ISSN_0856 - 034 eS Supplement No.12 25"March, 2005 SUBSIDIARY LEGISLATION 1 the Gazete of the United Republic of Tanzania, No. 12 Vol. 86 dated 29% March, 2008 Printed by the Government Printer, Dar es Salam, by Order of Government ST ‘Govern Nonice No. 79 published on 23/3/2005 ‘THE BANKING AND FINANCIAL INSTITUTIONS ACT, 1991 ARRANGEMENT OF REGULATIONS Regulation Title PART I PRELIMINARY PROVISIONS 1. Citation 2. Application. Other applicable regulations and guid Interpretation. PART UL Sraremenr of Pouicy Oniecrives 5. System of internal control. 6. Risk-based controls, 7. Internal audit function . 8. Promotion of quality and independence of internal controls and audit. inter PART II ESTABLISHMENT OF AN INTERNAL CONTROL SYSTEM 9, Dury to establish an effective internal control system. 10.Objective and design of the internal control system. 129Banking and Financial Institutions (Internal Control.and Internal Audit) GN. No. 79 (cond) PART IV COMPONENTS OF THE INTERNAL CONTROL SYSTEM 11. Management oversight and the control cuiture. 12. Risk recognition and assessment. 13. Control activities and segregation of duties. 14, Information and communication. 15, Monitoring activities and correcting deficiencies, PART V InTERNAL ConTROL RESPONSIBILITIES OF DiRECTORS AND SENIOR ‘MANAGEMENT 16. Responsibilities of directors. 17. Responsibilities of senior managers. 18. Creation and responsibilities of the audit committee. PART VI INTERNAL AUDIT 19. Appointment of the internal auditor. 20. Audit charter. 21. Duties of the internal auditor. 22. Audit plan. 23, Outsourcing of internal audit. PART Vil Sanctions AND Risk Control MEASURES 24, Offences 25. Risk control measure.Banking and Financial Institutions (Internal Control and Internal Audit) “G.N-No, 79 contd) ‘THE BANKING AND FINANCIAL INSTITUTIONS ACT, 191 (Act No. 12 oF 1991) REGULATIONS Made under section 51(1) “THE BANKING AND FINANCIAL INSTITUTIONS (INTERNAL CONTROL AND INTERNAL AUDIT) REGULATIONS, 2005 1, These Regulations may be cited as the Banking and Financial ition Institutions (Internal Control and Internal Audit) Regulations, 2005. 2.-(1) These regulations shall apply to all banks and financial 2" institutions. (2) These regulations shall also apply to financial cooperative societies licensed by the Bank. 3, Banks and financial institutions must comply, on all matters not Specifically addressed on these or other Regulations issued ae by the Bank, with regulations and guidelines issued by the ‘ems following bodies in the stated order: {a) the National Board of Accountants and Auditors (NBA), (b) the Basel Committee for Banking Supervision; and (©) the International Federations of Accountants Committee. 131Banking and Financial Institutions (Internal Control and Internal Audit) GNNo. 79 (contd) Interpreta- tioa System of itera Risk based controls 4. Inthese Regulations, unless the context requires otherwise- “Bank” means the Bank of Tanzania; “Board of Directors” is the collective group of individuals elected by the shareholders of'a corporation to oversee the management ofa financial institution. For the purposes of these Regulations, this term shall be applied to the management committee of a financial cooperative society; “internal auditing” means an independent, objective assurance and consulting activity, oriented to bring in a systematic and disciplined approach to evaluate and improve the effectiveness or risk management, control and governance processes; “internal control” means a concerted action of the Board of Directors, senior management and all leveis of personnel, designed to provide reasonablé assurance regarding the achievement of objectives, the effectiveness and efficiency of ‘operations and the reliability of financial reporting and compliance with applicable laws, regulations and interna! policies; “internal controls” are the policies and procedures established and implemented individually or with other policies or procedures, to manage and control a particular risk or business activity, or combination of risks or business activities, to which the company is exposed or in which it is engaged, PART IL SiATEMENT OF PoLicy OBiecTIVES 5. An effective system of internal contro! is a critical component of a bank or financ‘al institution’s management and a foundation for its safe and sound operation. 6. Internal risk-based controls can help the bank or financial institution meet its goals and objectives, achieve long- term profitability targets, and maintain reliable financial and managerial reporting. 1327. Adequate internal controls within financial organizations must be supplemented by an effective internal audit function that independently evaluates the control systems within the organization, 8.-(1) It shall be an objective of the Bank to ensure that an effective internal control system is present in all banks and financial institutions and that management takes appropriate cofrective action in response to weaknesses identified in internal policies and or procedures, (2) The Bank has developed the internal control and internal audit framework in order to promote the quality and independence of the internal controls and the internal audit function of banks and financial institutions without impeding the development of new financial products and services. PART UL ESTABLISHMENT OF AN INTERNAL ConTROL SYSTEM 9.-(1) All banks and financial institutions shall implement an effective system of internal controls that is consistent with the nature, complexity, and risk inherent in their on- and o#f-balance sheet activities and that is designed to respond to changes in the institution’s environment and circumstances. (2) The goals of the system of internal controls implemented under subregulation (1) shall be to reduce fraud, misappropriation and errors, and to mitigate other risks faced by the institution. 10.-(1) The internal control system refered to under Regulation 9 shall 133 ng_and Financial Institutions (Internal Control and Internal Au it) EN Ne 7D) of quality wnt seal ‘nd iteral mudi Dury 0 exch net: intemal Objectives and design ofthe inter contrl sytemBanking and Financial Institutions (Internal Control and Internal Audit) EN No. 79 (cond ee (2) promote the efficiency and effectiveness ofiactivities ‘and measures that protect the institution fromloss and the ability of every officer and employee to achieve the organization’s gosls, without unintended or excessive cost or placing other interests before those of the organization, (b) ensure the reliability, completeness and timeliness of financial and management information, so that managers, directors, shareholders, depositors, creditors, and supervisors can count on having reliable information for making decisions; and (©) ensure compliance with applicable laws and regulations. (2) The internal control system shall be designed to- (a) identify the relative risks of each area of activity of the bank and financial institution; and (b) help the bank or financial institution to focus appropriate amounts of time and resources on the higher risk issues. PART iY Components oF THE INTERNAL CoNTROL SvSTEM a 11.1) There shall be a proper governance which shall define the Tesi’ character of the institution mandated to promote an appropriate sndive organizational culture that provides the foundation for effective Shure internal control (2) Proper governance is reflected in the exercise of the duties and responsibilities of the Board of Directors and the audit ommite, the senior manasers andthe internal auditor.Banking and .ancial Institutions (Internal Control and Internal Audit) GN. No. 79 (contd) (3) The Board of Directors and senior managers shall be responsible for promoting high ethical and integrity standards, and for establishing a culture within the organization that emphasizes and demonstrates to all levels of pesonnel theimportance of internal controls (4) The senior managers shall ensure that all personnel understand ‘their role in the internal controls process and shall be fully engaged in the process. 12.-(1) All material risks that could adversely affect the achievement of the institution’s goals shall be recognized and continually assesssed. (2) The assessment under subregulation (1) shall cover all risks facing the institution and the consolidated financial organization, including credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational risk. (3) Internal controls shall be reviewed at once a year to appropriately address any new or previously uncontrolled risk. 13.-(1) Control activities shall be an integral part of the daily activities of an institution. (2) The management shall establish an appropriate control structure, with control activities defined at every business level, including: top level reviews; appropriate activity controls for different departments or divisions; physical controls; checking for compliance with exposure limits and follow-up on non- compliance; a system of approvals and authorizations, and a system of verification and reconciliation 135 Risk recog tiowand sctivitien toesBanking and Financial Institutions (Internal Control and Internal Audit) TN No, 79 cond (3) Duties shall be allocated appropriately and personnel shall not be assigned conflicting responsibilities. (4) Areas of potential conflicts shall be identified, minimized, and subject to careful, independent monitoring, particularly in those instances related to approval and disbursement of funds, customer and proprietory accounts, assessment and monitoring of loans and any other areas where significant conflicts of interest émerge and are not mitigated by other factors. 14,~(1) The management shall cBllect, record and retain adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant for decision making. Information shall be reliable, timely, accessible and maintained in a consistent format. (2) Reliable information systems shall be in place to cover all significant activities of the institution including the use of data in an electronic form, shall be secure, monitored independently and supported by adequate contingency arrangements. (3) The management shall maintain effective channels of communication to ensure that staff fully understand and adhere to policies and procedures affecting their duties and responsibilities and that other relevant information is communicated to the appropriate personnel. Mecior _-15.-(1) The overall effectiveness of the institution's internal 5% iq, controls shall be monitored by the management on an ongoing basis, St” through established procedures such as review and approval of corsa edger transactions and approval of exception reports. “e (2) Monitoring of key risks shall be a part of the daily activities of all operational and business areas of the institution, including control areas and the internal audit. 136Banking and Financial Institutions (Internal Control and Internal Audit) — = EW No. 79 (contd) (3) There shall be internal rules.for establishing clear lines of responsibility for each operational and business area. (4) An effective and comprehensive internal audit of the internal control system shall be carried out by operationally independent, appropriately trained and competent staff who shall report to the board of directors and communicate its findings to the senior management either directly or through the audit committee. (5) Periodic and separate reviews shall be performed by operational and business areas, (6) Subject to subregulation (5), where internal control deficiencies are established they shall be reported ina timely manner to the appropriate management level and addressed promptly. (7) Where review is conducted and material internal control deficiencies are established the deficiencies shall be reported to senior management and to the Board of Directors. (8) The Board of Directors shall record in minutes the adopted decisions concerning internal control deficiencies during its meeting, PART V InTeERNAL ConTROL RESPONSIBILITIES OF DIRECTORS AND SENIOR MANAGEMENT 16.-(1) Notwithstanding other duties provided under any other Rees. ‘ : er ier written laws, the directors shall be responsible for providing direction, guidance and oversight to the bank or finan and ensuring that the affairs of the entity are carried out in the best interest of the institution. (2) The Board of Directors shall act carefully in fulfilling the important task’of directing and monitoring the activities of the ‘management by ensuring that the company’s day-to-day operations are in the hands of qualified, honest and competent management, 137Banking and Financial Institutions (Internal Control and Internal Audit) TMNo 79 (condi 7 (B) Specific internal control duties of directors shall be to: (2) approve and review, on at least an annual basis, the overall business strategies and significant policies of the institution; (b) understand the major risks run by the institution and set acceptable levels for these risks and ensure that senior management is monitoring the effectiveness of the interhal control system; (©) approve and review, on at least an annual basis, the ‘manuals on organization and functions, on policies and procedures for eyery area of business, on risk management and control and any others necessary for carrying out the affairs of the institution (@) formally review, at least once a year, the internal control system and the audit function; and (e) be ultimately responsible for ensuring that an adquate and effective system of internal controls is established and maintained. Reps 17.-(1) The chief executive officer or general manager shall- smansges (a) be responsible for the institution’s organizational and procedural controls; and (b) ensure the integrity of internat controls are fulfilled by having in place an effective management team that is characterized by 2 culturé of control and that is, accountable for the perfornifice of its responsibilities 138trol and Internal Audit) GN No 79 (contd) Banking and Financial Institutions (Internal (2) The following shall be the specific internal control duties of the chief executive officer and the general manager: (a) to implement strategies and policies approved by the board; (b) to develop processés that identify, measure, monitor and control risks incurred by the institution; (©) to maintain an organizational structure that clearly assigns responsibility, authority and reporting relationships; (4) to ensure that delegated responsibilities are effectively carried out; and (€) set appropriate internal control policies; and monitor the adequacy and effectiveness of the internal control system (3) There shall be a manual of organization and functions shall specify the responsibilities of each member of the management team of the bank or financial institution, (4) The managers shall be responsible for ensuring that outsourced services of any kind are with reputable companies that themselves have an adequate internal control system. (5) Contracts shall stipulate that external auditors, internal auditors and examiners of the Bank have access to any documentation or information system in the discharge of their respective functions. 139Banking and Financial Institutions (Internal Control and Internal Audit) TN Na 79 feontdy Ceation wd repens tates the aut 18.(1) The banks and financial institutions management shall establish a permanent audit committee composed of not less than three and not more than five non-executive directors who shall be independent of the management and they shall havea background ‘compatible with their duties. (2) There shall be by-laws of the bank or financial institution made by the Board of Directors which shall provide for the establish- ‘ment, composition, authority and duties of the audit, including the duty to report to the Board of Directors after every three months. (3) The audit committee shall ~ (@) be entitled to call to its meetings any of the senior ‘managers or the intemal auditor, request access to any necessary data or records and order any investigation to be performed; (b) review and confirm the internal audit charter and the audit plan, as well as the resources required to implement the audit plan, in terms of personnel and material resources; (©) receive the activity reports and the summary of the significant internal auditor’s individual recommendations and management’ plans for their implementation; (d) recommend to the Board of Directors the appointment of the external auditor and review its terms of engagement, The work plan of the external auditor shall be subject to the audit committee’s approval and the audit report and management letter shall be presented and discussed with the audit committee, (©) review and take responsibility for prompt action to A ensure; 140i) dit w) (i (vii) (wil) is) GN the appropriate functioning of the internal controt system; the planning, implementation and performance of activities of the intemal auditor, that the planning of activities of extemal audits include a review of the nature, scope and opportunity of audit procedures; that external and internal auditors’ reports are adequately reviewed and the management takes appropriate corrective action, particularly regarding any weaknesses of the internal control system; that the risk areas of the instititution’s operations be covered in the scope of the internal and external audits planning each year, that financial information provided to management and external users is reliable and accurate; that any material accounting or auditing concerns identified as a result of the external or internal audits are properly corrected; that the institution complies with legal and regulatory provisions, its articles of association, charter and by-laws, and the rules established by the Board of Directors; that external auditors maintain their independence at all times, iat and Financial Institutions (Internal Control and Internal Auch() 79 contd)Banking and Financial Institutions (Internal Control and Internal Audit) EN. No. 79 (cond) (%) that internal controls and management performances correspond with the institution's needs; (xi) that the Board of Directors and the Bank are periodically informed about compliance with rules and regulations, internal control policies and procedures; identification of material internal control and internal audit problems; and an evaluation of the impact of corrective measures implemented by management. PART VI IrerNal, AUDITOR Annoite 19.-(1) The banks and financial institutions management shall tment of appoint an internal auditor whose function shall be to permanently evaluate the effectiveness of the internal control system. (2) The Board of Directors shall be responsible for ensuring the independence of the internal auditor and that sufficient human and material resources are available for the adequate performance of its functions and duties. 3) The internal auditor shall report to the board of directors either directly or through the audit committee. (4) The appointment of the internal auditor shall be advised to the Bank, with sufficient advance notice for the vetting process, (5) Where the internal ausitoriis dismissed or resigns from office, his dismissal or resignation shall be reported to the Bank or financial institutions management immediately, and in case the dismissal ot resignation falls in a weekend or public holiday, the report shall be made on the néxt following working day. 142GN No 79 comid) 20(I) The banks and financial institutions shall have a written Aust audit charter that enhances the standing and the authority of the internal audit function within the bank. (2) The internal audit charter shall provide for -: {a) the objectives and scope of the internal audit function; (b) the internal auditor’s position within the organization, its powers, responsibilities and relations with other contro! functions} and (6) the accountability of the internal auditor. 4 (3) The audit charter shall be reviewed annually by the internal auditor. (4) The audit charter shall be approved by the audit committee and subsequently confirmed by the Board of Directors as part of their supervisory role before the start of each financial year. (5) The audit charter shall - (2) niandate the internal auditor with the right of initiative and authority to have direct access to and communicate with any member or staff, to examine any activity of the institution, access any records, files or data of the institution, including management information and the minutes of all consultative and decision-making bodies, whenever relevant to the performance of its assignments; (b) establish the internal auditor’s authority to communicate directly, and on his own initiative, to the Board, the chairman of the Board of Directors, the members of the audit committee or the external auditors where appropriate or to the Bank; (©) specify the terms and conditions to whica the internal 143Banking and Financial Institutions (Internal Control and Internal Audit) TN No, 79 teomidy : auditor can be called upon to provide advisory services| or perform other special tasks, (d) establish an annual independent review of the internal audit performance, which may be carried out by an independent party like an external auditor or by the audit committee; and (©) be distributed to the financial institution and a copy be provided to the Bank Dwicsor — 21.-(1) The duties of the internal auditor shall include to: te item (@) examine and evaluate the adequacy and effectiveness mae : of the internal control sysem; (b) review the application and effectiveness of risk management procedures and risk assessment methodologies, (©) review the management and financial information systems, including the electronic information system; (@) review the accuracy and reliability of the accounting records and financial reports; (©) review the instructioin’s system of assessing its capital in relation to its estimate of risk, (8 apprise the economy and efficiency of the operations; (g) review the system established to ensure complianc= with ‘legal and regulatory requirements, codes of conduct and the implementation of policies and procedures; (h) test the reliability and timeliness of the regulatory reporting; and (i carry out special investigations, 144Banks ¢ and Financial Institutions (Internal Control and Internal Audi) GN. No. 79 contd) (2) It shall be the responsibility of senior management to ensure that the internal audit department is kept fully informed of new developments, initiatives, products and operational changes in order to ensure that all associated risks are identified at an early stage. 22.-(1) The internal auditor shall prepare an annual plan for the Auditplen assignments to be performed during the next financial year and present it to the audit committee for review on or before March 30, and to the Board of Directors for review and approval not later than May 30, (2) The minutes of the board’s approval session shall be provided to the Bank not later than June 15. (3) The annual audit plan shall include the timing and frequency of planned internal audit work and it shall be based on an evaluation of internal controls and on a written assessment of material risks; updated yearly. The plan under subregulation (1) shall include details of the necessary resources in terms of personnel and other resources and shall specify the time devoted to training (4) The reports of the internal auditor shall be presented to the audit committee, the report shall contain the findings and recommendations as well as the responses of senior managers. (5) The reports and working papers of the internal auditors shall be kept for at least five years. (6) The auditor committee shall follow up its recommendations to verify whether the recommendations provided by the internal auditor are implemented and the status of the recommendations shall be communicated on a monthly basis to the audit committee and permanent coordination shall be maintained with senior managers. 145neni ofitemal suit ences At Na. of 18 janking and Financial Instituto ja. 79 (cou) (internal Control and Internal Audit) 23.-(1) With the prior approval of the Bank, an intemal audit outsoucing arrangement shall be contracted between a bank or financial institution management and a qualified professional (2) Irrespective of the contractual stipulations, the audit committee and the board of directors shall remain ultimately responsible for ensuring that the system of internal control and the internal audit are adequate and operate effectively. (3) The conditions of this regulation remain applicable in the case where all internal audit activities are outsourced, PART VIL Sactions ano Risk ConrroL Measures 24, Without prejudice to the other penalties and actions prescribed under the Banking and Financial Institutions Act, 1991, and unless otherwise required in these Regulations, the deliberate or negligent violation of any of the provisions of these Regulations shall attract one or more of the following penalties- (a) imposition of fines on the directors, officers and employees responsible for the violation in such famounts as may be determined by the Bank to be appropriate or reasonable, (b) suspension from office of the defaulting director, officer or employee; and (0) perpetus! disqualification from holding any position or office in any bank or financial institution under the supervision of the Bank 146Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) GN, No 79 (contd) 25. Provisions for loan losses may be prescribed by the Bank Rist and of such amounts as may be determined to be appropriate or fheae according to any regulation, made in relation thereof for the purposes of controlling any additional risk represented by weak or inadequate internal controls or internal audit. Dar es Salaam, Daunt T. S. BALLALL, 15®March, 2005 Governor of the Bank of Tanzanta Government Notice No, 80 published on 25/3/2005 THE BANKING AND FINANCIAL INSTITUTION ACT, 1991 ARRANGEMENT OF REGULATIONS Regulation Title PART I PRELIMINARY PROVISIONS 1. Citation 2. Application 3. Interpretation. PART TI STATEMENT oF Poticy Onsectives Financial sector reform. National Microfinance Policy. Microfinance companies. Microcredit activities Promotion of sound monetary credit and banking coordinations. sane PART TIT MicroriNance COMPANIES 9. Minimum capital and procedures for its integration by body corporate’s experienced in microcredit. 10. Licensing. 147Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) EM Wo. BO ceontd) 11. Branches and agencies and business hours, 12. Organization, 13. Restrictions. 14, Capital adequacy and publishing of financial statements. 15. Acronym and transformation, 16. Insolvency. PART IV Microcrepr Activimies, 17, Definition, maximum amount and collateral of microcredit. 18. Clientidentification and reporting for credif reference. 19, Lending policies, procedures and internal contrdls. 20. Accouriting rules. 21. Portfolio classification and ayproyal of action plan. 22..Speeifig:provisions. 23, Additiohal provisions, 24, Internal audit. 25, External audit, 26, Fair lending practices. PARTV Orrences 27. Sanctions. 148Banking ond Financial Institutions (Microfinance Companies and Microcredit Activities) ‘THE BANKING AND FINANCIAL INSTITUTIONS ACT, 1991 (Act No, Tor 1991) REGULATIONS ‘Made under section 51(1) PART! PRELIMINARY PROVISIONS. THE BANKING AND FINANCIAL INSTITUTIONS (MICROFINANCE'COMPANIES AND MICROCREDIT ACTIVITIES) REGULATIONS, 2005 1. These Regulations may bE cited as the Banking and Financial Cistion Institutions (Micro finance Companies and MicrocreditiActivities) Regulations, 2005, 2-(1) These Regulations shall apply to financial institutions licensed PP by the Bank as Microfinance Companies, established to undertake baking business mainly with individuals, groups and micro enterprises in the rural or utban areas. (2) The Regulations in Part IV shall also apply tr banks and other financial institutions engaged in microcredit and te savings and credit cooperative societies and schemes licensed by the "Sank. 3. In these Regulations unless the context req ires otherwise- brit “Act” means the Banking and Financial Institutions Act, 1991; “ “available capital and reqhired capital” refers to concepis defined in the First Schedule of the Capital Adequacy Regulations 2001; “Board of Diredtors” means the Board of Directors of a bank or financial institution and the Board of a savings and credit cooperative society licensed bythe Bank; “Bank” means the Bank of Tans “institutions” means banks, financial institutions and other institutions licensed by the Bank; 149Banking and Financial Institutions (Microfinance Compantes and Microcredit Activities) TN No. 80 rome) “infrastructure” means immovable and movable assets that may serve for the conduct of banking business such as offices and other premises, parking garages, furniture, computer equipment, computer softwaré, etc; “microfinance company” means a financial institution licensed by the Bank as a microfinance institution to undertake banking-business ‘mainly with individuals, groups and micro enterprises inthe rurai ur urban area of Tanzania Maintand and Tanzania Zanzibar, “microcredit” means credit accommodation whose security muy include ‘non-traditional collateral, granted toa natural person, individually or in a group, whose income depends on his own business or economic activity and who may lack formal financial statements and other accounting and operational records, “registered collateral” means real estate or chattel registered as collateral in a public registry. PART IL StareMenr oF Pouicy Onrecrives 4. (1) The Government initiated financial sector reforms in order insncist to create an effective and efficient financial system, seston (2) The lynchpin of those reforms was the Government's cofnmitment to allow banking institutions to operate on a commercial basis, making business and management decisions free from outside intervention within the norms or prudential regulation and supervision. (3) The mainstream financial sector benefited from the reforms but financial services to small and microenterprises remains as a challenge to this sector. . (4) In 1998 the Banking and Financial Institutions Act, 1991 was amended to provide for the creation of banks and financial institutions specialized as “microfinance institutions”, designed to offer financial services to individuals, groups and micro-enterprises in the rural and urban areas of Tanzania Mainland and Tanzania Zanzibar. 5.-(1) The Government in year 2000 approved a National Microfinance — Wationat Policy, whose objective is fo establish a basis for the evolution of an Méofine efficient and effective micro financial system that serves the low-income 5,05 segment of the society, and thereby contribute to economic growth and reduction of poverty. 150Bonking and Financial Instituttons (Microfinance Companies and Microcredit Activities) = — EN No. 8O contd) (2) Among other things, the Policy-aims to set up a best practices framework so that all practitioners of micro finance offer their services under common standards of quality arid sustainability and covers the provision of financial services to households, small holder farmers and ‘small and micro enterprises in rural areas as Well as in the urban sector. 6.-(1) The involvement of hans and financial institutions in providing — wivofin ices fo the low-income segment ofthe sovity is already significant 2 and is expected and desirable that it grows in the future, under sound financial policies and best administrative and lending practices, in harmony with the highest degree of prudence required by publie trust. (2) The financial institutions chartered as microfinance institutions under the denomination of “microfinance companies”, need a reasonable framework of financial and operational regulations, including minimum capital, nding limits, capital adequacy and liquidity ratios, restrictions on fending to related parties and scope of operations. (3) Under this framework, successful non-governmental organizations will alsobe allowed o offer new financial services to their clients, including, deposit services 7 (1) The credit risk is the major cause of serious problems in a Miercre- bank or a financial institution and most often is direetly related to weak 2... credit standards for clients, lack of qualified lending expertise and poor portfolio management more so in micro finance companies, whose loan portfolios are composed of thousands or tenths of thousands of very small and unsecured lonns, extended to micro-entrepreneurs who do not have formal financial statements to demonstrate the level or the profitability oftheir business activities (2) The Bank considers a need to establish basi rules regarding the obligetion of banks and financial institutions, including microfinance companies, to establish proper lending and administrative policies and procedures when engaging in micro-credit activities, with adequate internal controls and internal auditing to ensure their effective implementation, (3) The Bank also considers pertinent to establish proper rules regarding accounting and reporting, including provisioning rules to recogmize the risk inherent in both individual micro-credits andthe entire rmieroloan portfolio. 151Banking and Financial Instiruttons (Microfinance Companies and rocredit Acivisles) Minority Activities) ze Prom No. 80 reonid) vin 8,-{1) The microfinancial sector of ‘Tanzania is highly segmented and of sound . includes banks, financial institutions, community banks, savings and credit cement? cooperative societies and non-governmental organizations. and : ‘coin (2) The demand of the micro-enterprise sector for financial services. far exceeds the current supply and itis important that it be met under best practices being applied by all, so that competition does not become synonymous of unfair, unduly risky and even “predatory” practices in lending, (3) Iti the intention of the Bank, under its legal mandate to promote sound monetary, credit and banking conditions conducive to the «development of the economy of the country, that the accounting, reporting, and other best practices in micro-credit established in these regulations, ‘which are of mandatory observance by banks and financial institutions, are also adopted by other Tanzanian regulatory authorities and by all practitioners of microfinance. PART OI Microriance Comeantss Minimum 9,-(1) Microfinance companies shall be incorporated as companies capita limited by shares, with a minimum core capital of eight hundred million shillings in the case of microfinance companies withnation-wide, branches and two hundred million shillings in the case of unit microfinance companies. (2) The minimum capital shall be reviewed from time to timé as may be necessary. 3) The Bank may authorize a body corporate with,a proven track secord in lending to household small holder farmers or small or micro- ‘enterprises of the urban or rural sector, to Own up to sixty-six per centum of the share capital of a microfinance company, provided such body corporate pledges to phase out its lending operations and to transfer to the microfinance company its management team, Jending officets and other key personnel and infrastructure. (4) The limit of subregulation (3) shall apply, as a group, to all body - corporates that intend to transfer its infrastructure and pergonnel or clientele to the microfinance company. 182Ranking and Firiancial Institutions (Microfinance Companies and Microcredit Activities) fi EN No 80 cond (5) The infrastructure of the botly corporates to which subregulations (3y-and (4) apply may be sold to the microfinance company, oily if financed by the same body corporstes through a long-term interest-free Joan made pursuant to a contract that may be repaid only by the issuance of new shares. (6) Insofar adequate proof regarding the adequacy and fair value of is presented to the Bank during the licensing précess, up fo one-half of the minimum capital requirement pursuant to subregulation (1), may be subscribed by the body corporate, provided that such payment isto be made in cash within one year ofthe agreement ‘with funds arising from the repayments to their own lending portfolios. (7) The microfinance companies may extend loans to former clients ‘of the body corporates that are authorized to own the share capital of a microfinance company pursuant to subregulations (3) and (4) only where such transactions are financed by inereases in paid up capital, over and above the minimum capital prescribed in subregulation (1). A micro finance company may not purchase the loan portfolio of such body corporates, save with the prior approval of the Bank and when financed bya long-term subordinated loan extended by the same body corporates. 10-(1) The Bank shall evaluate the adequacy of the capital structure “eencing of the applicant, where itis initended that the body corporate will have a ‘majority patticipation in the microfinance company, in order to vetify that the owners of the microfinance company are eapable of practicing financial intermediation and engaging in the granting of microcredit in a professional and business-like manner and with the high degree of prudence that is required by the public interest. (2)The by-laws of the applicant shall contain specific provisions to censure adequate corporate governance, particularly with regard to the appointment of directors and senior managers and modifications to the by- laws of the company. (3) The Bank shall Fequire registration of all proposed shareholders ‘that are natural persons. In addition, the Bank shall require disclosute of, and shall subject to a “fit and proper test”, all proposed shareholders whose participation exceeds one percentum of the equity of the ‘microfinance company. 153Banking and Financial Institutions (Microfinance Companies ane! Microcredit Activities) TW Na WO cond) = (4) The evaluation of the character, experience and qualifications of proposed directors and managers shall requir, in addition to meeting. such eriteria and qualifications as may be specified by the Bank, evidence cof successful dxperience in microfinance and sufficient individusl and combined skills for the assumption of all significant executive and non-executive duties. (5) The Bank may consider and approve in the evaluation process & ‘management and technical assistance agreement with a specialized institution in microfinance. (6) The applicant shall provide detailed poticies for hiring, firing anid training of eredit officers and other key personnel. (7) The proposed lending policies, procedures and intemal controls of the applicant shall be evaluated for their capacity to promote sound financing of economic activities or small and micro entrepreneurs of the rural and urban sectors (8) The evaluations described in this regulation shall be completed before the license is issued. Any matérial changes in board membership for management that may take place before the commencement of business, orthe inability of the applicant to secure a legally binding contract for management and technical assistance that was referred in the application, could lead the Bank to revoke the license. NNO, _ (9) Other licensing eriteria shall remain as applicable in Banking and 118 9° Financia Istittions Regulations 1997 tranches 11.=(1) The microfinance companies may be permitted to open and branches and agencies in any district of Mainland Tanzania or Tanzania ect Zenaibar, provided satisfactory evidence of good track record in providing business tierofinance services is presented to the Bank and the institution is in tow compliance with all relevant applicable requirements and ratios. (2) The opening of branches shall be subject to the review process prescribed by the Bank's regulations. ~ *(3) Opening of branches prior to reaching profitability will only be allowed if such opening is in accordance with the original business plan. 154sting and Kinancial Institutions (Microfinance Companies and Microcredit Activities) GN No WO cond) (4) The Bank: may permit microfinance companies to establish their own business days and business hours for branches or agencies located invural areas, said may also permit microfinance companies to establish ‘mobile agencies in rural and in urban areas, provided that evidence of satisfactory insnrance coverage is presented. 12-(1) The Board of Directors of a microfinance company shall Organiss- ensure thet proper lending, financial and administrative policies and tion procedur’s ave implemented for each line of business and market served by the institution, and also shall ensure that management establishes a satisfactory internal control system. (2) The Board of Directors must have at least five directors, two of whom shal! have microfinance experience and the rest must have experience related (c finance, business, micro-enterprise or law. (3) Subject to sub-regulation (2) the directors shall not hold an sition in the microfinance company executive y (4) The chief executive officer or general manager of a microfinance company shall have a satisfactory record of experience in managing a institution specialized in micro-credit or in financial intermediation. (5) A microfinance company shall have an intetnal auditor, who may not be a fui time employee of such company, responsible for monitoring, among otlic® cuties prescribed by the Board of Directors or the Bank, the correct at effective implementation of the intemal control system and (he {intcly identification and management of credit, finanicial, ‘operational, legal and any other risks affecting the institution. (6) The interval auditor shall be appointed by and present its reports to the Board of Directors. 13.1) A saicvofinance company may, as primary function, perform — Restictins any of the following activities subject to any condition ot regulation ow which the Bank inay prescribe: 97 (a) eecepting saving and passbook deposits from the public; (e} accepting fixed (time) deposits from the public; scuepting official deposits, such as from a development ot, wholesale financial institution, or government gency 135Banking and Financial Institutions (Microfinance Companies and GN. Ne 80 (cond Microcredit Activities) (@ making microfinance loans to individuals, groups of individuals, micro and small enterprises; (© making remittances, payment orders and transfer of funds domestically for its clients (P) such other activities as may-be authorized By the Bank. (2) Unless otherwise allowed by the Bank and subject to these ns, a micro finance company shall not engage in any of the fellowitig activities: (a) issuance of third party cheques; (b) opening current account for clients; (©) foreign exchange business; (@ foreign trade operations; (€) trust operations; (0 investment in enterprise capital; ‘(g) itvany business other than bankirig business; (h) participation in the underwriting and placement of securities; (@ purchase or acquisition of anj/tand or &ntPintefest or right therein except as may be reaivtibly ridteskif Yor the purpose of conducting its busitiess; where such ifivestaténts do not exceed such proportion of its core capital as may be prescribed by the Bank; and G)_extend loans Tor the account and at the risk of anothér person or institution. (3) The Bank may, in any case where it grants a'lictnse to a micro finance company, impose such terms and conditions as it may deem sppropriate; including teniporary or permanent restrittions regarding the individual or total amounts of credit accommodatiois or the erigagement inany activities or operations. (4)A microfinance company shall not, directly or indirectly, grant to ‘any person, any credit accommodation so that the total value of such accommodation to or on behalf of such person: 156Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) GW No. 80 feomid, “Wy it granted ageirif the security of collateral registered in a ‘Publis registry arid the value of which is atleast twenty- five pericentuniimare than the obligations secured thereby, is atany time more than three per centum ofits core capital; o () if secured by périonial guarantees, goods not registered ip 1 public registry or any other types of guarantees specified ~ in the lending policy approved by the Board of Directors, isat any time more-than one per centum of its core espital; or (©)if granted against a combination of the above, is at any time more than two per cenfum ofits core capital, provided the portion secured as specified in paragraph (b) is not more than one per centum ofits core capital. (5) The microfinance companies. shall not grant or permit to be ‘outstanding advances to sctors or employees, nor to their family tmetinbert of related businesies as defined by the Act or by the Credit Concentration and Other Exposure Limits Regulations, 2001, save for sal toans to ‘Non-executive employee, if so prescribed by the ne] policy of the institution. (©) The deposits of e-microfinance company in a single bank or financial institution, shall not exceed twenty five percentum of the core capital of the microfinance compeny nor five petcentum of the total abilities of the bank or financial institution. 14-(1) As provided:in the Banking and Financial Institutions Act 1991 and amendments, microfinance companies shall tal times maintain: core capital and total capital at not less than ten pereentum and fifteen percéntum respectively ofits total risk weighted assets and off balance sheet exposure, (2) The microfinance companies shall publish once a year, in a newspaper of general circulation advised by the Bank, financial statements and any other information to be prescribed by the Bank. @) The microfinance companies shall utilize the direct method to prepare its statement of cask: flow for operating activities. 157 GN. No 36 0f 2001 apie sdeqaney SEE i" fBanking and Financial Institutions (Microfinance Compan Asronym and ‘ransforma- tion Insolvency Cag. No. ‘Act No. 12of 2002 Definition maximum amount and collateral cf miero= srodits Microcredit Activities) Na 80 (contd) (4) For the purposes of the computation of capital adequacy ratio, micro-credits shall have a hundred percentum weighting after 15-(1) The microfinance companies shall utilize the acronym MFC their commercial names, before the term “Limited” (2) A micro finance company may transform into a bank upon fulfilment of conditions as preseribed by the Act. 16.-(1) A mictofinance company shall become insolvent for the purposes of section 26 of the Act where (@) it commits an act of bankruptcy under section 3 of the ‘Bankruptcy Act, or the relevant law applicable in Tanzania Zanzibar; or (b) a winding-up order is made against it, or a resolution for gfeditors’ voluntary winding up is passed, under . Compatties Act, 2002 or the relevant law applicable ‘Tanzania Zanzibar; or (¢) itis unable to pay sums due and payable to its depositors or the yalug of the financial institution’s assets is less than the amount of its liabilities. PART IV Micracrepit Activinizs 17.-(1) For the purposes of these Regulations, micro-credit means a credit accommodation whose security may include non-traditional collateral, granted toa natural person, individually or in a group, whose ingome depends on his or her own business ur economic activity and who may Jack formal financial statements and bther accounting and operational records. jero-eredit shal (2) The landing policies of institutions engaged specify the maximum amoiints that van be approved at every level of discretion, aswell as the documentary and procedural requirements a d the intemal-controls {0 be maintained. Micro-oredits in excess of the equivalent of one percentum of the core capital shall require the approval of every level of discretion, including the Board of Directors, 158Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) CW Ne. BO cond} (3) Where the borrower lacks the registered security of immovable ‘or movable property, a micro-credit shall nevertheless be covered by a reasonsblenon-traditional security or collateral substitute, such as personal guarantees, contractual pledging of home or business assets, compulsory savings or group guarantees where members jointly guarantee each other's loans. (4) Fully secured loans to households, small businesses and ‘micro- enterprises, shall bs subject to the provisos established in the ‘Management of Risk Assets Regulations, 2001, save forthe requirements, 9, No. ‘of audited financial statements contained in regulation 6 sub-regulation 2001 (2), which may be fulfilled through pro-forma financial analysis and statements prepared by the credit officers of the institution. 18, Institutions engaged in micro-credit shall adopt the methodology determined by the Bank to assign identification numbers to their clients a and toreportto acredit reference databank their oan portfolio information reporting in the format and with the frequency which the Bank prescribes, ee Client iden 19. (1) The Board of Directors of institutions engaged in tenting micro-credit shall approve lending policies and procedures that Ensure —jrocedure that the highest degree of prudence required by public trustis employed a in the approval, administration and intemal control of the loan portfolio. controls 2) Institutions engaged in granting individual micrp-credits shall conduct an appraisal of the character, payment history and payment capacity of each client. ; (3) Lending procedures shall ensure that, although loan officers may be responsible for client administration throughout the whole loan cycle, incompatible roles and conflicts of interest will Be identified and subject to segregation of duties among different employees of the institution, in order ‘to prevent the emergence of undersirable or even fraudulent practices. (4) Internal control procedures shall ensure the proper organization and timely monitoring of branch offices, credit officers and back office ‘operations, ina manner that is consistent with the degree of decentralization of the izstitution ints lending operations, (5) Micro-«redits shall be denominated in local currency, cave for clients ‘whose sales are wholly or substantially transacted ina foreign curtency. 159Banking and Financial Institutions (Microfinance Companies and Microcredit Activities — ‘0 eons » 20.1) Micro-credits shall be accounted as past due in their entirety, con the first day after an agreed payment of principal or interest is unpaid. (2) The date of past-due status shall remain unchanged until enough payments are made to return the micro-credit to its original repayment schedule, (3) A group loan shall be accounted as past due in its entirety, whent any of the members of the group defaults and the amount due is not covered by the members of the group. (4) Interest income shall be accounted on @ cash basis or shall be reserved in its entirety until effectively paid. A payment by client shall be first applied to interest and the rest to principal. (5) A micro-credit that is not repaid in accordance with the agreed schedule but subject to reprogramming, rescheduling, rollover, refinance or any other modification that defers, delays or postpones effective repayment, shall be accounted as restructured (© A micro-credit that is partially applied to cancel arfother micro- credit shall be accounted as current, as long as the client is in good standing and all the interest and at least eighty percentum ofthe principal is paid in accordance with the originally agreed terms. (7) It shall be prohibited to capitalize interest in a micro-credit. ‘Transgressions shall be classified as loss, notwithstanding other penalties applicable to officers responsible for its authorization. ~ (8) Micro-credits past due for one year shall be written-off and tecrded i memorendim counts fr, among oer purposes, reporting to the credit reference databank, (9) The loan portfolio ofan institution engaged in micro-credit shall be structured, for reporting and publishing purposes, as follows: =The net micro-credit portfolio + Current + Restructured, + Past due for up to 30 days + Past due from 31 t0 90 days + Past due for more than 90 days + Interest receivable (Loan loss reserves) ( Reserves for interest receivable)” 160Banking and Financial Institutions (Microfinance Compantes and ‘Microcredit Activites) (10) Subsidies received by institutions engaged in micro-credit ii the form of loans with significantly low rates of interest (soft loans), shall be accounted as capital grants. (11) To caloulate the amount of the subsidy, institutions shall use the present value method with the discount rate being the average cost of interest-bearing liabilities. (12) For the purposes of compliance with Tanzania Financial Accounting Standard No. 20 "Segmental reporting”, institutions shall consider micro-credit one of the business segments, and other segments being corporate, consumer credit and housing (mortgage based on individuals) lending. (13) Institutions engaged in micro-credit may adjust the book value and depreciation of their fixed assets on an indexed basis, utilizing for this purpose the rate of exchange of the shilling with respect tothe dollar of the United States of America. 21.-{1) The micro-credit loan portfolio shall be classified on a monthly basis, with the use of computers or any other appropriate mechanisms. (2) Micro-credits shall be classified in five categories according to the aging of the past due portfolio that are current, specially mentioned, substandard, doubtful and loss: (a) micro-credits scheduled to be paid in monthly installments shall be classified as follows: No. of days past due Classification Current Current Up to 30 days Specially mentioned 31 to 60 days ‘Substandard 61 to 90 days Doubtful More than 90 days Loss; (b) micro-credits with installments of less than one month or ‘any other periodical payment schedules other than one month, shall be classified as follows: No. of days past due Classification Current Current Upto 15 days Specially mentioned 16 to 30 days Substandard 310 45 days Doubtful ‘More than 45 days Loss; 161 EN No 80 (cond) Porfotio classifies- tion and approval of action phonBanking and Financial Institutions (Microfinance Companies and Microcredit Activities) GN Na 0 veonid) (©) restructured micro-credit shall be classified as substandard and shall be reclassified as loss where restructured for 2 second time. (3) The Board of Directors shall review and approve every month the classification of the loan portfolio and shall ensure, by whatewpr means that may be most appropriate, its accuracy and reliability. (4) The Board of Directors shall approve the action plan presented by senior managers when the quality ofthe micro-credit portfolio falls below the level estimated in the annual budget. Speviie __-2.-(1) The Board of Directors shall be responsible for determining Prowsiont and approving the amount of specific provisions for loan losses to be established for the micro-credit portfolio, taking irito consideration the recommendations of the managers and internal and independent auditors. (2) The minimum amount of specific provisions shall be based on the following schedule: Classification Provision Current M% Specially mentioned 25% Substandard 50% Doubtful 15% Loss 100%. Aucitions! 23.-(1) The Bank, the internal auditors or the independent auditors ‘Prowsiont may establish additional provisions for increased risks such as (8) implementation of lending policies or procedures regarding loan amounts or conditions, levels of discretion in the approval of loans, separation of duties, loan documentation or administration, for up to five percentum (5%) of the total portfolio; (b) lack of observance by loan officers, other personnel or senior officers, of sound lending practices or of lending policies or procedures established by the Board of Directors, for an amount of up to ofe percentum (1%) of the total portfolio for every ten percentum (10%) of transgressions detected in a statistically representative sample; and 162Banking and Financial Institutions (Microfinance Companies and ficrocredit Activities) GN Na. 80 oo (6) significant deterioration of the repayment performance of, the clients with respect to other providers of credit. (2) Additional provisions shall be booked within ninety (90) days, unless satisfactory evidence is presented to the Bank, internal auditor or independent auditor, to the effett that the situation has been overcome or placed under control. 24,-(1)'The professional responsible for internal audit of micro-credit inrnsi ‘operations shall be vetted by the Bank and shall have successful previous experience as a micro-credit auditor or loan offiger or manager, or shall have received specialized practical training on the subject to the satisfaction of the Bank. (2) The Board of Directors shall ensure that the internal auditor has ‘the necessary human and material resources to perform, among its regular duties; (a) examinations of branches where micro-credits are granted, at least twice every year; (b) tests of compliance with lending policies and procedures approved by dte Board of Directors, including visits to clients on a selected and a random basis; and ) tests of compliance with monitoring duties to be performed by credit supervisors and branch managers, (@) The reports ofthe internal auditor shall include recommendations regarding the quality and effectiveness of the internal controls for the purpose of deterring and detecting fraud, 25.(1) The qualifications and experience of the professionals Extra! ‘caponsible for auditing the micro-credit portfolio and its internal controls “"*" and systems shall be documented and filed with other audit planning ‘information (2)The working papers shall include documentary evidence regarding audit work conducted on:- (a) compliance with risk asset classification and provisioning, as provided by internal policies and by regulations issued by the Bank and basis for the auditor’s own professional opinion with regar tothe sufficiency of loan loss reserves. 163Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) TN No. 80 teonidy (b) evaluation of the reliability and correct implementation of the internal controls established in loan policies and procedures, including compliance tests through visits to a random sample of clients, branches and regional offices and a review of the sampling methodologies utilized by the internal audit; and (©) accuracy, security and effectiveness of computerized loan accounting and management systems, particularly in aspects related to aging and restructuring of loans. (3) The management letter to the Board of Directors shall include the commenits of senior managers and internal auditors with regard to weaknesses in internal control and internal audit, as well as the relevant time frames established for their rectification. GN. No. (4) Other criteria shall remain as applicable in the Independent Auditors 101 of 7 i Regulations, 2001. Fair 26(1) The contract between a financial institution and the borrower lending shall state the nominal rate, as well as commissions and fees, either on practices i an annual or a monthly basis. (2) The borrowers shall be permitted to make partial or total prepayments on their micro-credits whereas penalties for prepayment, if any, shall be described in the contract. (3) It shall be prohibited to impose or asser! any contractual term or condition granting the microfinance company authority to introduce unilateral modifications to interest rates or other loan conditions. (4) The micro-credit contracts may establish an indexed interest rate, designed to vary in I'ne with a reference rate published by the Bank. (5) The Bank shall monitor the collection practices of institutions ‘engaged in micro-credit and shall instruct institutions to discontinue those that, in its opinion, are abusive.Banking and Financtal Institutions (Microfinance Companies and Microcredit Activities) Wo. 80 veonid PART V Orrences 27. Without prejudice to 6ther penalties and actions prescribed by law, Sanctions and unless otherwise required in thes Regulations, deliberate violation of any of the provisions of these Regulations shall attract one or more of the following administrative sanctions: (@) prohibition from declaring or paying dividends; (b) suspension of the activity to open or establish new branches; (c) suspension of access to credit facilities from the Bank; (@) suspension of lending and investment operations or activities; : (©) suspension of capital expenditure; (f) revocation of license; (g) suspension tom office of the defaulting director; (i) instruction or direction to have the defaulting officer or ‘employee terminated or summarily dismissed; (perpetual disqualification froth holding any position or office in any bank or financial institution under the supervesion of the Bank; or )_ suspension of the privilege to accept deposits. Dar es Salaam, Dauoi TS. Bata, 15%March, 2005 Governor of the Bank of Tanzania 165Banking and Financial Institutions (Financial Cooperative Societies) Govennnen NoTICE No published on 25/3/2005 ‘THE BANKING FINANCIAL INSTITUTIONS ACT, 1991 ARRANGEMENT OF REGULATIONS Regulation Tile Citation. Application, Interpretation Preferential observance PART Il STATEMENT OF Poicy OpsecTiVEs National Microfinance Policy. Target group. Accountability and transparency. Objectives. PART Ill Licensinc «9. Application for licence. 10, Organization and governance. 11. Extension and duration of a licence. 12, Penalty for doing unauthorized business. PART IV Carta, ReseRvES AND Accounts 13. Minimun capital requirements 14. Other capital regulations, 15. Accounts and audits 16, Distribution of annual surplus. 166Banking and Financial Institutions (Financial Cooperative Socieri GN No 81 PART V Sprenvision, REGULATION, CooRpmation anp ConTROL 17. Supervision and Powers of the Bank, 18. Establishment of branches and investment in secondary societies. 19, Ownership. 20, Other events requiring prior authorization PART VI Srecia Dumies oF FINaNciaL CooreRarives 21. Various. 22, Cash reserves and liquid assets requirements, 23. Information to be furnished to the Bank. 24, Deposit Insurance Fund. PART VIL RESTRICTIONS ON FINANCIAL CoorERaTtvEs 25. Lending and operational restrictions and limits. 26. Loans and advances against the secusity of shares. 27, Persons not eligible to take part in management. PART VII Ligutparion 28. Voluntary winding-up. 29, Dissolution and liquidation 167Banking and Financial Institutions (Financial Cooperative Societies) TW No BF (ooned) ‘THE BANKING FINANCIAL INSTITUTIONS ACT, 1991 (Act No.12 oF 1991) REGULATIONS Made under Sections 51(1) ‘THE BANKING AND FINANCIAL INSTITUTIONS (FINANCIAL ‘COOPERATIVE SOCIETIES) REGULATIONS, 2005 PART I PRELIMINARY PROVISIONS cistion 1, These Regulations may be cited as the Banking and Financial Institutions (Financial Cooperative Societies) Regulations, 2005. ‘Applcsion — 2.-(1) These Regulations shall apply to savings and credit cooperative ‘et No. 20, of 2003 societies incorporated under the Cooperative Societies Act, 2003 or the lind Act Cooperative Societies Act, 1986 of Zanzibar, engaged in accepting savings 1986 of Zanzibar than eight hundred million shillings, 4 ef and deposits from their members for an amount that totals or is greater (2) These Regulations shall also apply to any other savings and credit schemes with deposits of the amount specified in sub- regulation (1). loverpre: 3, In these Regulations, unless the context requires otherwise- tation Act Ace" means the Banking and Financial Institutions Act 1991; 1991” “Bank” means the Bank of Tanzania; “Board “ means the governing body of a registered society to which the management of its affairs is entrusted; “financial cooperative” refers to a non banking institution whose primary activity is to furnish secured and unsecured loans to houscholds, smallholder producer and small and micro-enterprises of the rural and urban sectors. 168Banking and Financial Institutions (Financtal Cooperaty 4.—(1) The savings and credit cooperative societies and schemes specified under Regulation 2, shall observe these Regulations with preference over any other rules or Regulations, although the latter will apply with respect to all matters not specifically addressed in these Regulations (2) For the observance of Regulations issued by the Bank, the term “financial institution” shall be applicable to these societies and schemes. PART IL STATEMENT OF PoLicy OBJECTIVE 5, The National Microfinance Policy 2000 establishes that the regulation and supervision of microfinance operations shall be guided by principles involving protection of depositors and of the financial system through the application of prudential regulations, 6, Savings and credit cooperative societies are important suppliers of microfinance services to middle and low income segments of the Population, that usually operate at a small scale in areas or with sectors ofthe population not favored by banks and other financial institutions in the provision of financial services. 7.-(1) As a practical matter, financial sector authorities do not need to supervise small organizations, particularly when they are organized cooperatively among people who know each other. + (2) When institutions grow, the willingness and capacity of the majority of members to exercise their statutory role in governance and control declines significantly, leading in some cases to an undesirable, even damaging loss of accountability and transparency. 8. The objectives of these Regulations are to- (a) establish the circumstances under which savings and credit cooperatives societies become subject to legislation and supervision applicable to large-scale financial intermediation, as well as the special rules that must be observed on the account of their particular mode of organization as member-based institutions; 169 Societi Prefered observance Nations! Malas Policy Target group Accounta- bility and twanspare ObjectivesBanking and Financial Institutions (Financ! TH No 81 eon 1 Cooperative Societies) (b) promote participation of members in the govemance of the institution and establish clear lines of responsibility between committee members, managers and intemal auditors; (©) reinforce transparency in accor. ing and reporting, not only as ‘a means to properly inform me, s and other stakcholders, but to discourage the adoption - ss than best practices in product and service design and it nientation, (@) allow for more independence in inc _ sing the funding base, in ‘order to compete fairly with other jinancial intermediaries ‘in providing financial services to households, small and micro- entrepreneurs of the urban and rural secvor; and (©) establish mechanisms that will strengthen | Approach in their administration wn entrepreneurgal, PART II Licensing ection 9.—(1) A savings and credit cooperative whose volume of savings Usene and deposits accepted from members have reached the amount established in regulation (2), shall be required to apply to the Bank for a license to operate as a financial co-operative society. (2) Every application for a license shall oe made in writing and shall include: : (@) by-laws approved by the Registrar of Cooperatives showing that the savings and credit cooperative society has adopted or incorporated all necessary actions and provisions to comply with these Regulations; (©) copy of lending and other administrative policies and internal procedures and controls manvals (©) audited financial information showing, an adequate economic and financial situation and full compliance with rules and regulations applicable to savings ad credit cooperative societies; ox (¢) documentary evidence that the members of the Board and wie supervisory committee, the genecal manager and the senior officers that report directly to general manager and the internal auditor, fulfill the-requirements established inthe Banking and Financial Institutions Regulations 1997, 170(©) the approval of the General Meeting of a savings and credit cooperative; and (©, such other information that the Bank may require (3) Upon receipt of the application, the Bank may require the cooperative society that has applied for a license to comply with any condition stipulated under Part Il of the Banking and Financial Institutions Regulations, 1997, : (4) The Bank may issue a provisional license subject to fulfillment by the co-operative society, within six months following the date of application, of any condition necessary for grant of a license. (5) Without prejudice to sub-regulation (1) of this regulation, all existing savings and credit co-operative societies whose total savings and deposits have surpassed the amount established in regulation (2), shall continue to operate s such within a period of two years from the date of commencement of these regulations thereafter, the provisions of Regulation 12 shall apply. 10.~(1) A financial cooperative shall have a Board and a supervisory committee, appointed by the general meeting in accordance with the provisions of cooperative law, rules and regulations (2) The Board shall be responsible for establishing all operational and financial policies, as well as appointing a general manager and approving, a management team responsible for all executive duties including the approval of loans and advances to members. (3) The Board shall have all the duties and responsibilities assigned to the Board of Directors. (4) The supervisory committee shall appoint the internal auditor and shall have the duties and responsibilities of the auditing committee established in the Banks and Financial Institutions (Internal Control and Internal Audit) Regulations, 2005. (5) The members of the management and supervisory committees shall be subject to the sanctions and penalties established in financial and cooperative laws, rules and regulations 71 Banking and Financial Institutions (Financial Cooperative Societies.) GN. No, BF (cond) GN, Nols of 1997 Organiza tion and governance Act No.12 of 199