- Proposed Act to repeal and replace Microfinance Act, which is limited in scope
- New Act proposes authority mandated to regulate microfinance institutions and unregulated moneylenders
- CB says unless regulated, action of loans sharks could lead to significant socio-economic costs
In what could be termed as a long overdue regulatory reform to the country’s financial system, the authorities are now working to enact new laws to regulate the informal money lending business to protect people who often fall victim to those individuals and firms referred to as loan sharks.
Although there is a well-penetrated formal sector comprising of licensed banks and licensed non-bank lenders, there is still a large section of people who borrow money from informal moneylenders operating as individuals, sole proprietors, partnerships or companies.
Their activities are neither regulated nor supervised by any authority leaving many borrowers vulnerable to exorbitantly higher interest rates, unfair terms and conditions and sometimes harassment.
To this end, the Monetary Board has already approved a piece of legislation titled, ‘The Proposed Microfinance Credit Regulatory Authority Act,’ to address issues identified surrounding informal money lending, which includes customer protection and regulatory oversight on informal moneylenders.
The enactment of the law will give effect to a new authority established within the Ministry of Finance consisting of ex-officio representatives from the ministry and the Central Bank, and nominees of the Central Bank Governor.
The mandate of the proposed authority will be to regulate the microfinance institutions and unregulated moneylenders.
As such the new Act will effectively repeal and replace the existing Microfinance Act, No.6 of 2016.
“The issues associated with the informal moneylenders such as the over-indebtedness of customers, lack of reporting of credit information to authorities, and lack of protection to customers etc., could lead to significant socio-economic costs, unless appropriate measures are initiated on a priority basis,” the Central Bank said.
As the new Act will provide regulatory oversight and guidelines to similar lines of businesses, though in different forms of incorporation, the Central Bank considers the Act will lessen any confusion and room for regulatory arbitrage.
“The proposed Act could also assist in addressing some of the shortcomings identified in the existing Microfinance Act, where there could be a possibility of a regulatory arbitrage due to the existence of different regulators for licensed microfinance companies and microfinance non-governmental organisations, and also more emphasis given to regulation of deposit taking microfinance institutions over micro-credit institutions, which could result in lack of protection for small time borrowers,” the Central Bank noted.