BANKING AND FINANCE LAW UPDATE: LICENSING OF MICROFINANCE SERVICE PROVIDERS (MSPs) IN TANZANIA AND IMPLICATIONS FOR OPERATING WITHOUT REQUIRED LICENSE.
- The law regulating microfinance service providers (MSPs) in Tanzania
- Preconditions for licensing of microfinance service providers in Tanzania
- Classifications of microfinance service providers tiers
- Procedures to obtain requisite license
- Delegation of powers of the Bank of Tanzania (BOT) for registration and regulation of certain tiers of MSPs
- Consequences of operating as a microfinance service provider without obtaining a requisite license from BOT
The Microfinance Act No. 10 of 2018 (“The Microfinance Act”) requires all microfinance service providers to obtain license to operate as such from the Bank of Tanzania (“BOT”) or any other regulatory body delegated by the BOT to issue such license. This requirement extends to the microfinance service providers who were operating before enactment of the Microfinance Act.
In response to provisions of the Microfinance Act, in December, 2019 the BOT issued a public notice requiring all microfinance service providers to submit their license applications to BOT or other delegated authorities by 31st October, 2020.
In due course, the BOT issued a public notice extending the statutory time limit for microfinance service providers to register and submit license applications. The deadline extended to 30 April, 2021.
On 24th June, 2021, the BOT issued a notice to inform the public that all microfinance service providers failed to submit their applications by 30th April, 2021 are not allowed to continue with the business of microfinance services until such time when they have obtained a relevant license from the BOT. Any microfinance service provider who fails to comply with this requirement commits an office and may be liable to fine or imprisonment as per Section 16 of the Microfinance Act No. 10 of 2018.
Our Corporate, Commercial and NGOs Practices Department has prepared this brief to summarize on the requirements of the Microfinance Act for licensing of the microfinance service providers and recap of the public notice issued by the BOT.
2.0 LICENSING OF MICROFINANCE SERVICE PROVIDERS
A microfinance service provider is defined to mean an entity or a person licensed to undertake microfinance business.
According to Section 3 of the Microfinance Act, a microfinance Business means the deposit and non-deposit taking business and include the following activities: –
- Receiving money, by way of deposits or interest on deposits or borrowing and which is lent to members or clients;
- Accepting savings and providing loans or other credit facilities to micro or small enterprises and law income household or individuals;
- Providing micro credit, micro savings, micro-insurance, micro-leasing, micro-pension and micro-housing finance;
- Transfer and payment services, including digital microfinance services;
- Undertaking commodity microfinance business including provision of commodity loans;
- Providing financial education; and
- Any other related services as may be prescribed in the regulations made by the Bank of Tanzania.
Section 5 (1) of the Microfinance Act No. 10 of 2018 (hereinafter referred to as “the Microfinance Act”) has classified the microfinance service providers in numbered tiers as follows: –
- Tier 1 is comprised of deposit taking institutions such as banks and microfinance banks;
- Tier 2 is comprised of non-deposit taking microfinance service providers such as individual money lenders;
- Tier 3 is comprised of SACCOs (The Savings and Credit Co-operative Societies); and
- Tier 4 is comprised of community microfinance groups.
- LICENSING PROCEDURES UNDER TIER 1
The licensing of Tier 1 (is regulated by the Banking and Financial Institution Act No. 5 of 2006 (hereinafter referred to as “the Banking and Financial Institutions Act”). Section 8 of the Banking and Financial Institutions Act requires all applications under Tier 1 to be made to the BOT in writing and provide the following information: –
- applicant’s proposed memorandum and Articles of Association or other charter or instrument of formation required by applicable law;
- a statement of the address of the head office, location of the principal and other places where it proposes to do business and, in the case of a mobile agency, the area to be served;
- the name and address of every subscriber, shareholder, board directors, Chief Executive Officer and any officer directly reporting to the Chief Executive Officer;
- information that may be prescribed by the BOT for purposes of assessing solvency and trustworthiness of each shareholder with a significant interest; and
- such financial data, business plans and other documents and information as the BOT may require in order to conduct the investigation during review of the application;
- Prescribed non-refundable application fee; and
- other relevant information or document which may be required by the BOT.
- LICENSING PROCEDURES UNDER TIER 2
Tier 2 microfinance service providers must be registered as a business in Tanzania. They must be registered either as a company under The Companies Act No. 12 of 2002, a business firm or a sole proprietor under The Business Licensing Act, 1972.Regulation 6 of the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2019 requires all microfinance service providers who fall under Tier 2 to submit license applications to either the BOT headquarters or its branches located in Arusha, Mwanza Mbeya, Mtwara, Dodoma and Zanzibar. Such application should be in a prescribed form and accompanied with: –
- The latest financial statements;
- The lending policy;
- Approval of home country regulator for foreign applicants;
- training and succession plan for Tanzanian staff is mandatory in applications by foreign-owned Non Deposit Taking;
- a non-refundable application fee of TZS 500,000 for an entity and TZS 300,000 for an individual;
- All the information listed in the Second Schedule to the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, 2019; and
- Any other document or information as may be required by the BOT.
- Where an applicant fails to meet the licensing requirements, the BOT shall reject the application.
- The BOT shall determine the application within 60 days and upon being satisfied, issue a licence.
- Non deposit taking institutions are required to commence business within six months from the date the licence is issued, failure of which renders the licence expired.
- The BOT may, in writing, extend the time for NDTs to commence business.
- The licence remains in force unless suspended or revoked by the BOT.
- The deadline for submission of licence applications was on 30th April 2021. All microfinance service providers who does not have relevant license are restricted to operate until they have acquired a licence from BOT or other relevant Government Authorities to operate as microfinance service providers.
- LICENSING PROCEDURES UNDER TIER 3
Licence applications for microfinance service providers falling under Tier 3 are submitted to the office of the Registrar of Cooperative Societies in the respective region through the Tanzania Cooperative Development Commission (TCDC) licence application system. Please see the direct link to the online application system here.The Registrar of cooperative societies undertakes the function of licensing cooperative societies under delegated authority as provided by Regulation 5 of the Microfinance (Savings and Credit Cooperative Societies) Regulations of 2019 (“the SACCOS Regulations”). Essentially, it is the BOT, which is vested with the authority to licence cooperative societies. However, the BOT has delegated such powers to the Registrar of Societies through the Microfinance (Delegation of Powers and Functions) (Tier 3) Notice GN No. 887 which was published on 22nd November, 2020.Tier 3 microfinance service providers are issued with a licence in either category A or B, which differs by factors such as business activities and minimum capital requirements. (See the table below for details)
Licensing Requirements for Tier 3 Microfinance Service Providers S/N Category Requirements 1. Category A
Regulation 13 (1) of the SACCOS Regulations provides that a SACCOS with Category A may carry out the following activities:
- offering membership and voluntary shares;
- accepting savings from its members;
- granting loans to its members;
- making investments; and
- such other activities as may be authorized by the Bank or Delegated Authority.
- certified copy of the current by-laws of the SACCOS for the purpose of licensing;
- certified copy of registration certificate issued by the Commission;
- full names and addresses of the board members, supervisory committee members and officers of the SACCOS;
- curriculum vitae and certified copies of academic and professional certificates for board members and senior officers;
- copy of the lending policy;
- copy of the Tanzania national identity card, voters registration card, passport or any other identity acceptable by the Bank or Delegated Authority for each board member and senior officer;
- two passport size photographs of board members and senior officers;
- evidence of adequate safekeeping facilities and security for cash in the business premises;
- resolution of the general meeting to apply for a licence;
- proof that the SACCOS has employed or has contracted an internal auditor responsible for monitoring, among other duties, the correct and effective implementation of the internal control system; and
- proof that the SACCOS has a Management Information System.
2. Category B
Regulation 13 (2) of the SACCOS Regulations allows a SACCOS with Category B to carry out all activities which may be carried out by a SACCOS with Category A and the following mentioned activities:
- accepting deposits from its members;
- loan participations; micro-leasing;
- micro-insurance as an agent of insurers;
- agent banking with prior approval of the Bank or Delegated Authority;
- equity investment;
- debit cards;
- A non-refundable fee of TZS 100,000.00; and
- such other activities as may be authorized by the Bank or Delegated Authority.
- all items listed under Category A;
- business plan for three years of operations that includes the mission statement; organizational structure; and products and services;
- branch expansion plans if applicable;
- strategy for growth; and
- projected statement of financial position, income statements and cash flow statements and the assumptions used to make the projections for the three years of operations;
- policies for investments, human resources, savings, liquidity, finance, collections and internal procedures and control manuals;
- evidence that there is adequate insurance coverage; and
- a non-refundable fee of TZS 300,000.00.
- LICENSING PROCEDURES UNDER TIER 4
License applications under Tier 4 are submitted to the Local Government Authorities, which operate under delegation authority. The BOT has delegated its authority to licence Tier 4 applicants through the Microfinance (Delegation of Powers and Functions) (Tier 4) GN No. 888, 2019 which has to be read together with Section 28 (1) of the Microfinance Act and the Microfinance (Community microfinance Groups) Regulations 2019.Section 28 (2) of the Microfinance Act provides for the following requirements for licensing of Tier 4 microfinance service providers: –
- two copies of the constitution duly signed by all members of the applicant;
- members’ resolution to form and register a microfinance entity duly signed by all members; proposed organizational structure and names of proposed leaders of the applicant;
- a letter of reference from the ward or village authority introducing the applicant; and
- any other documents or information as the BOT or Delegated Authority may require.
Microfinance service providers in Tanzania were urged to comply with the Microfinance Act by making sure that they obtain the required license before 30th April, 2021. All microfinance service providers who failed to submit their applications to obtain the required license by 30th April, 2021 are prohibited from continuing with the business of microfinance services until such time when they have obtained a relevant license from the BOT or relevant Government Authorities especially for Tier 3 and Tier 4.
The microfinance service business entails about deposit mobilization and credit delivery to finance micro-enterprises at large. It is a mandatory compliance for microfinance service providers to adhere with provision of the Microfinance Act and regulations and guidelines made by BOT as the main regulator.
It is an offence to conduct microfinance business in Tanzania without obtaining license from the Bank of Tanzania or any other authority delegate by the BOT. One may be liable to fine, imprisonment or both.
Furthermore, there is a risk of being suspected to have committed tax offences and financial crimes such as Money Laundering; Corruption; Fraud and Electronic Crimes when operating without having a proper license. There are legal repercussions for all the above mentioned offences and at this stage, tax authorities and other Government Agencies which have authority to combat financial crimes come in. Hence, compliance requirements for microfinance service providers extend to rules and regulations made by Government authorities such as Tanzania Revenue Authority (TRA) Financial Intelligence Unit (FIU); and Prevention and Combating of Corruption Bureau (PCCB).
Non-deposit Taking Microfinance Service Providers that are in contravention of this requirement after 30 April, 2021 shall attract a fine of between TZS 20,000,000 and TZS 100,000,000 and / or imprisonment for a term between 2 and 5 years. An unlicensed SACCOS shall be liable to a fine of between TZS 10,000,000 and TZS 50,000,000 and / or imprisonment for a term of between 2 and 5 years.
This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.