formal groups include Savings and Credit Cooperatives (SACCOs), Rotating Credit and Savings Associations (ROSCAs), Accumulating Savings and Credit Associations (ASCAs), and other microfinance institutions (MFIs).
Introduction to Microfinance Act 2018
The main aim of introducing the Microfinance Act 2018 in Tanzania was to provide for the licensing, regulation and supervision of microfinance businesses; and to make provisions for the related matters.
The act clarifies the framework under which microfinance businesses and other financial groups operate, governed, and regulated. The act applies to the businesses operating in Mainland Tanzania. Let’s take a closer look at different sections of the Microfinance Act 2018 and how they may affect the working of various microfinance businesses in Tanzania.
Microfinance service providers
The act classifies microfinance businesses into four (4) main tiers as well as the regulations to transform from their current tier to another one. The four tiers are as follows:
- Tier 1 - It includes deposit-taking microfinance service providers namely banks and microfinance bank
- Tier 2 - It includes non-deposit taking microfinance service providers such as credit companies and financial organizations
- Tier 3 - It includes Savings and Credit Cooperatives (SACCOs); and
- Tier 4 - It includes community financial groups, individual money lenders and community-based organizations
According to the act, microfinance service providers in Tanzania need to have a proper address to carry out their operations. Prior approval from the Bank of Tanzania (BoT) will be required to open or close the location of a business. Businesses need to maintain a minimum holding of liquid assets and comply with minimum capital requirements as described in the bill. Any microfinance business which fails to comply with the rules and regulations may be subjected to notices or penalties from the BoT.
Licensing and registration
According to the act, a person who wants to start a microfinance business under tier 1, 2, or 3 must apply to the Bank of Tanzania for a license. The application will be submitted in accordance with the provisions described in the act. The BoT will grant a license to the person only after confirming that every requirement has been met. The bank can also refuse to issue a license if any of the conditions are not fulfilled.
Any person who wants to start a microfinance business under tier 4 must apply for registration to the Bank of Tanzania according to the regulations provided in the microfinance bill.
The Bank of Tanzania also holds the right to suspend or revoke licenses or registrations of microfinance businesses under any tier if it violates terms mentioned in the act. The detailed procedure of suspending the license is provided in the Microfinance Act 2018 pdf.
According to the Microfinance Act 2018, the Bank of Tanzania will be responsible for supervising and managing performance and undertaking for microfinance service providers in accordance with the act and other applicable laws. The BoT will hold the rights to evaluate and monitor the performance of microfinance businesses as well as provide circulars and guidelines to ensure proper adherence to the guidelines. It is also their responsibility to ensure that all credit information is collected and shared to maintain transparency and accountability.
The Bank of Tanzania also has the right to inspect or examine books of accounts, records as well as other documents of businesses to ensure better performance and protect consumers rights.
Management and Supervision
According to the Microfinance Act 2018, the Bank of Tanzania will be responsible for the management and supervision of operations, finances, and business of a microfinance service provider. Suppose the business is found not to be in a sound financial condition or not working according to the regulations provided in the bill. In that case, the BoT or local authorities have the right to take over the management of the business. All the terms and conditions of taking over the management are mentioned in the Microfinance Act 2018 PDF.
Every microfinance service provider under tier 1, 2, and 3 must appoint an internal auditor who holds required qualification and experience for the control of financial affairs. Businesses under tier 4 must nominate a person responsible for the internal management of finance. They must also submit the financial statements and documents comprising the credit information, outstanding debts and tax obligations of the customers to the Bank of Tanzania.
According to the Microfinance Act 2018, a microfinance business must comply with the principles of consumer protection in accordance with the applicable laws and regulations provided in the bill. To ensure consumer protection, businesses must implement a complaints handling and dispute resolution mechanism. They must also provide all the relevant information on the products and services and maintain transparency on interest rates, fees or penalties. If a business fails to comply with the provisions, the Bank of Tanzania may take appropriate actions to ensure compliance.
Offences and Penalties
The Act also sets guidelines for general offences and penalties for people and businesses violating any provision mentioned in the act. If no specific penalties are provided under respective sections, the violator may be liable to pay a fine of not less than 5 million shillings or imprisonment of not less than three months or both.
The Microfinance Act 2018 substantially focuses on elevating the status of microfinance institutions by formalizing them and promising better stability and security to the sector. The bill is also likely to boost financial inclusion in Tanzania as it encourages maintaining books and documents, taking another step towards formal financial services. However, with all the regulations, many businesses may find it challenging to comply with them. This may also create barriers for small institutions who cannot meet the requirements. It remains to be seen whether the bill has a positive impact on the financial market of Tanzania.