How to register a microfinance in Kenya: This feature offers insights on what it entails to register this kind of institution locally.
How to register a microfinance in Kenya: BACKGROUND
Microfinance Institutions are licensed by the Central Bank of Kenya to mobilise savings from the general public, thus promoting competition, efficiency and access. Microfinance have mitigated the negative impact of the increasing incidences of poverty and unemployment in Kenya.
Examples of microfinance in Kenya include:
- Faulu Kenya DTM Limited
- Kenya Women Finance Trust DTM Limited
- SMEP Deposit Taking Microfinance Limited
- Remu DTM Limited
- UWEZO Deposit Taking Microfinance Limited
- Century Deposit Taking Microfinance Limited
- SUMAC DTM Limited
Microfinance are regulated by The Microfinance Act, Chapter 493D of the Laws of Kenya (“the Act”); and The Microfinance (Deposit Taking Microfinance Institutions) Regulations, 2008 (“the Regulations”).
How to register a microfinance in Kenya: What is a Micro-finance Institution?
The Micro-finance Act defines a micro-finance bank as:
“a company which is licensed to carry on microfinance bank business, and includes all branches, marketing units, outlets, offices and any other place of business that may be licensed by the Central Bank of Kenya.”
The Act defines as microfinance bank business as:
“a) the accepting from members of the public of money on deposit repayable on demand or at the expiry of a fixed period or after notice;
- b) the accepting from members of the public of money on current account and payment on and acceptance of cheques;
- c) the employing of money held on deposit or on curren8t account, or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money including the provision of short-term loans to small or micro enterprises or low income households and characterized b the use of collateral substitutes; and
- d) such other business activity as the Central Bank may prescribe.”
From the foregoing, it is evident that for an institution to carry out micro-finance business, the institution must be (Section 4(1) of the Act):
- A company registered under the Companies Act; or
- A wholly-owned subsidiary of a bank or a financial institution whose main objective is to carry out such micro-finance business; and
- Licensed under the Act.
Accordingly, co-operative societies and entities registered under the Registration of Business Names Act are disqualified from carrying on micro-finance business. Please note that only deposit-taking micro-finance institutions can carry on micro-finance business.
How to register a microfinance in Kenya: How does one register a Micro-finance Bank?
The Microfinance (Deposit Taking Microfinance Institutions) Regulations, 2008 provides for at least four stages for the issuance of a licence to operate a micro-finance business, namely: (1) approval of the name of the proposed microfinance institution, (2) application for a licence, (3) issuance of a letter of intent, and (4) issuance of licence.
How to register a microfinance in Kenya: The stages
Stage 1: Approval of Name
- Contact the Central Bank of Kenya at an early stage for a preliminary meeting to discuss licensing requirements and related issues.
- Propose and book, in descending order of preference, at least three business names with the Registrar of Companies and Business Names.
- Submit the proposed names to the Central Bank in descending order of preference accompanied by a brief concept paper on the proposed Microfinance Bank, including evidence of sources and availability of capital. This should be done before incorporation of the proposed entity as a company limited by shares.
- The proposed name must incorporate the words “Microfinance Bank” e.g. XYZ Microfinance Bank Limited
- The name approval is valid for 12 months from the date it’s granted by the Central Bank within which you should have received a licence to carry out microfinance bank business.
Stage 2: Application for Licence (Regulation 3)
- An application for a license to carry out deposit taking microfinance shall be in Form 1 set out in the First Schedule to the Microfinance (Deposit Taking Microfinance Institutions) Regulations 2008] to CBK and shall be accompanied by all supporting documents, including:
i) Certified copy of the Certificate of Incorporation;
ii) Certified copy of the tax Personal Identification Number (PIN) certificate;
iii) Certified copy of the registered Memorandum and Articles of Association indicating core capital (at least Kshs 20 million or Kshs 60 million for community and nationwide microfinance bank business, respectively). For community microfinance bank business, indicate the area of operation as District or Division; if operating in a city, attach the supporting Government administrative map(s);
iv) Incorporation of the words “Deposit Taking Microfinance” or the acronym “DTM” in the business name;
v) Duly complete and submit the “Fit and Proper Forms” for all significant shareholders (at least 10% shareholding) and proposed directors accompanied by supporting documentation (certified) including:-For individual natural persons: (Forms 2a and 2b set out in the First Schedule to the Regulations);
- Payment of a non-refundable application fee to the Central Bank by Bankers cheque or by such other mode of payment as the Central Bank may prescribe.
- A declaration witnessed by an advocate or Commissioner of Oaths indicating that the proposed entity has no existing scheme of arrangement with its creditors.
- Provide evidence of minimum core capital (Kshs 20 million and Kshs 60 million for a “community” and “nationwide” microfinance bank business, respectively):
- Evidence should be reflected in a bank statement of a licensed bank indicating the earmarked funds (attach letter from the bank) and/or Government of Kenya Treasury Bills and Bonds not under lien.
- Evidence should either be in the name of the company and/or the promoters/ shareholders of the company.
- The promoters/shareholders should give the Central Bank authority to verify the authenticity of the bank statement directly from the bank.
- The promoters/shareholders should provide the distribution or allocation (ultimate beneficiaries, citizenship, amount and percentage) of core capital to each individual promoter/shareholder and/or company, indicating significant shareholders/promoters (owning at least 10% of the share capital).
- Certified statements indicating that the entity and each of the shareholders and officers are tax compliant. The current Tax Compliant Certificate should be provided.
- Prepare and submit a comprehensive feasibility study and business plan covering but not limited to: Executive Summary;
- governance structure including ownership;
- audited financial statements, (where applicable) and projected financial statements for at least three years;
- SWOT analysis;
- economic and financial markets environment;
- financial sector structure and environment;
- institutional analysis;
- potential market survey;
- scope of proposed business activities and marketing strategy;
- capital, liquidity and portfolio quality;
- proposed projected financial statements and analysis;
- legal and regulatory compliance function, and
- proposed infrastructure and internal controls;
- High level outlines of the proposed Risk management policies and procedures and internal control systems manual.
- Curriculum Vitae and biographical data on each of the significant shareholders and proposed officers.
- Evidence and disclosure of the source of funds e.g. certified copies of bank statements, fixed deposits and/or government securities.
- Total number and the percentage of shares to be acquired and evidence of the consideration given or to be given for the same.
- Four recent colour passport size photographs, of which at least one must be certified.
- Names of three independent referees who have known the proposed shareholder/officer for at least 5 years, giving detailed contacts including postal addresses, e-mail and telephone numbers.
- A recent (i.e. not more than three months since issuance) credit report from a licensed credit reference bureau.
- A declaration witnessed by an advocate indicating that none of the funds the shareholder seeks to invest are from proceeds of crime as required in Section 4.6 (a) of the Application Form (Significant shareholders)
- An affidavit that none of the proposed directors or significant shareholders holds or owns a similar position in any other microfinance bank in Kenya (Directors) licensed under the Microfinance Act, 2006.
Moreover, regulation 4 provides that foreign companies intending to set up a local subsidiary will be required to submit further information including but not limited to:
- A copy of the board resolution authorizing the entity to microfinance bank business in Kenya, and the designated persons who will represent the business in connection therewith.
- Historical background of the foreign entity.
- Signed declaration by the board of directors to adhere to the Microfinance Act and Regulations issued thereunder and other relevant Kenyan laws at all times during the validity of the licence.
- Endorsement letter (or a letter of no objection) from the home supervisory authority.
Stage 3: Letter of Intent
Upon assessment and fulfillment of all the requirements in stage two, the Central Bank will issue a Letter of Intent, which is an approval in principle and advises the applicant on the next steps and requirements to be fulfilled before issuance of a licence and approval to commence operations, including:
- payment of licence fees to the Central Bank by bankers cheque or such other mode of payment that the Central Bank may prescribe
- preparation of operating premises to meet prescribed standards [see inspection checklist in Form 4 of the First Schedule to the Microfinance (DTM) Regulations 2008] in readiness for inspection by the Central Bank
- completion and submission of the “Fit and Proper” Forms for key senior managers (to be guided by the Central Bank) accompanied by all the supporting documentation, including but not limited to the following:
- Curriculum Vitae and any supporting documentation
- At least three referees who should have known the proposed senior officer for at least five years and who should not be related to the officer, giving detailed contacts including their e-mail addresses and telephone numbers.
- Current and any previous employers and occupation(s) of the proposed officers giving detailed contact addresses including e-mail and telephone numbers.
- A recent (issued within the last three months preceding the date of submission) credit report from a licensed credit reference bureau.
- Two colour passport-size photographs and copies of identification documents (ID card and/or Passport) and PIN certificate. These should be certified by a registered Commissioner of Oaths. For non-Kenyan citizens, documents originally issued outside Kenya may be notarized in the jurisdiction in which the said documents were issued.
- A declaration that none of the proposed senior officers holds a similar position in another Microfinance bank(s) licensed under the Microfinance Act.
- Preparing and putting in place the proposed management information system (MIS) and other institutional structures required to conduct the microfinance bank business including but not limited to the following:
- Governance structures: Board, Senior Management and Committees.
- Deposit mobilization strategies/plans and marketing methodologies.
- Management Information Systems and infrastructure.
- Operations manuals – lending and credit administration; human resource development; investment policy; liquidity and funds management policies; accounting procedures; Management Information System; internal audit and controls; capital, planning and budgeting; Know Your Customer (KYC) requirements, operations and assets manuals.
- Risk management policies and internal control systems.
- A satisfactory inspection, upon invitation thereto, by the Central Bank, of the applicant’s proposed operating premises to examine compliance with the standards and operational readiness of the applicants to commence the business of the microfinance bank .
- In this stage, the Central Bank shall undertake a due diligence evaluation on the proposed management, an assessment on the adequacy of the MIS, internal controls and procedures.
Stage 4: Issuance of Licence (Regulation 5)
The Central Bank, if satisfied that the applicant has met all the requirements of the above three stages, may then issue a licence; the Central Bank will duly specify the institution by placing a notice in the Kenya Gazette, thereby legally authorizing the applicants to commence microfinance bank business. A license once issued shall remain valid up to 31st December of the year in which it is issued and may, on expiry, be renewed.
An application for the renewal of a licence shall be made in writing to the Central Bank at least three months before the date of expiry. Please note that a Microfinance Institution is required to maintain a minimum core capital. According to the Schedule annexed to the Act,
“Every institution shall, at all times, maintain minimum capital ratios indicated below or such other ratios as may be determined by the Central Bank-
- A core capital of not less than ten per cent of total risk-adjusted assets plus risk adjusted off balance sheet items as may be determined by the Central Bank;
- A core capital of not less than eight per cent of its total deposit liabilities;
- A total capital of not less than twelve per cent of its total risk-adjusted assets plus risk-adjusted off balance sheet items as may be determined by the Central Bank;
- (i) a core capital of at least sixty million Kenya Shillings; or
(ii) in the case of a deposit-taking business of a category prescribed for the purposes of this subparagraph under section 7, a core capital of at least twenty million Kenya Shillings.”
How to register a microfinance in Kenya: CONCLUSION
In conclusion please note as follows; although the Act distinguishes between deposit-taking microfinance business and non-deposit taking microfinance business, the Act largely provides for the regulation of the former. It is expected that the Cabinet Secretary responsible for the Ministry of Finance will make regulations specifying the non-deposit taking microfinance business and prescribing measures for the conduct of the specified business (Section 3(2) of the Act).
We how this feature on How to register a microfinance in Kenya was enlightening enough for you!
Ngugi Mburu is a Commercial and Litigation lawyer with a reputable Law Firm in Nairobi. Email: [email protected] for any queries or clarifications.
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