MPs Oppose UGX 10Bn Minimum Capital Requirement for Microfinance Institutions

Members of Parliament have opposed the Government’s proposed increment of the minimum paid-up cash capital requirements of micro-finance deposit-taking institutions from 500,000,000 million to 10 billion Shillings.

It follows a debate on a report of the Committee on Finance, Planning, and Economic Development that recommended the adoption of the increment as proposed in the Micro-Finance Deposit-taking Institutions (Revision of Minimum Capital Requirements) Instrument 2022.

Amos Kankunda Kibwika, the Committee Chairperson while presenting the report during a plenary sitting chaired by Speaker Anita Among on Thursday, said the value of the required minimum capital requirements has been eroded over time and needed to be aligned with the macroeconomic developments.

Kankunda explained that Uganda has the lowest paid-up capital among regional peers in the East African Community – EAC bloc which undermines her banks’ competitiveness in the financial services market.

The Committee observed that enhanced paid-up capital will enable banks to finance strategic development projects and sectors, which are currently largely financed with external borrowing and domestic syndications.

But Muhammad Muwanga Kivumbi, the Member of Parliament Butambala County Constituency, also the Shadow Minister for Finance presented a dissenting minority report opposing the increment, describing it as ‘high and prohibitive’ to domestic sector players.

Denis Lee Onguzu, the Maracha East County MP equally opposed the high capital requirements that might limit the capacity of smaller institutions with limited resources, and they may be more cautious in extending loan services resulting in reduced access to credit micro-enterprises and low-income borrowers.

Samuel Okwir, the Member of Parliament for Moroto County also dissented from the increment citing that small-scale institutions will struggle to meet the stringent capital requirements, which could hinder their growth and expansion. As a result, the sector might become concentrated with larger institutions dominating the market.

The Leader of Opposition – LOP, Mathias Mpuuga reasoned that the increment is unjustifiable because already Uganda has the highest interest rate on loans in the EAC bloc, which is affecting the affordability of credit for borrowers.

Speaker Among also faulted the Committee for consulting only the Ministry of Finance, and the Bank of Uganda while leaving out critical views of the sector players. She ruled that the Committee should consult all the relevant stakeholders before Parliament makes fresh deliberations and subsequently adopts the report.

The Shadow Cabinet proposed that minimum paid-up capital requirements of Microfinance Deposit-taking Institutions be increased from 500,000,000 million to 2 billion Shillings.

They observed that striking the right balance in setting capital requirements promotes a stable and inclusive microfinance sector that benefits both the institutions and the communities they serve.

Currently, there are mainly four micro-finance deposit-taking institutions in operation including FINCA Uganda, Pride Micro-Finance, UGAFODE Microfinance Limited, and EFC Uganda Limited.

On 6 July 2023, the Minister of Finance, Planning, and Economic Development presented the Micro Finance Deposit-taking Institutions (Revision of Minimum Capital Requirements) Instrument 2022 to the Parliament and referred to the line Committee for consideration.

Key objectives of the Revision of Minimum Capital Requirements Instrument include; improving the soundness of the financial sector, enhancing the efficacy of monetary policy transmission; ensuring commensurate economic growth and inflation developments to address emerging risks.

It also aims at ensuring Microfinance institutions hold strong capital that is adequate to finance national development priorities, and compete in the regional markets; protect their depositors and creditors against the risk of losses from the banking business in line with international standards.

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