REGULATION AND SUPERVISION OF MICROFINANCE FINANCE: THE CASE OF ZAMBIA PRESENTED BY LYNDA MATAKA BANK OF ZAMBIA PAPER PRESENTED AT THE AFRACA GENERAL CONFERENCE JOHANNESBURG, SOUTH AFRICA (22ND- 26TH NOVEMBER 2004 )

OUTLINE INTRODUCTION THE ZAMBIAN FINANCIAL SYSTEM THE DEVELOPMENT OF DRAFT MFI REGULATIONS MICROFINANCE REGULATION AND SUPERVISION PROJECT PHASE I PHASE II DRAFTING PROCESS SALIENT FEATURES OF REGULATIONS EXPECTED BENEFITS CHALLENGES CONCLUSION

INTRODUCTION Size of Zambia is approximately 752,614 square kilometres Poverty in Zambia is considered high. An estimated 73% of the 10.3 million population subsist on less than US $1 a day. Poverty levels are higher in the rural areas at 83% compared to urban areas at 56%. The high poverty has partly been attributed to ‘poor access to financial services’. Provision of rural and microfinance particularly to the rural and low income group is therefore fundamental to promoting economic growth necessary for improving the standard of living of the majority of people in Zambia.

INTRODUCTION (continued) This presentation attempts to explain our experience in the developing Microfinance Regulatory Framework The regulation and supervision of microfinance institutions (MFIs) in Zambia is still at infancy stage. Emergence of the microfinance industry dates back to the 1990s a period characterised by the closure of Lima and Cooperative banks; This led to an institutional gap in the provision of banking facilities to the low income group. Majority MFIs in Zambia were established between 1995 and 1998 to close the gap; Currently there are over 50 known MFIs in Zambia; 20 are affiliated to the Association of Microfinance in Zambia (AMIZ); Two are registered with Bank of Zambia – Bayport Financial Services and Microfin;

THE ZAMBIAN FINANCIAL SYSTEM The Zambian Financial System consist of: The Central Bank; Banks; Non Bank Financial Institutions Comprising: Specialist Lenders (Leasing companies, Development Finance Institutions, Housing Finance Institutions, Savings and Credit Bank and Microfinance Institutions) Contractual Savings Providers ( Pension Scheme Funds and Insurance Businesses) Bureaux de changes The Financial Market (money, capital and foreign exchange markets) Most of the MFIs in Zambia are operating in an unregulated market.

THE DEVELOPMENT OF DRAFT REGULATIONS Following the rapid increase in the number of MFIs in the mid-1990s, there has been an industry-led drive for legitimacy and recognition through regulation. In September 2000, revisions to the Banking and Financial Services Act (BFSA) placed MFIs within the formal financial markets in legal terms. In order to enhance the balanced growth of the financial sector in Zambia, the BOZ embarked on the development of a regulatory framework for MFIs - under the Development of Microfinance Regulation and Supervision Project (DMRS). The project is jointly funded by SIDA and USAID.

MICROFINANCE REGULATION AND SUPERVISION PROJECT WORK UNDER THIS PROJECT IS DIVIDED INTO 2 PHASES: PHASE ONE - (1999) Survey of MFIs in Zambia. To study the nature of the market as a basis for establishing regulation and supervision. Survey results: Presence of MFIs country wide serve about 10,000 people. Identified Weaknesses included: Poor lending practices inadequate disclosure of information Poor accounting and internal systems Poor corporate Governance and structures inadequate provision of savings facilities MFIs dependent on donor funding This provided a persuasive case to provide a regulatory and supervisory framework for MFIs under phase two.

MICROFINANCE REGULATION AND SUPERVISION PROJECT PHASE TWO Duration The second phase commenced on 6 September 2001 and ran up to 5 September 2004. Phase II Objectives To develop regulations, prudential returns and systems necessary for effective supervision of MFIs; To develop the BoZ capacity to implement MFIs supervisory framework effectively; To assist MFIs understand and comply with MFI regulations and supervision requirements. Ultimate Goal The goal of the project is to create a safe, sound and efficient MFI industry in the country.

DRAFT MICROFINANCE REGULATORY FRAMEWORK The BFSA was amended in September 2000; These amendments extended the BOZ regulatory and supervisory powers to microfinance institutions; The draft MFI regulations are specific to microfinance institutions and will be issued under the BFSA; Harmonisation With Other Laws Many MFIs in Zambia are currently registered under various Acts. Therefore there would be need to harmonise other Laws to the BSFA and some of these Laws include: Companies Act; Cooperative Act; Societies Act.

DRAFTING PROCESS The BOZ held public consultations, focus group discussions and one-on-one meetings with with various stakeholders, which included Provincial Sensitisation workshops in all the nine Provinces. Discussions were focused on the following areas: The role of registrars and courts in microfinance; Which MFIs should be regulated and who should regulate them? How should MFIs be regulated? How should MFIs be supervised? The role of donors in the microfinance sector? In addition, the BoZ held consultations with other supervisory bodies and practitioners from other countries such as Ghana, United States of America and South Africa. Following these consultations, the draft microfinance regulations were submitted to the Ministry of Finance and National Planning (MoFNP) in June 2004.

SALIENT FEATURES OF THE MFI REGULATIONS The regulations have provided for a two tier system: Deposit Taking Microfinance Institutions Non-Deposit Taking Microfinance Institutions. For small MFIs with a capital base below K25 million will continue to be regulated under their respective primary regulators

SALIENT FEATURES OF THE MFI REGULATIONS (Continued) Requirements Deposit taking MFIs Non deposit Taking MFIs Min. Capital K250 million K25 million. Services Credit facilities; Linkage Banking; In-country transfers; Savings accounts (no current accounts) Credit Facilities only Shareholding Limits 25% per shareholder 50% per shareholder

SALIENT FEATURES OF THE MFI REGULATIONS (Continued) REQUIREMENTS DEPOSIT TAKING MFIS NON DEPOSIT TAKING MFIS Governance Structures To be registered as companies No trusts Governing body, Qualified CEO & Qualified CFO required Supervision and Reporting Requirements Off-site through monthly reports & On site Yearly visits Quarterly or Half yearly Off-site reports Fee Structure License Application- K5.4m License Application - K1m Annual Licence – K2 m Annual Licence – K0.6 m

SALIENT FEATURES OF THE MFI REGULATIONS (Continued) LICENCE/ FEE CATEGORY BANKS NON-BANKS BUREAUX DE CHANGE DEPOSIT TAKING MFI NON-DEPOSIT TAKING MFI Licence application fee K9.0 million K5.4 million K1 million Annual licence fee K4.5 million K2.7 million Licence renewed annually at K10.8 million K0.6 million Supervisory fee Higher of K10 million and 0.2% of monthly deposits for preceding 12 months 0.15% of average total assets preceding 12 month period (proposed) Nil 0.02% of monthly deposit preceding 12 month period No fee proposed

SALIENT FEATURES OF THE MFI REGULATIONS Supervisory fee Higher of K10 million and 0.2% of monthly deposits for preceding 12 months 0.15% of average total assets preceding 12 month period (proposed) Nil 0.02% of monthly deposit preceding 12 month period No fee proposed Penalty fee Late submission of returns Late payment of annual licence fee. Breach of Foreign exchange regulations K0.1 million per day for each delayed return 28 day treasury bill rate per day for the outstanding amount. 0.1 per cent is charged on the excess amount above exposure limits. K0.1 million per day for each delayed return. 20% of the licence fee remaining unpaid from the date payment was due. 0.1%percent is charged on the excess amount above exposure limits. K0.02 million per day for each delayed return. Nil-moral suasion is proposed. Nil-moral suasion. Nil-moral suasion is proposed

SALIENT FEATURES OF THE MFI REGULATIONS (Continued) Current Portfolio Current Rescheduled Loan Portfolio MFIs Discretion 10% Portfolio Past-Due 1 - 29 Days Portfolio Past-Due 30 - 59 Days Portfolio Past-Due 60 - 89 Days Portfolio Past-Due 90 - 119 Days Portfolio Past-Due > 120 Days Portfolio in Legal Recovery 25% 50% 75% 100% Rescheduled Portfolio Past-Due 1 - 29 Days Rescheduled Portfolio Past-Due 30 - 59 Days Rescheduled Portfolio Past-Due 60 - 89 Days Rescheduled Portfolio Past-Due 90 - 119 Days Rescheduled Portfolio Past-Due > 120 Days Rescheduled Portfolio in Legal Recovery 00%

SALIENT FEATURES OF THE MFI REGULATIONS (Continued) Liquidity ratio of 40% has been proposed for Deposit taking MIFs. The liquid assets will comprise: Cash; Government Securities; Treasury Bills; Government Bonds; Placements with banks and financial institutions; Investment in money market instruments with maturity of less than 12 months.

EXPECTED BENEFITS & CHALLENGES Availability of Information Good Corporate Governance Availability of Financial Services Alleviation of Poverty CHALLENGES Developing a Government policy in line with the FSDP recommendation on Rural Finance, Housing Finance, and Development Finance. Develop appropriate regulatory and supervisory frameworks for Rural Finance, Housing Finance, and Development Finance.

EXPECTED BENEFITS & CHALLENGES Harmonization with other Laws to the BSFA under the current Law Review Exercise. A Steering Committee has been put in place comprising officials from the Ministry of Finance, the Bank of Zambia and other identified key stake holders. Development of Credit Reference bureaus.

CONCLUSION The BoZ thanks the organisers for the invitation to share its experiences in the development of the draft MFIs regulatory and supervisory framework. The session has come at an appropriate time when the Nation is in the process of implementing the various recommendations of the FSDP, which among others include the development of Government policy on MFIs and harmonisation of all pieces of legislation in the financial sector where input from all stakeholders is required. In this regard, BoZ would like to invite you to make submissions to the Law Review Committee housed at the BoZ in order to broaden and deepen Zambia’s financial sector.

…Thank You…