Law No. 2017-026 on Microfinance

REPUBLIC OF MADAGASCAR
Our Country - Freedom - Progress

PRESIDENCY OF THE REPUBLIC

Law No. 2017-026 on Microfinance

STATEMENT OF REASONS

The banking sector is governed by Law No. 95-030 of February 22, 1996, which defines, among other things, banking operations, credit institutions, the supervisory authority (Banking and Financial Supervision Commission or CSBF), and sanctions for non-compliance with legal provisions.

The banking profession is thus a regulated profession, as the law sets itself the objectives of:

• protecting depositors;
• preventing systemic risk (banking sector bankruptcy having repercussions on the economy as a whole).

Hence, specific provisions regarding approval, legal form, prudential rules and standards, supervision, and liquidation.

Due to its specificity, microfinance was the subject of a law in 2005 (Law No. 2005-016 of September 29, 2005). This law allowed the sector to evolve but currently faces its limits. Several microfinance institutions (MFIs) are bankrupt. The volume of activities has stabilized and has not seen significant evolution in recent years. One institution transformed into a bank due to regulatory constraints.

This microfinance law thus requires a overhaul.

The objectives pursued in this overhaul aim to ensure a healthy and resilient banking sector (including microfinance), which contributes to economic financing.

In this regard, the general framework of this new microfinance law consists notably of:

• modernizing the legal framework of the microfinance sector in line with the vision of inclusive finance and developments in technology or innovations in the distribution of digital financial services;
• providing secure development of the microfinance sector to ensure consolidation of achievements for the supervisory function and to accompany the professionalization of microfinance institutions (MFIs);
• establishing a specific resolution mechanism for MFIs to address gaps in handling distressed MFIs.

The reform of the microfinance law is based on four (4) strategic axes, namely:

1- strengthening sector stability;
2- promoting financial inclusion;
3- modernizing the microfinance sector;
4- creating a favorable legal environment for consumers and developing financial education.

The new legal framework thus introduces provisions enabling, among other things, the achievement of the following objectives and innovations:

• refocusing the microfinance sector landscape: classification into deposit-collecting MFIs « Deposit MFIs » and non-deposit-collecting MFIs or « Credit MFIs »;
• modulating the intervention of the supervisory authority according to risk levels: application of prudential rules for Deposit MFIs and proportionate non-prudential rules for Credit MFIs;
• broadening product and service offerings: introduction of digital financial services and insurance products among authorized MFI operations;
• leveraging new technologies: distribution of digital financial services through distribution channels and distribution agents;
• accessing financial infrastructure compliant with international standards: consultation of the Risk Central Registry for credit assessment and membership in the national payment system to promote interoperability;
• adopting policies and procedures ensuring consumer protection: financial education, instilling values and practices related to the use of financial services;
• preventing and managing risks: introduction of a crisis resolution framework including strengthening CSBF powers in preventing and handling distressed MFIs;
• establishing a safety net: introduction of a deposit and resolution guarantee fund.

This law comprises 178 articles across 10 Titles:

• Title 1. Preliminary Provisions
• Title 2. Conditions for Practice and Professional Regulation
• Title 3. Supervision and Resolution of Microfinance Institutions
• Title 4. Organization of the Profession
• Title 5. Consumer Protection
• Title 6. Prevention, Restructuring, and Resolution of Fragile Microfinance Institutions
• Title 7. Liquidation of Microfinance Institutions
• Title 8. Deposit Guarantee Fund
• Title 9. Disciplinary and Criminal Sanctions
• Title 10. Transitional and Final Provisions

This is the purpose of the present law.

REPUBLIC OF MADAGASCAR
Our Country - Freedom - Progress

PRESIDENCY OF THE REPUBLIC

Law No. 2017-026 on Microfinance

The National Assembly and the Senate have adopted in their respective plenary sessions on November 30, 2017 and December 7, 2017,

THE PRESIDENT OF THE REPUBLIC,

• Having regard to the Constitution;
• Having regard to Decision No. 08-HCC/D3 of January 31, 2018 of the High Constitutional Court,

PROMULGATES THE LAW WHOSE TEXT FOLLOWS:

TITLE 1: PRELIMINARY PROVISIONS

CHAPTER 1: SCOPE OF APPLICATION AND DEFINITIONS

Scope of Application

Article 1. This law applies to microfinance institutions abbreviated as « MFIs » and distribution agents defined below.

Entities qualified as microfinance institutions are all legal persons approved by the Banking and Financial Supervision Commission (CSBF) that habitually carry out microfinance activities.

Distribution agents are considered to be all persons designated by a microfinance institution that offer microfinance services on behalf of said institution pursuant to a mandate contract.

Entities Not Subject to This Law

Article 2. The following are not subject to this law:

1. all public or private entities that, in a one-off manner, carry out operations of managing refundable or non-refundable funds for final beneficiaries for humanitarian or social action reasons;
2. all groups of natural persons not possessing legal personality, temporarily assembled to form a common fund through contributions for the purpose of granting loans to members. The distributed loans are repayable by the members;
3. all private entities that have adopted the legal form of an association or non-governmental organization that, in a habitual manner, carry out refundable loan operations for members or clients.

The Minister in charge of Finance sets by decree the conditions for carrying out operations by the aforementioned non-subject entities and the criteria applicable to them. He maintains and publishes the list of these entities on his website.

When the criteria set by the Ministry in charge of Finance are met, these entities:

• suspend loan disbursement upon notification by the Ministry in charge of Finance;
• submit, within three (3) months from said notification, an approval application file as a microfinance institution in accordance with the provisions of Article 14 of this law.

The CSBF is consulted on any draft decree applicable to these entities.

Definitions

Article 3. For the purposes of this law, the following terms are understood as:

1. Provisional Administrator: any person appointed by the CSBF to carry out restructuring measures for a fragile microfinance institution as provided for in Articles 112 to 121 of this law.
2. Resolution Administrator: any person appointed by the CSBF to carry out resolution actions for a microfinance institution as provided for in Articles 124 to 135 of this law.
3. Distribution Channels: all means such as the own distribution networks of a microfinance institution or its distribution agents or any electronic, magnetic, biometric, or computing instrument enabling it to distribute microfinance services.
4. Deposit Collection: any receipt of funds from a natural or legal person by microfinance institutions, with the right to dispose of them for their own account. These institutions return the funds upon request by depositors according to the terms and conditions set in the contract.

The following are not considered as « deposits »:

• guarantee deposits or sums deposited by clients with the microfinance institution as collateral for the repayment of received loans;
• capital contributions, membership fees, and non-refundable contributions.

5. Banking and Financial Supervision Commission or CSBF: the regulatory and supervisory authority for credit institutions established by banking law.
6. Loan Disbursement: any act by which a microfinance institution:

• makes or promises to make, for consideration, funds available to a natural or legal person, with the latter being obliged to repay them at the agreed maturity in the contract;
• takes for consideration, in the interest of a person, a commitment by signature such as a guarantee, suretyship, or collateral.

Financial leasing is treated as a loan operation.

7. Politically Exposed Person (PEP):

• any natural person who exercises or has exercised important public functions in Madagascar, notably Heads of State or Government, senior officials within public powers, high-ranking military personnel, political party leaders;
• any natural person who exercises or has exercised important public functions in a foreign country, or within or on behalf of an international organization;
• any person known to be closely associated with a PEP, notably any close person, family member in direct line or by marriage, or any person linked by business relations.

The duration of the Politically Exposed Person status is 5 years after cessation of function or title.

8. Prudential Rules: set of prudential rules fixed by the CSBF to guarantee, among other things, the solvency and liquidity of microfinance institutions for the purpose of protecting depositors and preventing systemic risk.
9. Non-Prudential Rules: set of rules fixed by the CSBF aiming to:

• ensure the proper conduct of operations carried out by microfinance institutions, the regularity of their accounting records, and their control;
• supervise market conduct notably competition, consumer protection, transparency, and the fight against money laundering and terrorist financing.

10. Resolution: any action carried out by a Resolution Administrator with a view to the liquidation of a fragile microfinance institution.
11. Systemic Risk: any risk of propagation of the failure or bankruptcy of a microfinance institution across the financial sector.
12. Digital Financial Services: all microfinance services provided by microfinance institutions or their distribution agents through digital distribution channels.
13. Management Information System or MIS: set of devices, procedures, and actions enabling the microfinance institution to collect, store, process, disseminate, preserve integrity, and ensure the reliability of data in accordance with the requirements needed by the CSBF for control purposes.

CHAPTER 2: MICROFINANCE SERVICES

Services Offered as Primary Activity

Article 4. Microfinance institutions are authorized to habitually offer microfinance services primarily to natural or legal persons with limited or no access to financial services. Microfinance services include deposit collection, loan disbursement, distribution of insurance products, and digital financial services including money transfer and payment services.

For the distribution of insurance products and digital financial services, microfinance institutions comply with the current regulations on insurance, foreign exchange, and electronic money.

Ancillary Services

Article 5. Microfinance institutions are authorized, as ancillary to their main activity, to:

• offer advisory, educational, and training services;
• provide safe deposit box rentals;
• carry out payments in Ariary of funds received from abroad or from any person residing outside the national territory through an authorized intermediary;
• carry out payments of funds received from other entities within the framework of an agreement with the concerned entities. The conclusion of said agreement is subject to prior authorization from the CSBF.

The CSBF sets by instruction the conditions for carrying out the operations referred to in Articles 4 and 5 of this law.

Unauthorized Services

Article 6. Microfinance institutions are not authorized to carry out the following operations:

• issuing checks;
• transferring money abroad;
• operations denominated in foreign currencies and foreign exchange operations;
• financing international trade through documentary credit operations;
• issuing or managing securities.

CHAPTER 3: CLASSIFICATIONS AND LEGAL FORMS OF MICROFINANCE INSTITUTIONS

Article 7. Microfinance institutions are classified according to the nature of their activity:

• microfinance institutions that collect deposits and grant loans designated as « Deposit and Credit MFIs »;
• microfinance institutions that grant loans called « Credit MFIs ». They are not authorized to collect deposits.

Microfinance institutions may only provide services authorized for their classification.

They must not create any related confusion.

Article 8. Microfinance institutions benefiting from individual approval as provided for in Article 16 of this law take the legal form of a public limited company (société anonyme).

Microfinance institutions constituted in a network as provided for in Article 56 of this law and possessing collective approval as provided for in Article 16 of this law are formed by:

• a parent structure having the legal form of a public limited company;
• affiliated mutual microfinance institutions each having the legal form of a cooperative.

CHAPTER 4: PROHIBITIONS

Illegal Exercise of Microfinance Activity

Article 9. It is prohibited for any person, other than a microfinance institution, to offer microfinance services under penalty of applying the criminal sanctions provided by banking law.

The President of the CSBF orders the closure of the entity and is authorized to join as a civil party in the related criminal proceedings. He immediately notifies his decision to the Minister in charge of Finance and informs the public by all means of the illegal exercise of a microfinance activity by an unapproved entity.

The decision of the President of the CSBF is subject to an appeal for annulment before the Council of State. This appeal is not suspensive.

The prohibition cited in the first paragraph does not apply to distribution agents defined in Article 1 of this law. These agents are governed by Articles 49 to 52 of this law.

Trade Name or Advertising

Article 10. It is prohibited for any person other than a microfinance institution to use a trade name, carry out advertising, or use expressions making it appear that they are approved as a microfinance institution or to create confusion on this subject.

Shareholders or Members of Governance and Control Structures

Article 11. No one may, directly or through an intermediary, be a shareholder or member of an administration or management body of a microfinance institution, nor dispose of the power to sign on behalf of such an institution, if the person has:

1. been dismissed from their position as manager or administrator of a credit institution by the CSBF;
2. directed or been a member of a corporate body of a credit institution placed into forced liquidation as provided for in Article 163 of this law;
3. been convicted of a crime or misdemeanor by a final judicial decision;
4. been convicted as administrator, legal or de facto manager of a company, under insolvency proceedings legislation, unless rehabilitated in their favor;
5. been subject to a measure of removal from the roll of ministerial officers pursuant to a judicial decision;
6. disposed of doubtful or contentious claims registered at the Risk Central Registry and information systems created at the national level;
7. been excluded or removed from the list maintained by a competent authority pursuant to specific regulation.

The aforementioned prohibitions apply in case of dismissal, liquidation, conviction for crime or misdemeanor, or removal pronounced by a foreign jurisdiction or administration.

Politically Exposed Persons

Article 12. Any person holding the status of « Politically Exposed Person » defined in Article 3 of this law, as well as any person placed under their control, may not assume a function of administrator, manager, or controller of a microfinance institution.

The prohibition continues to apply for a period of five (5) years from the cessation of the « Politically Exposed Person » status.

This prohibition does not apply to administrators who represent the State within the Board of Directors of a credit institution.

Article 13. Microfinance institutions ensure that members of the administration, management, and control bodies of a microfinance institution do not hold the status of « Politically Exposed Person » defined by this law.

Persons who become « Politically Exposed Persons » must resign from their administration, management, and control functions within a microfinance institution within one (1) month from their appointment. The concerned institution immediately informs the General Secretariat of the CSBF by any written traceable method. Acts passed before their resignation remain valid.

TITLE 2: CONDITIONS FOR PRACTICE AND PROFESSIONAL REGULATION

CHAPTER 1: CONDITIONS FOR PRACTICE

Section 1. Approval

Approval Application

Article 14. The exercise of the microfinance activity is subject to obtaining prior approval issued by the CSBF.

Any promoter who submits an approval application file to the General Secretariat of the CSBF:

• demonstrates their capacity to comply with the requirements required for an MFI as provided by this law and its implementing texts;
• pays the application file fees, the amount and payment methods of which are fixed by decree of the Minister in charge of Finance upon proposal of the CSBF. These application fees are non-refundable.

The application fees are intended to cover the operating costs of the CSBF as provided for in Article 65 of this law.

Any existing private entity other than a credit institution wishing to exercise the microfinance activity creates a subsidiary with a distinct legal personality equipped with its own governance and control structures.

Processing of the Approval Application File

Article 15. The General Secretariat of the CSBF processes the approval application file, which contains the elements enabling it notably to verify:

• the requirements in terms of governance and control structures by this law and its implementing texts;
• the origin of funds;
• the viability and sustainability of the project to create a microfinance institution.

The CSBF determines by instruction the content, processing procedures for the approval application file, the deadlines provided for filing without follow-up and closing the file processing, the taking and notification of the decision, and the refusal of the approval application.

Approval Decision

Article 16. The CSBF grants approval when the promoter meets the conditions required by this law and its implementing texts. The President is authorized to take decisions regarding approval on behalf of the CSBF. He reports to the CSBF at the next meeting.

The approval decision is notified by the General Secretary of the CSBF to the promoter. It specifies the classification and denomination of the institution as well as the authorized microfinance services.

Microfinance institutions may only carry out the microfinance services provided in their approval decision.

The CSBF issues an individual approval for microfinance institutions referred to in Article 8 first paragraph or a collective approval for microfinance institutions constituted in a network as provided for in Article 8 second paragraph of this law.

Refusal of Approval Application

Article 17. The CSBF notably refuses the approval application when:

• the governance and control structures, the anti-money laundering framework do not comply with the requirements required by this law or its implementing texts;
• the origin of funds is not justified in accordance with the regulation on the fight against money laundering and terrorist financing;
• when the General Secretary of the CSBF finds that the information and management system does not meet the needs required by the CSBF for control purposes;
• the business plan does not demonstrate the viability, solidity, and sustainability of the institution or the projected financial statements are prepared on unjustified or unrealistic parameters;
• the preventive restructuring plan provided for in Article 93 of this law is not adapted to the risks related to the nature of the activity in case of potential failure of the institution;
• the approval file presents gaps or repeated inconsistencies reflecting the lack of professionalism of the promoter.

The General Secretary of the CSBF notifies the promoter of the duly reasoned refusal decision.

In the event that the promoter intends to maintain their project, they submit a new application with new elements required by this law and its implementing texts. However, when the reason for refusal of approval relates to gaps or repeated inconsistencies in accordance with the CSBF instruction, no promoter may submit a new approval application.

Suspensive Conditions

Article 18. The CSBF sets in the approval decision one or more suspensive conditions accompanied by a deadline to allow the promoter to fulfill them.

The General Secretary of the CSBF notifies the promoter of the lifting of the suspensive conditions.

The approval becomes effective after the notification of the lifting of the suspensive conditions.

When the suspensive conditions are not fulfilled by the end of the deadline set by the decision and if no request for extensio