Law No. 179/AN/07/5th Legislature Regulating Microfinance Activities in the Republic of Djibouti

1 JOURNAL OFFICIAL OF THE REPUBLIC OF DJIBOUTI Law No. 179/AN/07/5th Legislature regulating Microfinance activities on the Territory of the Republic of Djibouti. THE NATIONAL ASSEMBLY HAS ADOPTED THE PRESIDENT OF THE REPUBLIC PROMULGATES THE LAW WHOSE TEXT FOLLOWS: SEEING the Constitution of September 15, 1992; SEEING Law No. 91/AN/05/5th Legislature of January 16, 2005 establishing the Statutes of the Central Bank, particularly in its articles 7, 9 paragraph 1, 32 and 35; SEEING Law No. 92/AN/05/5th Legislature of January 16, 2005 regulating financial activity, particularly in its articles 4 paragraph 2, 16 paragraph 1, 19 paragraphs 2, 4 and 5, 21 paragraph 2, 65; SEEING Law No. 191/AN/86/1st Legislature of February 03, 1986 regulating commercial companies; SEEING Decree No. 2005-0067/PRE of May 21, 2005 appointing the Prime Minister; SEEING Decree No. 2005-0069/PRE of May 22, 2005 appointing the members of the Government; SEEING Decree No. 94-0147/PRE of November 05, 1994 appointing the Governor of the Central Bank of Djibouti. GENERAL PROVISIONS DEFINITIONS Article 1: Terminology In this Law, the following notions mean:

1. "Central Bank": Central Bank of Djibouti.
2. "Microfinance": the set of basic financial services (credit, savings, notably but also, transfers, manual exchange, insurance, salary/pension/emolument domiciliation,...) intended to ensure or effectively contribute to the promotion of the vulnerable layers of the Djiboutian population.
3. "Microfinance Institution - abbreviated as IMF": any legal entity that exercises the activity of Microfinance as a habitual profession. This institution may be affiliated or not to a grouping as defined below.
4. "Associative-type Organization": Mutual institution, Savings and Credit Cooperative (CEC), Non-Governmental Organization (NGO), Foundation, etc., that is to say any legal entity that is dedicated exclusively to the realization of a work of general interest without any spirit of profit, and which has as its main object to contribute to the implementation of the policy of facilitating access to financial services for vulnerable populations. The creation, organization and life of this person may be based on the principles of associative order and cooperation enumerated in its statutes and internal regulations. Also, in its social object specified in its statutes and clarified in its internal regulations, the organization must at least set the following objectives:

• the collection of savings and the granting of credit;
• favoring solidarity and cooperation among its members;
• the promotion of economic, social and cooperative education of its members.

5. Level 1 Institution, any institution affiliated with a network.
6. "Grouping": set of Microfinance institutions that decide to unite, federation, network, association, etc..
7. "Member": adhering member (having paid membership fees and released the shares subscribed) of an associative-type organization;
8. "Shareholder": Natural or legal person holding social titles (share certificates) in a capital company.
9. "User" or "Client": beneficiary of the services of a Microfinance Institution without being a member or shareholder.
10. "Share Capital": amount of contributions from members and shareholders increased by endowments, donations and bequests (for Projects/Funds/Agencies and associative-type organizations), of incorporation of reserves, profits and excesses of the fiscal year. Article 2: Scope of Application This Law as well as all other regulatory or conventional texts that derive from it bearing the Legal Framework of Microfinance apply to all legal entities that have the habitual profession of exercising Microfinance operations on the territory of the Republic of Djibouti. Article 3: Microfinance Institutions The denomination "Microfinance Institution" is exclusively reserved for entities that exercise the activity of Microfinance on the territory of the Republic of Djibouti and that have obtained the necessary authorization in accordance with the provisions of this Law.

3 TITLE I: CATEGORIES OF MICROFINANCE INSTITUTIONS Article 4: In the sense of this Law, entities presenting one of the profiles below may apply for approval to exercise the activity of Microfinance as defined at level Article 1. 2) above:

• Associative-type organization (associations, NGOs, foundations, etc..) as defined at level Article 1 - 4 exposed above.
• Projects/Funds/Agencies set up by the government in relation with or without its development partners to facilitate access of vulnerable populations to financial services.
• Capital companies legally formed. TITLE II: LEGAL FORM, MINIMUM CAPITAL AND APPROVAL Legal Form Article 5: 1°) The Microfinance Institution is obligatorily constituted in the form of a legal person. 2°) Associative-type organizations must previously to their approval by the Bank Central as a Microfinance Institution, have been declared to the Ministry that ensures the administrative supervision of associations. 3°) Capital companies must have been constituted in accordance with the provisions of the current positive law (notably Law No. 191/AN/86/1st Legislature of February 03, 1986) in the form of SA or SARL and as such, meet the conditions required to call on the savings of the public. 4°) Projects/Funds/Agencies must have been created by Presidential Decree in accordance with the current positive law in Djibouti. Minimum Share Capital Article 6: No minimum capital is required for associative-type organizations. As a legal entity with variable capital, their share capital is constituted by the rights of membership and social shares subscribed and released by their members in accordance with their statutes and internal regulations. However, obtaining approval as a Microfinance Institution is subject to a starting capital that can cover at least, their needs in investments and working capital for a certain period of operation which will be specified by instruction of the Central Bank. Capital companies must prove that the minimum capital required by the regulation applicable in this matter on the territory of the Republic of Djibouti and indicated in their statutes has been subscribed and entirely released.

4 For Projects/Funds/Agencies, it is the conditions specified at the level of the Decree of creation that will allow the delivery of approval. Furthermore, the duration of validity of the approval will be indexed at most on the duration fixed for the applicant belonging to this category. Authorize to exercise, its suspension and its withdrawal Article 7: Before exercising their activity on the territory of the Republic of Djibouti, the Microfinance Institutions must obtain the authorization delivered for this purpose by the Bank Central which ensures that all required conditions are met. This authorization is called "Approval". Before delivering the approval, the Central Bank also ensures that the conditions related to social and financial viability are met. Article 8: The request is introduced with the Central Bank. The application must be accompanied by the following information and documents: 1°) the administrative act establishing, organizing and operating (Funds/Projects/Agencies), the recognition order (for associative-type organizations), the document attesting to the quality of capital company authorized or not to make a public call for savings (notably registration in the commercial register and the patent). It remains understood that each of these documents must be delivered by the competent authority. For associations and capital companies, their social object must primarily be attached to the exercise of financial activity. 2°) the statutes and the standard internal regulations that will be the subject of an instruction of the Bank Central (for associative-type organizations) of the issuer of the approval application; 3°) the minutes of the Constitutive General Assembly; 4°) the extracts from the criminal record no. 3 of the managers; 5°) the certificates of good conduct of the managers; 6°) the residence certificates of the managers; 7°) the documents attesting to the payments made for the subscription to the capital; 8°) the document establishing strategic planning; 9°) the different procedure manuals. The Central Bank may, if necessary, ask for any other documents or information that allow it to make a good decision. Article 9: The approval is notified by a decision of the Central Bank taken within a period of 90 days (by derogation from the provisions of the law of 16/01/05 cited above). This period takes effect from the date of receipt of the file at the Central Bank. The approval gives rise to the inscription of the name of its beneficiary at the level of the list opened for this purpose at the Central Bank. The refusal of approval is notified to the issuer of the request within the same period as that fixed in the paragraph above.

5 Article 10: The withdrawal of approval is pronounced by the Central Bank when the Microfinance Institution:

• renounces the approval;
• no longer meets the conditions to which the approval is subject;
• has not started its operations within six months from the date of obtaining its approval;
• has ceased to exercise its activity for at least 6 months. The withdrawal of approval may, in addition, be pronounced in case of serious or repeated breach of the provisions of this Law. The withdrawal of approval is motivated and notified to the Microfinance Institution by the Central Bank. A copy of this decision is made to the Professional Association of Microfinance Institutions. The name of any institution whose approval has been withdrawn is struck off the list. It follows a liquidation in accordance with the provisions of its basic texts and the current positive law. TITLE III: MERGER, SPLITTING AND DISSOLUTION Merger Article 11: It is recognized to institutions of the same level who wish it, the faculty to merge and become a single institution. The merger is decided by the Extraordinary General Assembly of each of the entities (associative-type organizations or capital companies) that are parties to the operation. It is validly justified by a detailed report sent to the Central Bank. It is done in accordance with the provisions of the positive law applicable to the category of entities concerned. However, this faculty is subject to the prior favorable opinion of the Central Bank. Splitting Article 12: Opposite to the merger, splitting is also admitted but requires a strict respect of the provisions of a contractual order (statutes & internal regulations) that underlie the life of the institution. This projected splitting in accordance with the law applicable to the structures concerned, must be preceded by a motivated opinion addressed to the Central Bank. The latter judges on the merit of the motive advanced and the respect of the provisions of the basic texts. In case of splitting as in case of merger, the mentions initially carried at the level of the list of institutions are modified accordingly. Dissolution Article 13: The dissolution of an approved institution may take one of the two forms below:
• it can be voluntary. In this case, unless contrary provisions of the statutes, the dissolution must obligatorily proceed from a majority decision of the shareholders or members gathered in extraordinary general assembly. Then, the monetary authority must be informed within

6 eight clear days to be able to take possible conservatory measures particularly concerning the protection of savers.

• Forced dissolution is pronounced by the competent administrative or judicial authority under the conditions and modalities provided by the legislative and regulatory texts applicable in this matter notably the law of 1901 applicable to non-profit associations and the law No. 191/AN/86/1st of February 03, 1986 relative to commercial companies. TITLE IV: ADMINISTRATION, MANAGEMENT, OPERATION/SOCIAL GOVERNANCE Article 14: Institutions are organized, administered as decided at the level of their basic texts approved (statutes & internal regulations) or taken (decree or order) by the competent authorities. However, the functions of management and control must be exercised by different organs or persons. Consequently, the statutes must specify the composition, the attributions, the operation (organization of sessions, exploitation of reports, sanctions for imperfect application of recommendations and/or suggestions contained in the reports) of the structure that has received the mandate to exercise the internal control of the institution. This separation of functions must also be the rule at the level of Projects/Funds/Agencies. Outside of the coordinator, general manager, manager, cashier (as the case may be) and its collaborators recruited in accordance with the procedures in force within each institution, any manager of a Microfinance Institution must be elected. It is however specified that this provision does not apply to the members of the steering committees of Projects/Funds/Agencies whose nomination procedure is specified at the level of the administrative act establishing their creation. The election or designation of the members leading must in all cases, have taken place as provided at the level of the basic texts of each institution. Furthermore, it is specified that no one can be an elected manager and employee of a Microfinance Institution, nor have the power to sign on behalf of it, if he: a. exercises functions of responsibility in a competing institution, having totally or partially the same social object. b. is not a member/shareholder (for capital companies and associative-type organizations) or duly designated representative (for Funds/Projects/Agencies). c. does not enjoy his civil and civic rights. d. has already been definitively convicted of a crime or misdemeanor likely to tarnish his honorability and notably one of the infractions covered by the legislation in force relative to the prohibition of administering and managing an associative-type organization, capital company and Funds/Projects/Agencies. Under this register, particular attention will be accorded to the following infractions:

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• counterfeiting and forgery or falsification of banknotes but also, of all other infractions of this nature;
• issuance of a check without funds;
• forgery and use of forgery;
• theft, extortion, misappropriation or abuse of confidence, fraud, handling;
• bankruptcy, fictitious circulation of commercial instruments;
• corruption/concussion/money laundering; e. has taken part in the administration, direction or routine management of an establishment falling within the scope of Law No. 92/AN/05/5th Legislature of January 16, 2005 and whose forced liquidation has been ordered or whose bankruptcy has been declared. Article 15: Social governance must allow at any time to detect the eventual strengths and/or weaknesses of the institution. It must have as foundations and orientations:

• a democratic mode of election of managers and a functioning in conformity (with respect to the basic texts) of the administrative organs (steering committee, general assembly, board of directors, specialized committees or commissions);
• a sufficient number allied with quality (level of studies and/or satisfactory experience, competence, good morality, sufficient motivation and loyalty,..) of the technical or salaried staff;
• the most rational possible management of salaried staff. For this, this text makes obligation to Microfinance Institutions to ensure that the status (hiring, employment relations, social guarantees, etc..) of salaried or technical staff conforms to the requirements of Djiboutian social law;
• directive behavior of employees on validated operational procedures;
• relations and responsibilities clearly specified and correctly applied by the elected managers and technical staff;
• training that fits with the objective concerning the battle of competence. Article 16: Physical security will be presumed thanks to:
• a good configuration of the professional premises;
• the existence of safes;
• as far as possible, a system of protection and surveillance of the premises that house the institution.

8 The implementation of a good archiving system for better security of financial transactions. Must be considered as archives, all documents produced or received in the context of the activities of the IMF. As an integral part of the patrimony of the IMF, the management of archives must be organized (procedure) to exclude all risks of subtraction, alteration and illegal destruction of documents. TITLE V: OF GROUPINGS, THE PROFESSIONAL ASSOCIATION AND COOPERATION WITH THE CLASSIC BANKING SYSTEM The Groupings of Microfinance Institutions Article 17: Microfinance institutions having an interest in it, may associate to create a grouping. This structure may be called, union, network, federation, association, etc.. Its territorial attraction zone may extend over a neighborhood, a city, a province or the whole country. Like the basic institutions it groups, the legal personality of this intermediate or umbrella structure, will necessarily result from the approval delivered in accordance with the provisions of this Law. The basic texts (statutes & internal regulations) of each grouping fix the conditions and modalities of admission, suspension, exclusion or withdrawal of its members. The provisions of this Law relative to the withdrawal of approval, to the prudential management standards and to the control of Microfinance Institutions apply to these groupings of basic or intermediate institutions. Article 18: Any legally constituted grouping ensures for its members, the functions below enumerated:

• representation before the monetary authorities of Djibouti, donors and all other organizations;
• the definition and implementation of measures participating in the search for social viability and financial and respect for the regulation applicable to Microfinance Institutions;
• the exercise of disciplinary power and the implementation of corrective measures with respect to the administration or management of a member decided but also, of sanctions pecuniary against affiliates, provided at the level of the fundamental texts of the grouping ;
• the organization of the management of surpluses or deficits of resources of its members;
• the implementation of an internal control system of the grouping and of each of its members;
• the conception and implementation of an appropriate program of technical capacitation (awareness, information, training).

9 Professional Association Article 19: Microfinance Institutions are required to adhere to the Professional Association. This non-profit association must be recognized in accordance with the provisions of the Djiboutian legislation applicable to this category of entities. The basic texts (Statutes & Standard Internal Regulations) of said association will be the subject of an Instruction of the Bank Central; It will have for object:

• to serve as a privileged interlocutor in Microfinance operations in Djibouti;
• to maintain close relations with the monetary authorities (the Central Bank);
• to maintain regular relations between its members through consultation and settlement at amiable of eventual disputes between them;
• to be interested in the role of Microfinance operations in the development of the country and to present all suggestions of general interest in these domains;
• to promote and consolidate Microfinance by studying all questions relating to it and to provoke agreements on these questions;
• to ensure respect by its members, of the code of ethics and the regulatory framework applicable to Microfinance. Under the impetus of this association, its members concerned to ensure their permanence must repertoire a certain number of Performance and Professionalization Indicators of the sector among which:

• those of activity;
• those relating to the quality of the portfolio;
• those relative to operational efficiency;
• those concerning financial viability;
• those dedicated to the management of the balance sheet or financial structure. The draft statutes and internal regulations of the Professional Association as well as their eventual modifications must be submitted to the approval of the Central Bank. From the Committee for Reflection on Microfinance Article 20: It is created, organized and functions in accordance with the provisions of Decree No. 2006-0020/PRE its mandate is specified at the level of the aforementioned text. Cooperation with the classic banking system Article 21: With a view to favoring the integration of Microfinance, into the Djiboutian financial system, this Law recommends to the different actors of said sector, to identify and implement the modalities of a strengthened and durable cooperation in respect of the differences. The Central Bank will accord the greatest attention to this cooperation.

10 TITLE VI: OF OPERATIONS AND SERVICES AUTHORIZED TO INSTITUTIONS OF MICROFINANCE Article 22: As a principal, Microfinance Institutions are authorized to perform:

1. the collection of savings for associative-type organizations, are considered as savings, the funds other than the membership fees and social shares subscribed and paid by the members and which are managed in accordance with the provisions of the statutes and internal regulations to which each member has freely subscribed. Thus, the placements made in their books by the members and the users must be considered as collected savings and must be returned at the request of their owner. The same definition of savings is given for capital companies registered at the level of the list of Microfinance Institutions. On the other hand, Funds/Projects/Agencies are not authorized to perform operations of savings collection except through intermediaries with which they are in partnership.
2. the distribution of credit falls under this chapter, any act by which a person acting for a consideration puts or promises to put funds at the disposal of another person on condition of restitution or takes in the interest of the latter an engagement by signature such as a guarantee, a suretyship or another guarantee. Also considered as credit operations, the operations of discount. Associative-type organizations are only authorized to make