REGULATING AND REGULATING AND SUPERVISING FINANCIAL SUPERVISING FINANCIAL

COOPERATIVES IN MALAWICOOPERATIVES IN MALAWI

Presentation by Noel MkulichiPresentation by Noel Mkulichi

Financial Co-operatives Regulators Roundtable, Financial Co-operatives Regulators Roundtable, PretoriaPretoria

November 24-25, 2008November 24-25, 2008

Historical Background of SACCOs in MalawiHistorical Background of SACCOs in Malawi Overview of SACCO Movement in MalawiOverview of SACCO Movement in Malawi Regulatory Environment for SACCosRegulatory Environment for SACCos Roles of the National AssociationRoles of the National Association Observations on SACCOs Regulatory Environment Observations on SACCOs Regulatory Environment Consequences of the Regulatory EnvironmentConsequences of the Regulatory Environment Regulatory Direction for SACCOsRegulatory Direction for SACCOs Broad objectives of the RegulationBroad objectives of the Regulation Strengthening Governance and Internal ControlsStrengthening Governance and Internal Controls Regulation and Supervision of SACCOsRegulation and Supervision of SACCOs Regulatory Relationships Regulatory Relationships Concluding ThoughtsConcluding Thoughts

Presentation OutlinePresentation Outline

Historical Background of Historical Background of SACCOs in MalawiSACCOs in Malawi

SACCO philosophy was introduced by Catholic Fathers in 1962SACCO philosophy was introduced by Catholic Fathers in 1962

In 1968 an African Body called ACCOSCA was formed in Nairobi In 1968 an African Body called ACCOSCA was formed in Nairobi in order to facilitate development of SACCOs.in order to facilitate development of SACCOs.

In 1969 leadership of ACCOSCA visited Malawi and discussed In 1969 leadership of ACCOSCA visited Malawi and discussed with Government officials on SACCOs in the country.with Government officials on SACCOs in the country.

In 1971 three nuns went to Swaziland to study SACCO In 1971 three nuns went to Swaziland to study SACCO philosophy.philosophy.

In 1973 first SACCO was registered in Malawi.In 1973 first SACCO was registered in Malawi.

In 1979/80 SACCO feasibility studies were done.In 1979/80 SACCO feasibility studies were done.

In 1980 MUSCCO was registered as a National Association.In 1980 MUSCCO was registered as a National Association.

Overview of the SACCO MovementOverview of the SACCO Movement The Movement is still at its nascent stage, but relatively The Movement is still at its nascent stage, but relatively

developed compared to other movements in the regiondeveloped compared to other movements in the region

Comprises: Comprises: The Regulatory Authority (Registrar of cooperative societies)The Regulatory Authority (Registrar of cooperative societies) A national association (MUSCCO) with 60 affiliatesA national association (MUSCCO) with 60 affiliates Three chapters (regional groupings of SACCOs)Three chapters (regional groupings of SACCOs) Individual SACCOs (about 90 of which about 70 are active) Individual SACCOs (about 90 of which about 70 are active)

Total membership of SACCOs stands at about 74,000 Total membership of SACCOs stands at about 74,000 against adult population of about 5 millionagainst adult population of about 5 million

Outstanding loans amount to 232,500 with value Outstanding loans amount to 232,500 with value totallingK1. 04 billion ($7.4 million)totallingK1. 04 billion ($7.4 million)

Deposits stand at K1.09 billion ($7.7 million) of which:Deposits stand at K1.09 billion ($7.7 million) of which: K116.6 million ($0.8 million) are savings and K116.6 million ($0.8 million) are savings and MK974.0 million (6.9 million) are share depositsMK974.0 million (6.9 million) are share deposits

Regulatory Environment for Regulatory Environment for SACCOsSACCOs

SACCOs are registered under Cooperative Societies Act, 1998 SACCOs are registered under Cooperative Societies Act, 1998 (primary law), and Cooperative Societies Regulations, 2002 (primary law), and Cooperative Societies Regulations, 2002 (subsidiary law)(subsidiary law)

The Registrar of cooperative societies in the Ministry of Industry The Registrar of cooperative societies in the Ministry of Industry and Trade (MoIT) administers the lawsand Trade (MoIT) administers the laws

Each SACCO is further guided by its own bye-laws approved by Each SACCO is further guided by its own bye-laws approved by Registrar Registrar

The Registrar does not however supervise affairs of SACCOs on The Registrar does not however supervise affairs of SACCOs on account of capacityaccount of capacity

Delegated the inspection function to the National Association to Delegated the inspection function to the National Association to ensure safety and soundness of SACCOs ensure safety and soundness of SACCOs

MUSCCO is also mandated to conduct external audits in SACCOs MUSCCO is also mandated to conduct external audits in SACCOs

to ensure compliance with statutesto ensure compliance with statutes

Roles of the National AssociationRoles of the National Association

MUSCCO was set up to develop, promote and MUSCCO was set up to develop, promote and safeguard a safe and sound network of SACCOs in safeguard a safe and sound network of SACCOs in MalawiMalawi

In addition to inspections and external audits, In addition to inspections and external audits, MUSCCO:MUSCCO: Operates a central finance facility which assists SACCOs Operates a central finance facility which assists SACCOs

in liquidity management in liquidity management Operates in-house financial protection plan, an Operates in-house financial protection plan, an

insurance scheme for SACCO members targeting life insurance scheme for SACCO members targeting life savings and loan protection savings and loan protection

Provides technical support on accounting procedures Provides technical support on accounting procedures and systems, management information systems, and and systems, management information systems, and data base development, etc data base development, etc

Lobbying and dialogueLobbying and dialogue

Observations on SACCOs Regulatory Observations on SACCOs Regulatory EnvironmentEnvironment

No established position of the Registrar for No established position of the Registrar for cooperative societies in MoIT as required by law, cooperative societies in MoIT as required by law, only puts on the hat in times of needonly puts on the hat in times of need

Both the primary and subsidiary laws are not Both the primary and subsidiary laws are not enabling for financial cooperatives development enabling for financial cooperatives development

Conduct of inspection and external audits by one Conduct of inspection and external audits by one institution (MUSCCO) is cause for conflict of interestinstitution (MUSCCO) is cause for conflict of interest

Both inspection and external audits may not be Both inspection and external audits may not be independent (principal – agent dilemma)independent (principal – agent dilemma)

Observations on SACCOs Regulatory Observations on SACCOs Regulatory Environment Environment (Cont’d)(Cont’d)

Some SACCOs, especially those not Some SACCOs, especially those not affiliated with MUSCCO can escape affiliated with MUSCCO can escape regulation regulation

Some SACCOs have registered growth Some SACCOs have registered growth overtime thereby requiring stringent input overtime thereby requiring stringent input and involvement of board and involvement of board

Weak governance structures at both board Weak governance structures at both board and management leveland management level

Weak internal controls within SACCOs Weak internal controls within SACCOs

Consequences of the Regulatory Consequences of the Regulatory EnvironmentEnvironment

The office of the Registrar for cooperative societies The office of the Registrar for cooperative societies has no budget and hence depends on the ministryhas no budget and hence depends on the ministry

The Registrar reports to the Minister through the The Registrar reports to the Minister through the Principal Secretary, hence has no final say.Principal Secretary, hence has no final say.

Weak governance arrangements and internal Weak governance arrangements and internal controls have led to frauds, insolvency and controls have led to frauds, insolvency and ultimately, failure of SACCOsultimately, failure of SACCOs

Loss of confidence by membersLoss of confidence by members SACCOS lack formal recognition among non-SACCOS lack formal recognition among non-

members as portrayed by low membershipmembers as portrayed by low membership

Regulatory Direction for SACCOs Regulatory Direction for SACCOs

Introduce a specific and enabling Introduce a specific and enabling legislative framework for SACCOslegislative framework for SACCOs

Create a Regulatory Authority that is Create a Regulatory Authority that is independent, has capacity to independent, has capacity to regulate; andregulate; and

Strengthen governance and internal Strengthen governance and internal controls controls

Broad Objectives of the RegulationBroad Objectives of the Regulation

Place the regulatory authority under the Registrar for financial Place the regulatory authority under the Registrar for financial institutions to ensure effective oversightinstitutions to ensure effective oversight

Create a prudential, proportional and predictable legal and Create a prudential, proportional and predictable legal and regulatory framework for SACCOs in Malawi.regulatory framework for SACCOs in Malawi.

One central piece of legislation recognizing the banking, One central piece of legislation recognizing the banking, cooperative and microfinance aspects of SACCOscooperative and microfinance aspects of SACCOs

Protect deposits and shares of members while preserving ability Protect deposits and shares of members while preserving ability to serve the membersto serve the members

Limit the scope of regulation so the regulator is not Limit the scope of regulation so the regulator is not overburdenedoverburdened

Balance interests of regulation and supervisory capacity through Balance interests of regulation and supervisory capacity through delegation of regulatory powers to an independent body. delegation of regulatory powers to an independent body.

Put in place effective governance and internal controls in order Put in place effective governance and internal controls in order to gain public recognitionto gain public recognition

Strengthening Governance of Strengthening Governance of SACCOsSACCOs

Registrar to introduce minimum standards Registrar to introduce minimum standards for board of directorsfor board of directors

The Registrar to subject directors to ‘fit The Registrar to subject directors to ‘fit and proper’ test before rising onto the and proper’ test before rising onto the boardboard

Also to determine composition, frequency Also to determine composition, frequency of meetings, rules of appointment, of meetings, rules of appointment, responsibilities and additional responsibilities and additional qualifications for directorsqualifications for directors

Strengthening Governance of Strengthening Governance of SACCOs (Cont’d)SACCOs (Cont’d)

SACCOs to be managed by a CEO SACCOs to be managed by a CEO and another senior management and another senior management officerofficer

CEO to pass ‘fit and proper’ testCEO to pass ‘fit and proper’ test Must also have hands-on experienceMust also have hands-on experience

Strengthening Internal ControlsStrengthening Internal Controls SACCOs shall be expected toSACCOs shall be expected to

conduct business with integrity, conduct business with integrity, prudence and professional skillprudence and professional skill

engage only in bona fide transactionsengage only in bona fide transactions truth in lending by disclosing terms of truth in lending by disclosing terms of

any credit or savings product offeredany credit or savings product offered Comply with minimum standards of Comply with minimum standards of

good practicegood practice

Strengthening Internal ControlsStrengthening Internal Controls (Cont’d)(Cont’d)

Registrar to issue directives onRegistrar to issue directives on minimum capital or loan fund minimum capital or loan fund

requirements requirements Aging and provisioning of loansAging and provisioning of loans Insider lendingInsider lending Certain classes of credit facilities, Certain classes of credit facilities,

investments and risk-bearing investments and risk-bearing commitmentscommitments

Any other transactions affecting the Any other transactions affecting the solvency or liquidity of a SACCOsolvency or liquidity of a SACCO

Strengthening Internal Controls Strengthening Internal Controls (c(cont’d)ont’d)

SACCOs to appoint external auditors SACCOs to appoint external auditors for production of audited financial for production of audited financial statementsstatements

Regulation and Supervision of Regulation and Supervision of SACCOsSACCOs

Registrar to determine threshold for Registrar to determine threshold for placing a SACCO under prudential placing a SACCO under prudential supervisionsupervision

SACCOs to submit periodic returns to SACCOs to submit periodic returns to RegistrarRegistrar

SACCOs to submit annual financial SACCOs to submit annual financial statements to Registrarstatements to Registrar

Regulation and Supervision of Regulation and Supervision of SACCOs (Cont’d)SACCOs (Cont’d)

Minister shall issue regulations on Minister shall issue regulations on administration of the Actadministration of the Act

Remedial measures and winding up Remedial measures and winding up covered under the umbrella law, the covered under the umbrella law, the Financial Services ActFinancial Services Act

Regulatory relationships Regulatory relationships The Registrar for cooperative societies shall The Registrar for cooperative societies shall

maintain registration of cooperative maintain registration of cooperative societies according to Cooperative Societies societies according to Cooperative Societies Act Act

The Registrar for financial institutions shall The Registrar for financial institutions shall consider application from registered consider application from registered societies for licensing under the Financial societies for licensing under the Financial Cooperatives ActCooperatives Act

The Registrar for financial institutions may The Registrar for financial institutions may

delegate the supervision function to delegate the supervision function to MUSCCO (non-prudential) MUSCCO (non-prudential)

Concluding ThoughtsConcluding Thoughts

Access to financial services by the poor is Access to financial services by the poor is likely to accelerate economic development likely to accelerate economic development and poverty eradication and poverty eradication

An enabling cooperative law is likely to: An enabling cooperative law is likely to: reform and modernize the functioning of the reform and modernize the functioning of the

SACCOsSACCOs create a strong foundation for regulation and create a strong foundation for regulation and

supervision of SACCOssupervision of SACCOs provide a platform for prudent growth and provide a platform for prudent growth and

innovation in financial cooperatives industryinnovation in financial cooperatives industry provide a level playing fieldprovide a level playing field

Asante Sana!Asante Sana!Yebo!Yebo!MerciMerci!!

Thank You!Thank You!