Proclamation No. 40/1996
PROCLAMATION TO PROVIDE FOR THE LICENSING AND SUPERVISION OF THE BUSINESS OF MICRO FINANCING INSTITUTIONS
WHEREAS, it needs to provide for a legal regime that brings the activities of micro financing institutions within Ethiopia’s monetary and financial policies;
WHEREAS, the monetary and banking laws in force do not provide for micro financing institutions catering for the credit needs of peasant farmers and others engaged in small-scale production and service activities;
WHEREAS, it has become necessary to legislate on the licensing and supervision of the business of micro financing institutions;
NOW, THEREFORE, in accordance with Article 55(1) of the Constitution of the Federal Democratic Republic of Ethiopia, it is hereby proclaimed as follows:
PART ONE
General
1. SHORT TITLE
This Proclamation may be cited as the “Licensing and Supervision of Micro Financing Institutions Proclamation No. 40/1996.”
2. DEFINITIONS
In this Proclamation, unless the context otherwise requires:
1) “Bank” means the National Bank of Ethiopia;
2) “Company” means a share company, as defined under Article 304 of the Commercial Code, the capital thereof owned fully by Ethiopian nationals and/or organizations wholly owned by Ethiopian Nationals and registered under the laws of, and having its head office in, Ethiopia;
3) “Micro financing business” means an activity of extending credit, in cash or in kind, to peasant farmers or urban small entrepreneurs, the loan size of which shall be fixed by the Bank;
4) “Micro financing institution means a company licensed under this Proclamation to engage in micro financing business in rural and urban areas;
5) “Members” means the shareholders of a micro financing institution or signatories to any type of membership arrangement created by such institution;
6) “Group guarantee” means a guarantee mechanism whereby a group of borrowers undertake to be liable jointly or severally to defaulted loan of any one of them;
7) “Savings” means non-withdrawable mandatory or regular savings of members of a micro financing institution;
8) “Deposits” means any regular or irregular savings which may be withdrawn partially or totally at any time by the account holder;
9) “Directors” means members of the board of a micro financing institution.
3. PURPOSE AND DUTY
1) The purpose of micro financing institutions is granting credit, in cash or in kind, the maximum amount of which shall be determined by the Bank.
2) Subject to conditions set under this Proclamation, a micro financing institution may carry out some or all of the following activities:
(a) accepting savings as well as demand and time deposits;
(b) drawing and accepting drafts payable within Ethiopia;
(c) borrowing money for its business purposes against the security of its assets or otherwise;
(d) purchasing such income generating financial instruments as treasury bills;
(e) acquiring, maintaining and transferring of any movable and immovable property including premises for carrying out its business;
(f) providing counseling service to its clients;
(g) encouraging income generating projects for urban and rural micro-operators;
(h) rendering managerial, marketing, technical and administrative advice to borrowers and assisting them to obtain services in those fields;
(i) managing funds for micro financing business; and
(j) engaging in other activities customarily undertaken by micro financing institutions.PART TWO
Licensing of Micro Financing Institutions
4. CONDITIONS REQUIRED TO ENGAGE IN MICRO FINANCING BUSINESS
1) To carry out micro financing business, the following conditions shall be fulfilled:
(a) obtain a license from the Bank;
(b) be formed as a company;
(c) deposit with a bank the minimum initial capital required by the Bank; and
(d) that the directors and other officers meet requirements set by the Bank.
2) The Council of Ministers may, upon recommendation by the Bank, exempt an applicant from the requirements of any of the provisions of sub-Article (1) of this Article inorder that other innovative financial intermediaries engage in micro financing business and for other causes consistent with the objective of this Proclamation.5. PRESCRIBING ADDITIONAL CONDITIONS
1) The Bank may issue directives at any time and prescribe additional conditions to be complied with before a license is issued.
2) Where the Bank intends to change or vary the terms and conditions attached to a license, it shall notify the concerned micro financing institutions of such intentions forty-five (45) days before the date it proposes to carry same into effect.6. APPLICATION FOR LICENSE
1) An application for license to carry out micro financing business shall contain the following:
(a) the prospective place of operation (indicating that of the head office and branches);
(b) the name, occupation, residence and nationality of the founders;
(c) form of organization of the undertaking;
(d) memorandum of association of the undertaking;
(e) proposed name of the undertaking;
(f) biographical data on each of the founders, proposed directors and officers;
(g) the proportion of contribution in cash and in kind and the manner of valuation of contribution in kind;
(h) the proposed transactions and operations of the undertaking as well as the manner for carrying out same; and
(i) such other relevant information as the bank may require.
2) An investigation fee, prescribed by the Bank, shall be paid at the time of submitting the application for license.
3) An applicant issued with a license shall commence operations within 12 (twelve) months from the date thereof.
4) No micro financing instituion shall, without the prior consent of the Bank, operate outside the area for which it has been issued with a license.
5) Every micro financing institution shall pay such annual license renewal fee as the Bank may prescribe.7. AUTHORIZATION OF COMMENCEMENT OF OPERATION
Any micro financing institution may, before commencing operations, be required to meet certain conditions prescribed in a directive to be issued by the Bank.
8. RECOVERY OF MONIES AND SECURITIES RECEIVED BY UNLICENSED UNDERTAKINGS
Where any unlicensed person undertakes activities carried out pursuant to this Proclamation, and holds monies or property obtained through such act, the Bank may apply to the Federal High Court for orders in respect of the disposition of same; the High Court shall give orders for the speedy and efficient return of such monies or property to the depositors or owners thereof.
9. REVOCATION OF LICENSE
The license of a micro financing institution may be revoked by the Bank for any of the following reasons:
1) where it fails to commence operations within a period of 12 (twelve) months following the issuance of license;
2) where it ceases to carry on its activity;
3) where it is declared bankrupt or decided that it be liquidated;
4) where it is amalgamated with another micro financing institution or bank without prior written authorization of the Bank; or
5) where confirmed that its registration was effected on the basis of false information.10. APPLICATION FOR RE-REGISTRATION
1) where the savings mobilized by a micro financing institution equals Birr 1,000,000 (one million Birr) it shall apply for re-registration.
2) where application is made under sub-Article (1) of this Article, it may be required that additional conditions prescribed by directives issued by the Bank be met.11. ASSISTANCE
1) Where it deems it appropriate, the Bank shall extend technical assistance requested by a micro financing institution while being organized or in the course of operations.
2) Micro financing institutions may obtain line of concessional credit or any assistance from foreign sources for the purpose of on-lending or capitalization.
3) Any credit or assistance to be obtained under sub-Article (2) of this Article shall require the prior approval of the Ministry of Finance.PART THREE
Financial Requirements and Limitations
12. MINIMUM CAPITAL REQUIREMENT AND POWERS AND RESPONSIBILITIES OF THE BANK
1) The minimum paid-up capital required to obtain license for micro financing business shall be determined by directives to be issued by the Bank.
2) The Bank may issue directives governing the following:
(a) limits on the maximum credit extended by micro financing institutions to any individual or group;
(b) the loan period and procedures;
(c) periodic reporting, the accounting system and the keeping of books of accounts;
(d) periodic surveys of loan and audits;
(e) standards regarding accountability, structure, savings system and financial performance;
(f) setting of special interest rate applicable to micro financing institutions.
3) The Bank shall have the responsibility to:
(a) encourage banks and other financing institutions to engage in micro financing business or to expand their activities in same;
(b) offer or facilitate training for the personnel of micro financing institutions;
(c) promote and develop traditional savings institutions such as Iqub inorder that the low-income section of society benefit most from them; and
(d) promote investment in micro financing business, especially in rural Ethiopia, pursuant to powers vested in it under the law.13. CONSOLIDATION AND MERGER
Consolidation and merger of micro financing institutions operating in adjacent areas shall be encouraged and such incentives as the Bank deems appropriate shall be granted to them.
14. OPENING OF BRANCHES
1) Every micro financing institution shall notify its having opened a branch office, within fifteen (15) days of the commencement of operation of such branch.
2) The Bank may set general guidelines on donations of opening and operating branch offices by micro financing institutions.PART FOUR
General Conditions
15. EXTENDING OF LOAN SERVICES
Micro financing institutions may extend loan to members as well as to non-members. However, such credit schemes as operating under group guarantee shall exert themselves to bring borrowers into membership of the institutions.
16. MINIMUM OPERATIONAL PRUDENCE
The minimum prudential framework of operation in respect of all micro financing institutions shall be in the manner and form to be prescribed by the Bank.
17. PROHIBITIONS
Without the prior approval of the Bank no micro financing institution may:
1) enter into any arrangement or agreement for the sale or disposal by amalgmation or otherwise of its business or effect self restructuring;
2) transfer or otherwise dispose of the whole or any part of its property, whether inside or outside Ethiopia, other than in the ordinary course of its business;
3) effect reduction of its capital; or
4) amend its memorandum of association or alter the name under which it is licensed.18. CIRCUMSTANCES REQUIRING APPROVAL FOR MANAGERIAL RESPONSIBILITY
The following shall not be allowed to manage micro financing institutions without the prior written approval of the Bank:
1) persons declared bankrupt or who have made a compromise with their creditors, whether in Ethiopia or elsewhere;
2) persons convicted of offences of breach of trust or fraud, whether in Ethiopia or elsewhere.19. TAX EXEMPTION
The Ministry of Finance is hereby empowered to determine the period, manner and condition of exemption of micro financing institutions from income tax.
20. SPECIAL RESPONSIBILITY
Every micro financing institution shall devise and execute a policy whereby the low-income section of society, especially in rural areas, get access to credit and to this end it shall implement such means of substituting group guarantee for property collateral requirement.
PART FIVE
Miscellaneous Provisions
21. DUTY TO COOPERATE
Where so requested by the Bank, all concerned bodies shall have the duty to cooperate in the implementation of this Proclamation.
22. AUDIT
Accounts of micro financing institutions shall be audited annually by an independent auditor acceptable to the Bank prior to the payment of dividends to shareholders.
23. INAPPLICABLE LAWS
Any law inconsistent with the provisions of this Proclamation shall not apply to matters provided for under this Proclamation.
24. OTHER APPLICABLE LAW
With respect to matters not covered under this Proclamation, the Licensing and Supervision of Banking Business Proclamation No. 84/1994 shall apply, mutatis mutandis.
25. POWER TO ISSUE DIRECTIVES
The Bank may issue directives necessary for the proper implementation of this Proclamation.
26. TRANSITORY PROVISIONS
Undertakings engaged in micro financing business, prior to the coming into force of this Proclamation, may continue in their previous form until reorganized in compliance with the provisions of this Proclamation.
The conditions and time limit of non-applicability of this Proclamation to such undertakings shall be determined in directives to be issued by the Bank.
27. EFFECTIVE DATE
This Proclamation shall come into force as of the 5th day of July, 1996.
Done at Addis Ababa, this 5th day of July, 1996.
NEGASO GIDADA (DR.)
PRESIDENT OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIΟΡΙΑ