Finance: Restrictions on use of the word
Relevance to microfinance and total financial inclusion
Section 10 (2) of the Finance Business Act No. 42 of 2011, provides that: no other person other than a finance company and an institution specified under s. 10 (6), shall use the words ‘finance,’ ‘financing,’ or ‘financial’ as a part of its name or description, except with the written approval of the Board.
However, the section itself allows certain exceptions to this rule by Section 10(6). Further Section 10(3) gives a six month grace period, but also permits the Monetary Board to give its written approval, to any person who uses this prohibited name, to continue using it, even after the six month grace period is over.
The Communications Department of the Central Bank of Sri Lanka on 19 March 2012 has issued a press release (an advertisement in the newspapers of Sunday 25 March conveyed the same message) from the Department of Supervision of Non-Bank Financial Institutions stating, among other things: ‘Further to the exemptions in paragraphs 2(a)-(e)’ (of the release, which quotes Section 10(6) of the Act in full), goes on to say that: ‘the Monetary Board has approved that any company/organisation which has been carrying on microfinance business and registered under the following statutes as at the effective date of the Finance Business Act no. 42 of 2012 may continue to use the words ‘microfinance’ as part of its name or description until such time the proposed Micro Finance Act is enacted.’
The statutes are (a) a Company registered under the Companies Act No. 7 of 2007. (b) Any NGO registered under the Companies Act No. 7 of 2007 and Voluntary Social Service Organisations (Registration and Supervision) Act No. 31 of 1980. (c) Any society registered under the Societies Ordinance (Chapter 123).
Careless and puerile errors
This press release, does not quote a legal authority in terms of the Finance Business Act, on the basis on which the Monetary Board can ‘approve’ what is tantamount to an amendment of the law enacted by Parliament! The circular does not define what ‘microfinance’ is.
This is an opportunity for unscrupulous promoters of pyramid Ponzi schemes which takes deposits from a gullible public, like Madoff of New York and our local Sakvithi and Danduwan, to indulge in their duplicitous activities!
Also it is strange that an NGO that carries on a ‘microfinance business’ has to be registered under the Companies Act and the VSSO Act, as well. Most Microfinance Institutions (MFIs) are either companies limited by guarantee or NGOs registered under the VSSO Act, rarely do they, and they are not required to by law either to, register under both statutes!
Further, the Societies Ordinance referred to in the CBSL’s press release, is not in Chapter 123 but in Chapter 141 Volume VII of the Legislative Enactments of Sri Lanka. At Chapter 123, referred to in the press release is the Surveyors Ordinance, in Volume VI of the Legislative Enactments of Sri Lanka!
Not only does the CBSL press release seem to attempt to give the Monetary Board a purported legislative power to amend laws made by Parliament, which contravenes the Constitution of the Republic, it is also riddled with careless and puerile errors and mistakes and seems to promote anti social and criminal Ponzi schemes!
As the law stands, each and every MFI which is a company, an NGO or a registered society, in terms of S. 10(3) of the Finance Business Act, has to write to the Monetary Board individually and obtain permission in writing, to continue to use the word ‘finance’ or its various derivatives, after six months have elapsed from the date the Finance Business Act came into force.
While the press release seems to claim that the Monetary Board has somehow changed the law by giving a blanket approval to any MFI created under the statutes it refers to, the danger lies in that if a micro borrower from an MFI using in its name the word finance or its derivatives, defaults and the MFI takes legal steps to recover the debt, the Court may call upon the micro lender to prove that ‘written approval of the Board’ has been obtained to use the name finance or its derivatives in the name of the MFI, otherwise it will be deemed to be an enterprise which contravenes the law, and may not be allowed to ask for legal recourse to recover the debt. One has to come before the law with clean hands!
It is strongly recommended that MFIs to whom S.10 applies take steps to get the written approval of the Monetary Board, notwithstanding the communication in the press release.
Silver lining
The only silver lining in the press release is that seems to envisage a timeline by which the proposed Micro Finance Act (sic) is enacted. This is salutary as the legislation, which will help to make total financial inclusion a reality, has been inexplicably much delayed.
The Monetary Board’s purported amendment to the Finance Business Act gives an open-ended approval for the word finance and its derivatives to be used until the MF legislation is enacted only.
The draft legislation on the establishment of an Authority (Microfinance Regulation and Supervision Authority – MRSA) for the purpose of licensing, regulation and supervision of microfinance business among other things, which was found on the CBSL’s website, in Part II section 10 (2) defines a microfinance business, as the ‘acceptance of deposits and providing financial accommodation in any form and other financial services mainly to low income persons and micro enterprises’.
This is a very broad definition, probably the broadest possible, and Section 10(3) empowers the authority to lay down the criteria for determining who is a ‘low income person’ and what is a ‘micro enterprise’ by gazette. It is not yet a legal definition recognised by law.
As there are around 30 other existing laws which would apply in various ways to ‘accepting deposits and providing financial accommodation’ already on the Statute Book, it would be important to exclude all these laws from applying to matters governed by the new Microfinance Law, or in the alternative explicitly specify which specific provisions of the existing laws, will apply. S.41 of the draft which merely provides that this law will prevail over all other laws is not of sufficient clarity.
In India, the Reserve Bank (RBI) has published a draft Microfinance Institution Development and Regulation Bill, which in Section 42 provides that ‘this act will override other laws’ and goes on by way of ‘explanation’ to say that ‘MF services extended by any MFI registered with the RBI shall not be treated as a money lender for the purpose of any enactment relating to money lenders’.
Microfinance Regulatory and Supervisory Authority
The Sri Lankan bill provides for the creation of the Microfinance Regulatory and Supervisory Authority (MRSA) and a five member Board of Directors (s.5[3]), consisting of: An officer of the Ministry of Finance, nominated by the Secretary to the Treasury, an officer of the Central Bank nominated by the Monetary Board and three nominees of the Minister, one an accountant, and two professionals or academics in finance, banking, economics, law, management or any other related field with relevant experience. The Minister appoints the Chairman, from among the Board members who has ‘knowledge in the operation of the financial sector’ (s.5 [5]). Members of the authority should not be players in a microfinance business licensed with the authority (3[7]).
The Board will not have any active practitioners of microfinance, it would be useful if some sort of advisory or consultative mechanism, be created by law, since the act does not provide an institutional basis for the bureaucrats and professionals who are on the Board of the MRSA to consult and get feedback from MFI and practitioners on the ground situation and on things they propose to do. The RBI’s draft provides for such an advisory committee, for an ombudsman to inquire into disputes and for a development fund.
S.3 provides that the objects of the authority are, broadly, to license, register, regulate and supervise the microfinance business; to strengthen and develop and qualitatively improve the microfinance business; to ensure its integrity and transparency; to maintain the confidence of stakeholders in the business; and minimise losses by establishing and enforcing standards of accounting, governance and disclosure for the microfinance business.
S.11 provides that the following categories of legal persons could apply for a license or registration, in terms of the act: A Company, in terms of the Companies Act, which is not a private, offshore or overseas one (s.11 {1} a). A NGO registered under the Companies Act, the Voluntary Social Services Act (s.11[1] b), a Co-operative Society, (s.11(1) c.) and a Society, registered under the Societies Ordinance.
There are specific requirements for National level operations (s.11 [2]), Provincial and Multi District (s.11 [3]), Single District and Divisional (s.11 [4]).
S.11 (2) explicitly prohibits a company limited by guarantee, a private company, an offshore company or an overseas company from applying for a license for a national level business. The section also authorises the Board to fix the core capital for companies which will be granted a license to carry on microfinance business at national level. Commentators have queried why companies limited by guarantee have been excluded.
This section may not catch up all entities set up under the various laws, numbering around 38, which apply to microfinance currently on the statute book, and those such as trusts under the Trusts Ordinance will have to canvass to be included in terms of an amendment to the draft law, or comply with what the law provides. The pawn broking business is not specifically exempted – does it provide a ‘financial accommodation’?
Exemptions
The following institutions are exempt from the Act, other than Part VII, dealing with the powers of the Monetary Board over MF businesses: Licensed Commercial or Licensed Specialised Banks (s.13 [a]), Finance Companies (s.13 [b]), Samurdhi Banking Societies (s.13[c]) and Farmers organisations (s.13.[d]) set up under the relevant law.
These entities are in direct competition with MFI supervised by the MRSA. They all indulge in the ‘microfinance business’. Is there a legal basis, in terms of fair and acceptable classification for exempting the microfinance business as defined of banks, finance companies, Samurdhi and farmer organisations from the MRSA’s supervision and regulation? It may be unfair discrimination and placing microfinance business subject to the MRSA’s seemingly more rigorously empowered supervision under a disadvantage, due to higher costs of compliance, etc., which may be challenged under the Fundamental Rights (equal treatment of same class of persons) jurisdiction of the Courts.
S.17 obliges the authority to maintain a register of microfinance institutions.
S.19 allows any microfinance business which is in operation on the day preceding the day the act comes into operation, to carry on business without a license or registration for one year more.
S.20 provides that a microfinance business registered or licensed under the act is exempt from S.78 of the Finance Companies Act and Part IXA of the Banking Act.
Part IV empowers the MRSA by S.23, to specify, terms and conditions under which deposits may be accepted, the maximum interest payable, the maximum length of time, and the cap on the amount one person may deposit, the terms and conditions, rate of interest and the time frame for any financial accommodation provided by an MFI.
Conditions on any investment made by an MFI, minimum ratios, a deposit protection fund, a reserve fund and the power to impose restrictions on MFI activities. S.23 (3) empowers the MRSA to issue a code of corporate governance on licensed and registered MFI.
Issues
There are over 30 laws presently on the Statute book, which would apply to the ‘acceptance of deposits and providing of financial accommodation in any form’ as the new draft law provides. Only where low income persons and micro enterprises, as defined by regulation made under the draft Microfinance Act, are involved will the MRSA have authority and the provisions of the draft Microfinance Act apply.
Where a low income person makes a financial deposit in any financial institution whatever, will the MRSA and the provisions draft Act apply? Where a low income person, is given a financial accommodation by, for example a Pawn Broker, established under the Pawn Brokers Ordinance, will amount to a ‘microfinance business’ as defined in s.10(2) of the draft Act ? Will the MRSA and the provisions of the new draft act apply?
Micro insurance, micro leasing, etc. are financial accommodations which are increasingly becoming popular in Sri Lanka; how will the Draft Act deal with those concepts, in the context of a pre existing legal regime covering insurance and leasing already in operation.
The draft Act will have to face up to these issues.
International trend
Further, the international trend is that microfinance businesses are securitising themselves and listing on stock markets to raise funds from investors for their activities, as subsidised funds and donor money is drying up.
For example a social enterprise called SKS Microfinance raised US$ 350 million in a stock offering in New York. SKS Microfinance is not the first MFI to go public, but it is the biggest-ever stock offering for the sector.
SKS Microfinance has its roots in a non profit microfinance organisation called SKS Society that operates in India and has around 6.8 million borrowers, holding US$ 624 million worth of micro loans.
However, promoters of traditional micro credit like Prof. Muhammad Yunus of Grameen Bank, who was awarded the Nobel Peace Prize for his work in the sector, and now have migrated to promoting social enterprises, have misgivings with this commercialisation of micro credit.
But since Sri Lankan MFIs will not have access to subsidised funds in the future and donor funds are also drying up, with our middle income country status, it would be good if the draft Act deals with these issues in anticipation, so that there will be the space for Sri Lankan MFIs to resort to these innovations if need be, in the future.
There are also other new evolving concepts such as Micro Angels, a derivative of Angel Funds, which is a Venture Capital Fund which does not take a share of the profit, and Micro Equity, which makes equity investments in micro enterprises, which are developing in this very dynamic sector.
If the new draft Act does not take cognisance and provide space for these developments, it will be redundant at inception and stifle the development of a pro-poor sector of the economy which is vital for total financial inclusion to be a reality. . Also, there are restrictions on entities carrying out microfinance business from accessing foreign funds, this seems like unequal treatment and no other type of financing is subjected to this restriction, other than existing rules and regulations.
Benign neglect
The official attitude in Sri Lanka, to the microfinance sector over time has been one of ‘benign neglect’ (this phase was coined by the late Massachusetts US Senator Pat Moynihan, to describe the Reagan administration’s attitude to coloured Americans). Rarely was anything positive done, but there was no great damage caused to the sector either, by official acts.
Of course the periodical loan waivers for agricultural and housing loans killed a credit culture painstakingly built up over the years by MFIs. On the positive side the Janasaviya Trust Fund’s (JTF) micro credit window brought in over 150 new partner organisations into the MF sector. The National Youth Savings and Credit Cooperative (NYSCO), CBSL’s Isuru project, the credit window of the Janasaviya Trust Fund and Janasaviya Program and the Samurdhi Project, main streamed self help groups and savings mobilisation.
However the JTF, later renamed National Development Trust Fund (NDTF) has now been closed down and its funds transferred to the Sri Lanka Savings Bank, which is supposed to have record numbers of nonperforming loans, to function as an apex lender to the MF sector.
There is a huge gender empowerment issue with the microfinance sector in Sri Lanka, since over 70% of the loans have been taken by women belonging to the poor and marginalised sectors of society. This should be reflected in the draft, may be by providing for gender equity on the Board of MRSA?
The confusion caused by the CBSL’s Communication Department’s press release should be cleared up and the draft MRSA law enacted early to achieve total financial inclusion in Sri Lanka.
(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)
