Major Departures of the New Micro-Finance Business Proclamation

Unlike mainstream financial institutions, microfinance institutions play an important role in providing access to finance for rural farmers, small businesses, and other people who are engaged in similar activities. Hence, it was necessitated to have a legal framework to govern this issue i.e., Proclamation No. 626/2009. However, for various reasons, the existing proclamation needs amendment and the lawmakers came up with a new proclamation, Proclamation No. 1164/2019 (‘the new proclamation’), which introduces some innovative concepts to the existing proclamation. Therefore, in this piece, I will display some of the fundamental issues that are introduced in the new amending Proclamation. 

The existing Proclamation defines ‘company’ as a share company in which capital is fully owned by Ethiopian nationals and hence, it clearly excludes foreign nationals of Ethiopian origin. As part of the policy shift however, the new Proclamation expands the meaning of ‘company’ as a share company as defined under the Commercial Code in which capital is fully owned by Ethiopian or Foreigners of Ethiopian origin (diaspora) or jointly owned by the Ethiopian and Foreigners of Ethiopian origin. Even though the company is registered in another country, as far as its capital is contributed by Ethiopian or Foreigners of Ethiopian origin, as stated under Proclamation No. 270/2002, the law still recognizes it as a ‘company’. Still and all, the new Proclamation excluded foreigners from the microfinance business. 

Under the existing law, the very purpose of the compulsory deposit is to enable individuals or groups to qualify for the loan. In the existing structure, a loan from microfinance institutions is only permissible for individuals, but not for businesses. However, the new Proclamation enables businesses to take a loan from micro-financial institutions. On top of that under the existing law, one of the purposes of micro-financial institutions is to support income-generating activities and manage the funds of small scale and microbusinesses. However, the new Proclamation expands to include “other related productive activities” and their purpose is expanded to include providing financial service, agent banking service, and provide interest-free microfinance service. 

Although the existing Proclamation provided an illustrative list of what constitutes a financial institution it was only limited to insurance, bank, microfinance institution, postal saving, company transfer institutions. However, the new proclamation also includes capital goods finance company, micro financing institution, a reinsurer, a micro insurance provider. Furthermore, under the new Proclamation enables micro-financial institutions to outsource their critical or important functions including functions related to deposits, loans, and local money transfer.

Under the existing law, there are only two grounds that lead to revocation of license: if the license was provided based on false information, and if the institution failed to commence work within 12 months. However, the new Proclamation includes the following as ground of revocation: if the institution is illiquid, insolvent, or unwilling or unable to be abiding by the law. 

The existing law prohibits any attempt on the part of microfinance institutions to amend the memorandum of association or article of association without the consent of the National Bank of Ethiopia. Recognizing the fact that this is too much interference of shareholders’ rights and hence, the success of microfinance institutions, under the draft Proclamation the shareholders have full freedom to alter the terms and conditions of the memorandum of association/ article of association. However, they must seek the approval of the National Bank during the registration of the amended version. 

Under the new Proclamation, the National Bank of Ethiopia is empowered to issue directives regarding financial consumer protection, credit-information-sharing, interest-free microfinance businesses, and the minimum condition to provide digital financial service, and regulation of advertisement.