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Why Parliament Rejected Proposal For MDIs To Use ‘Bank’ Name

The Attorney General, Kiwanuka Kiryowa

The proposal by Micro Finance Deposit Institutions (MDIs) to use the word ‘bank’ in their names has been rejected by Parliament on grounds that the move would cause confusion not only in Uganda’s banking sector but also attract legal battles across the world.

This was during the consideration of the Micro-Finance Deposit-Taking Institutions Amendment Bill 2022, where Government had proposed to amend section 5 of the Act to permit MDIs  to use the word Micro Finance Bank after their name, arguing that the new nomenclature would be associated with safety and reliability.

MDIs argue that the absence of the word Bank has seen MDIs lose some prospective and existing customers who opt for commercial banks that they perceive safer.

The MDIs had argued that the use of word Bank will enable them compete fairly with commercial banks and be in position to moblise cheaper funds, and restricting the use of word bank would be a barrier to Uganda’s saving culture, arguments lawmakers on Finance Committee backed, asking Parliament to approve the changes.

However, the Committee’s recommendations were rejected by lawmakers like Jonathan Odur (Erute South) who warned fellow lawmakers against accepting such a proposal as it would bring confusion in the banking sector, and push Uganda’s commercial banks to fall under the international standards.

“You are either a bank or you aren’t. Trying to find ways which are deceptive under justification that we are moblising resources that the public is doubting us, you are supposed to deal with your business in the way that the public can trust you. So you can’t circumvent by hiding behind the word Bank and then say we should be allowed to use it.”

Similar sentiments were shared by Leader of Opposition, Mathias Mpuuga, who argued that the use of the word “Bank” casually and locally by MDIs would have far reaching implications at international scale when dealing with transfers of money.

“I don’t know if the Committee made this with cross referencing with the other laws or this meaning is just for business purposes. And therefore we draw serious repercussions legally when transactions are being done. I would like clarification whether this isn’t going to cause us serious problems of interpretation at transaction level,”  he said.

Aisha Kabanda (DWR Butambala) described the justification that people are running away from MDIs because they aren’t banks as wrong justification, pointing out that in fact, some people run to MDIs because they fear commercial banks.

“MDIs don’t hold the same capital as banks, so it is wrong for them to claim to be called banks. They should stay as MDIs because that is what they are, and they are limited by their capital, so they should be what they are,” she said.

Nandala Mafabi (Budadiri West) reminded Parliament that the microfinance deposits institutions act was enacted to cater for those institutions which didn’t qualify to be under Financial Institutions Act, warning that trying to incorporate MDIs into the FIA would be a mistake and appealed to Government to reconsider withdrawing the Bill until matters raised by MPs are dealt with.

He explained, “This law as it is now, can’t address what you want, what can be addressed is to look at the FIA and then we import objects from there which can assist those lower tiers which want to operate as commercial banks but if we do it this way, this law will not be implemented and it will be very dangerous, in fact it can bring confusion in the banking sector.”

The Attorney General, Kiwanuka Kiryowa argued that the effect of calling MDIs as banks will mean the entities moving from the MDI Act up to the Financial Institutions Act, and that would require the MDIs to meet all the obligations under the Financial Institutions Act.

“…I beg to agree that we remove the word bank from here. We are legislating the right law because our hearts are in the right place. Probably, we put it in the wrong law, but the heart is in the right place. I take the advice that maybe we need to go back and review the interface of this with the Financial Institutions Act and then reconcile it,” said Kiryowa.

Speaker gave the Government side until next week to report back to Parliament on whether they were going to proceed with the Bill or not.

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