MPs oppose high increment for minimum paid-up capital for MDIs

MPs have opposed the high increment for minimum paid-up capital requirements for microfinance deposit-taking institutions from sh500m to sh10b.

They were discussing a report of the finance committee on the Financial Institutions (Revision of Minimum Capital Requirements) Instrument 2022. They said the required amount is too high for new entrants.

The finance ministry plans to increase the amount through the instrument, from 25,000 currency points (sh500m) to 500,000 currency points (sh10b).

Uganda has just four MDIs: Pride Microfinance Ltd, FINCA Uganda, UGAFODE Microfinance Ltd, and EFC Uganda Ltd.

A minority report presented by Butambala County MP Muwanga Kivumbi indicated that an increase in capital requirements for MDIs will stifle new entrants in the sector.

“High capital requirements might limit the lending capacity of MDIs, particularly smaller institutions with limited resources. They may be cautious about extending loans, resulting in reduced access to credit for low-income borrowers,” said the legislator.

He recommended that the requirement be increased from sh500m to sh2b.

“Striking the right balance in setting capital requirements is crucial to ensuring a stable and inclusive microfinance sector that benefits both the institutions and the communities they serve,” said Kivumbi.

His Bugabula North counterpart, John Teira, seconded the minority report, also noting that the cost of credit is very high in Uganda, and as such, a high capital requirement would close out new sector players.

MP Samuel Okwir (Moroto County) called for a reduction in the minimum paid-up capital to ensure the entry of new players in the MDI sector, which he said will promote competition.

MPs also questioned the committee’s decision to consult only the finance ministry and Bank of Uganda on the same.

'Go back and consult stakeholders'

Committee chairperson Amos Kankunda justified the increment to Parliament chaired by Speaker Anita Among.

He attributed this to the erosion of the value of minimum capital requirements over time, which needed to be aligned with macroeconomic developments based on GDP growth, headline inflation, and depreciation of the shilling against the US dollar.

He added that the current MDIs already have the minimum paid-up capital requirements.

“The committee observed that paid-up capital will enable banks to finance strategic development projects and sectors, which are largely financed with external borrowing and domestic syndication," said Kankunda.

Speaker Among directed the committee to engage the stakeholders.

“I am going to defer debate on this matter so that the committee goes back to consult the stakeholders. Next time when you have a report, make sure that the stakeholders are involved and give their views,” she said.

Finance state minister Henry Musasizi, who is also the MP of Rubanda East, explained that this measure is primarily aimed at ensuring financial stability and eliminating risks, not eliminating local players as presumed.

“We looked at the inflationary numbers over the years since 2003 and so many things have happened," he told the House.

"We have developments in the financial system. The money laundering you keep hearing about We have increased risk because of technology. Our depositors must be adequately protected, as must the economic growth over the years. Once all this happens, there are potential risks that we must guard against,” explained the minister.

“For those whom my brother Kivumbi is concerned about, we can start them from Tier IV and nurture them because I feel every company and start-up at one point would wish to grow.

"Any one of us who does business would wish to grow and raise capital of sh10b or so. Even when you can’t afford this capital you have a window under Tier IV,” he further stated.

Uganda’s financial sector is stratified into four tiers.

Tier one comprises commercial banks while tier two has credit institutions and finance companies.

MDIs fall under tier three while tier 4 consists of SACCOS, financial NGOs, and all other non-deposit-taking financial institutions.

Tiers one to three are regulated and supervised by the Bank of Uganda.