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Parliament Approves Shs5bn As Minimum Capital Requirement For MDIs

Parliament has increased the minimum paid up cash capital requirements of Microfinance Deposit-taking Institutions (MDIs) from 25,000 currency points (Shs500M) to 250,000 currency points (Shs5Bn), which is half the value the Ministry of Finance had proposed of 500,000 currency points (Shs10Bn).

The decision followed a report by Amos Kankunda, Chairperson Parliament’s Finance Committee who asked MPs to cap the share capital at Shs5bn, arguing that the majority of micro finance institutions are still operating under tier 4, and these institutions are not legally allowed to take deposits and in order to enhance financial inclusion, there is need for a legal regime that enables the majority of the micro finance institutions to mobilise deposits.

Kankunda said that currently, there are only four MDIs in Uganda with a very limited footprint and branch networks and these vary in the size of their balance sheet and shareholding value, and in order to ensure equity among MDIs and aspiring Tier-4 Institutions, the minimum paid-up cash capital requirement should not be a one-size-fits-all.

“Instead, it should be premised on a pro-rata basis, that is, the size of the balance sheet of an MDI and aspiring Tier 4 institutions which should determine the minimum capital requirement of the MDI.  In the meantime, the minimum capital requirement of the MDIs should be set at 250,000 currency points (Shs5Bn),” said Kankunda.

He also added, “The minimum paid up capital requirements of MDIs should be a function of the percentage of the balance sheet of each MDI. The Bank of Uganda should therefore annually review the proposed instrument within one year and determine the right percentage of the minimum capital requirement.”

The Committee also pointed out that Section 110 of the Tier4 Microfinance Institutions and Money lenders Act 2016 brings some Tier 4 institutions under the control of central Banks if their minimum share capital is above Shs500M and the increment also affects them, which new legal regime will affect their organic growth in light of the proposed stringent capital requirements.

Parliament thus asked Government to ensure that Tier 4 micro finance institutions under the control of the Central Bank as per Section l10 of the Tier4 Microfinance Institutions and Money Lenders Act 2016 should be exempted from this Statutory Instrument

Recently, the Ministry of Finance tabled the Micro Finance Deposit-taking Institutions (Revision of Minimum capital Requirements) Instrument 2022 seeking Parliamentary approval to revise the minimum share capital for MDIs from Shs500M to Shs10Bn, arguing that the move was aimed at improving soundness of the financial sector and enhance efficacy of money or policy transmission;

Minister of State for Finance, Henry Musasizi defended the proposal arguing that the revision will ensure that minimum capital requirements are commensurate with economic growth and inflation developments, are aligned with financial system developments, and sufficient to address emerging risks, as well as ensure that MDIs hold strong capital that is adequate to finance national development priorities and strategies, and compete in the regional markets;

Currently, under Tier 3 Micro Finance Institutions, Uganda has only four MDIs, namely; Pride Micro Finance Limited, FINCA, UGAFODE and EFC, and Government had proposed to have the new regulations come into effect in June 2024.

However, the consideration of the proposal was halted for the first time by Speaker Among after realizing that the Finance Committee hadn’t sought the opinions of the operators and managers of MDIs and other stakeholders that would be impacted by the revision.

Muwanga Kivumbi (Butambala County) who had earlier authored a minority report asking to have the capital requirement capped at Shs2Bn revealed both Government and Opposition had agreed on the middle ground of Shs5Bn and called for increased financial penetration by the MDIs and other institutions in order to strengthen Uganda’s sovereignty.

“Given what is happening, our sovereignty remains at hazard for as long as we aren’t able to moblize the local deposits. The difference between MDIs and Tier 4 institutions is that these Tier 4 SACCOs aren’t deposit taking institutions. That means that those people who go to the market and sell their cattle, can’t deposit their money in the evening and therefore, that is why we are making a point is that if we don’t deepen the reach of Tier 4, a lot of monies will remain in the communities,” said Muwanga.

Minister Musasizi while reacting to the latest Committee position said, “We would have preferred the Shs10Bn, but since we can’t get it, the Shs5Bn is good enough. I therefore agree with the position.”

The Ministry of Finance, Planning and Economic Development proposes that the increase in minimum paid-up cash capital requirements for Micro-finance Deposit-taking Institutions shall take effect from June 2024.

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