Recommendations on Policy and Regulatory Framework for Inclusive Finance A COMESA Region Country Representatives Initiative - Published by Alliance Forum Development Programme Zambia   Ltd. African Development Institute, African Development Bank Common Market for Eastern and Southern Africa (COMESA) First Published 2016 -Written By Kimanthi Mutua kim.kamoli@gmail.com This report reflects the views based on presentations by and ddiscussions among participants at the relevant workshops, and not necessarily those of the Alliance Forum Foundation, African Development Institute (EADI), African Development Bank, COMESA, nor of any of the other collaboration institutions. - Contact Alliance Forum Development Programme Zambia Ltd. Sunwood Court NO.2, 144 Broards Road, Rhodes Park Lusaka- Zambia Email: tojokoku@allianceforum.org African Development Bank Group African Development Institute (EADI) Avenue Joseph Anoma, 01 BP 1387, Abidjan 01, COTE D'IVOIRE Email: n.sebutsoe@afdb.org COMESA COMESA Monetary Institute   (Nairobi, KENYA) COMESA Head Quarters Ben Bella Road, P. O. Box 30051 Lusaka- ZAMBIA Email: CMI@comesa.int - Curriculum Advisory Prof. Kazuto Tsuji Saitama University/Visiting Senior Advisor to JICA/the ExCom Chair of CGAP All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying recording or otherwise, without the prior permission of the Alliance Forum Development Programme Zambia   Ltd.
During the last decade a new era of inclusive finance has started in Sub-Saharan Africa. Diversified products and services, particularly savings and remittances, have changed the lives of many in poverty. Digital finance services with mobile telephone technology and retail agents have significantly enhanced financial access. The globalization of financial markets has made policy issues such as AML/CFT increasingly important. The distinction between responsible and irresponsible finances has gained global attention especially after the 2008 financial crisis. All these trends attest the importance of the right "rules of the game "to be guided by appropriate policies and regulations. At the 2013 TICAD (V) in Japan, COMESA, African Development Bank and Alliance Forum Foundation agreed to start a new initiative for addressing the above issue. The objective of the initiative would be to develop the policy and regulatory frameworks of inclusive finance, suitable to COMESA member countries, in order to strike the balance of financial stability, financial inclusion for the poor, consumer protection, and financial integrity. Industry-friendly policies and regulations can be built only through face-to-face discussions by regulators and practitioners. Practitioners, largely represented by MFI executives working in close communication with their clients, shared cutting-edge perspectives and practices. Regulators were primarily young experts, who wo ld be the future leaders of the regulatory bodies. Both showed the strong sense of a mission for their countries’ inclusive development and poverty reduction by creating more enabling policy and regulatory environment. The group of delegates was facilitated by Mr. Kimanthi Mutua, the author of this book and the founder of K-Rep Bank (now Sidian Bank) in Kenya. Mr. Mutua pioneered one of the first transformations of an NGO-MFI to a licensed commercial bank, focusing on micro-finance. The perfect mix of experience and skills in financial inclusion and related issues on regulatory frameworks, coupled with his passion and entrepreneurial spirit, infused discussions on practicalities. The true value of the recommendation in this book comes from its participatory approach. It is the result of COMESA country representatives' experiences and beliefs in financial inclusion for the poor. l am confident that for each COMESA member country to implement actions in the recommendation will help creating more enabling policy and regulatory environment across the region. A greater number of people at t he bottom of the pyramid will be able to enjoy access to and better usage of financial services to improve their lives. It has been my great pleasure to be part of this initiative as continuous effort to financial inclusion in Sub-Saharan Africa. Prof. Kazuto Tsuji Saitama University in Japan, Visiting Senior Advisor to JICA The Executive Committee Chair of CGAP
The COMESA Monetary Institute (CMI) with the support of The African Development Bank Group (AfDB), organized two workshops on Financial Inclusion in 2014 and 2016. Participants in the two workshops came from 16 COMESA countries and comprised of individuals from respective financial institutions regulatory bodies, as well as s selected representatives of microfinance networks and microfinance institutions. The outcome of the two workshops is the recommendations by the participants, summarized herein below and presented in detail under Section 3. The recommendations are organized into four categories:
Category 1: Policy & Regulatory Framework
The first area of focus in this category, legal & regulatory framework, emphasizes the importance of coordination across the different regulatory authorities. This is because of innovative financial services and new delivery channels span across multiple institutions and regulatory authorities.  Clarifying the roles and responsibilities of different regulatory bodies involved in financial inclusion initiatives to ensure focus and accountability, is the main recommendation. Subsequent recommendations are to specify in law, who licenses and supervises what institution, regulation for e-money providers and enforcement of collaborations among agencies. The second area of f ocus is legal forms of different types of FSPs, Its aim is to broaden the types of institutions allowed to be licensed as FSPs. To accomplish this; a tiered approach to regulation and supervision, introduction of prudential & non-prudential regulatory frameworks, a risk- based approach to supervision & regulations, separate regulations for SACCOs, permitting different forms of MFIs, as well as on a single regulator for the financial sector, are recommended. The third area of focus under this category is transparency.  Specific recommendations in this area include; providing for full disclosure of charges, standardization of reporting formats, expansion of the list of approved auditors and simplification of contracts between FSPs and their customers.
Category 2: Consumer Protection
The second category, consumer protection, aims at ensuring that access to financial services is not just based on the number of people with access, but also focuses on the quality of services and the ultimate impact on the poor and marginalized customers. There are six areas of focus under this category. The first area of focus is a framework for consumer protection. The key recommendation here is to ensure that a framework for consumer protection and dispute resolution mechanisms exist in the law. Subsequent recommendations are on stakeholder consultation, conflict management & resolution, protection of consumers' assets & data, as well as deposits protection. The second area of focus is consumer education. This aims at inculcating a nation-wide financial literacy awareness, as a means of accomplishing consumer protection goals. The main recommendation is to develop a national financial education strategy, to be complimented by a regulatory framework. Over-indebtedness is the third area of f ocus, in this category. It aims at preventing possibilities of poor people accumulating debts beyond their means. Credit reporting, tools for prevention of over- indebtedness, enforcing civil laws on uttering false documents and guidelines on interest rates are the main recommendations. The fourth area of focus is credit reference bureaus. The objective in CRBs is to facilitate fast and accurate decisions on credit, by FSPs. Developing an environment to attract CBRs is the key recommendation for countries that do not have CBRs. Mandatory reporting to CBRs is a key recommendation for those countries that have CRBs.  Other recommendations include; introducing financial personal identification numbers, as well as regulations on fair play and CRB requirements. Interest rates caps is the fifth area of f ocus. The main recommendation under this area is to not control interest rates but to let the market determined them. Further, it is recommended that regulators issue reference rates to be used as a guide or benchmark for FSPs to set interest rates. Requirements on full disclosure on interest rates and charges as well frequent checks by regulators are also recommended. The sixth area of focus in this category, is collateral. Where the key recommendation is to let FSPs decide, whether or not to require collateral, from their borrowers, and to also decide on the type of collateral. Other recommendations include; establishing collateral registries, guidelines for valuation of assets held as collateral and regulatory framework to facilitate ease of recovering impaired loans.
Category 3: Innovations
The objective under this category is to ensure access to financial services by underserved and unserved, by promoting innovations. The first area of f focus is policy and regulatory framework for innovations. The main recommendation is to develop regulations for promoting innovations. This is followed by recommendations to establish or amend regulations on payment systems, provide guidelines for agency banking, enforce compliance with AML/CFT in the entire ecosystem, establish the structure for collaboration, as well as guidelines for safety & reliability of services. The last area of focus in this category is interoperability & interconnection. The key recommendation is here to develop a regulatory framework in this regard. Complementary recommendations include; to promote the E-Money ecosystem and to create an enabling environment.
Category 4: Capacity Building
Capacity building is the fourth category. The objective in capacity building is to enhance the knowledge and skills of regulators, to effectively regulate and supervise new institutions, products, and delivery channels. Firstly, under the focus area of exposure for regulatory bodies, several activities are recommended. These include a needs assessment to establish the gaps in skills and knowledge, as well as creating rapport with all players. Capacity building activities such as; study visits, specialized courses and information exchange are further recommended to be conducted on an on-going basis. Lastly, the participants proposed that the COMESA Monetary Institute develops specialized courses and in addition provide technical assistance to COMESA member countries. The second area of focus is the cost of regulation and supervision, which aims at managing and reducing these costs. The key recommendation here is not to charge FSPs any fees for their supervision. To reduce costs, recommendations to introduce a tiered/delegated approach to regulation, streamlining reports and encouraging mergers, were are made. Governance of FSPs is the third area of focus under this category.  The main recommendation in this area of focus is the requirement to have a board of directors in every FSP.  Additional recommendations are requirements on; fit & proper for all key personnel, independence of directors, as well as board structures and activities. The fourth area of focus in this category is the capacity of FSPs. The recommendations here focus on a three-pronged national capacity building strategy for FSPs; at t the Macro, Meso and Micro levels. Further, the establishment of a regional strategy was also recommended. The last area of focus in this category is on management information or core banking systems. The aim is to facilitate efficient and accurate reporting, as well as to foster management of risk related to weak or poor systems. The key recommendation is to have a mandatory requirement for such systems, with minimum given functionalities. To compliment this recommendation, suggestions of how small FSPs can address the issue of affordability are made. These include exploring options of sharing core banking systems and securing external support. Sections 1 and 2 of the report provide an overview on financial inclusion from a global perspective and profiles of f financial inclusion for each participating member country, respectively.  Section two also present results of a brief survey conducted to determine the state of financial inclusion in each country and the region as a whole. The findings of the survey, vindicate the need for the two workshops, as well as the recommendations made by the participants. In conclusion, the recommendations contained in this report are quite extensive and cover most of the key policy and regulatory areas that are recommended globally. Each country will be able to use this guide, in one way or another, regardless of the state of financial inclusion in their respective markets.

1.
Introduction and Background
1.1
About the Report
This report presents recommendations by representatives of 16 COMESA Countries who participated in two workshops organized by the sponsors outlined in section 1.3 below. They comprised of individuals from respective financial institutions regulatory bodies, as well as selected representatives of microfinance networks and microfinance institutions. The report is organized into three sections: The first section contains the introduction and background to this report and an overview of financial inclusion initiatives and trends from a global perspective. The second section presents results of a brief study that was conducted to determine the state of financial inclusion in the region and an update of FI profiles of COMESA member countries. Section 3, the main focus of this report, presents the recommendations by the said participants.
1.2
Background
The two workshops were held in Lusaka, Zambia between December 2 nd and 8 th , 2014, and in Nairobi between February 24 th and March 1st, 2016. A full report of the first workshop, titled "Initiative for Regulations and Supervision for Financial Inclusion", can be sourced from a website via this link; http://www.allianceforum.org/if_report_e2014 The second workshop was centred on the developing strategies to enhance financial inclusion in the COMESA region, focusing on policy and regulatory framework. The overall objective of the second workshop was to promote financial inclusion through the initiatives of central players from COMESA member states. Specific objectives of the second workshop were to: i. Develop COMESA policy guideline for financial inclusion, focusing on enabling the regulatory and supervisory framework. ii. Produce a national action plan to improve regulatory and supervisory framework for inclusive finance. iii. Validate the key findings of the Microfinance Training Course for Policy and Development (MFTCPD), held in December 2014, Lusaka, Zambia. iv. Promote active discussions between regulators and practitioners in inclusive finance on the regulatory and supervisory framework. Encourage knowledge sharing and networking among COMESA member states. v. The main outcome of the workshop is the recommendations presented under Section 3.
1.3
Sponsors
This initiative was sponsored by three organizations who recognize that financial inclusion can play a major role in addressing economic growth challenges facing COMESA countries. Access to appropriate financial services can provide opportunities for poor people to get out of the situation and accelerate the pace of economic growth.  The three sponsors are:
1.3.1
COMESA Monetary Institute
The COMESA Monetary Institute (CMI) is the implementing partner that organized the workshops. CMI was established in 2011, by the Common Market for Eastern and Southern Africa (COMESA), the largest regional economic organization in Africa.  COMESA's vision is to make the region a zone of macroeconomic stability and ultimately achieve monetary union that will lower the cost of doing business, facilitate intra-COMESA trade, make the region globally competitive and attractive for cross- border and foreign investment. CMI is an organ of COMESA, whose main mission is to undertake all technical preparatory work needed for enhancing monetary cooperation in the region with the aim of establishing a COMESA Monetary Union.  This project falls within the policy- oriented mandate of CMI.
1.3.2
Alliance Forum Foundation
The Alliance Forum Foundation (AFF) was the organizing partner that played the key role of managing and administering the two workshops. AFF supports a variety of activities aimed at creating a new core industry for a new era. It endeavours to assist Japan in becoming a leader in the development of a next- generation core industry players. To support this objective, AFF promotes a number of prestigious forums that attract business leaders, government officials, and academia who believe in the power of next-generation technologies and who share a vision of global cooperation.
The African Development Bank Group
1.3.3
The two workshops were supported by The African Development Bank Group (AfDB) through provision of funding. AfDB is a multilateral development finance institution established to contribute to the economic development and social progress of African countries. It is a financial provider to African governments and private companies investing in the regional member countries, which was established to promote economic and social development efforts on the continent, thus contributing to poverty reduction.
1.4
Definitions of Financial Inclusion
Financial Inclusion has been defined differently by different entities. However, the central theme in these definitions remains basically the same. A few of the definitions are as follows: i. The Centre for Financial Inclusion defines financial inclusion as a state in which all people who can use them, have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. 1 ii. The OECD/INFE defines financial inclusion as the process of promoting affordable, timely and adequate access to a wide range of regulated financial products and services and broadening their use by all segments of society through the implementation of tailored existing and innovative approaches including financial awareness and education with a view to promote financial well-being as well as economic and social inclusion. iii. According to the World Bank, financial inclusion is defined as an economic state where individuals and firms are not denied access to basic financial services based on motivations other than efficiency. As defined in the Global Financial Development Report (GFDR) 2014, “Financial inclusion is the usage of financial products”. 2 Consultative Group to Assist the Poor (CGAP), defines financial Inclusion as to mean that households and business have access and can effectively use appropriate financial services. Such services must be provided responsibly and sustainably in a well regulated environment.³ iv.
History & Evolution
1.5
Financial inclusion as a concept has evolved through three stylized stages: first, fostering state-led industrial and agricultural development through directed credit; second, market-led development through liberalization and deregulation; and third, institution building that aim at balancing market and government failures. At least until the 1980s, many developing countries channelled public funds to target groups like farmers and small enterprises and regulated the scope of activities for which these funds could be used. These “directed credit” programs assumed that the rural poor were unable to save or to afford market rates of interest, and therefore need loans at subsidized rates to build capital. Hence development banks lent at below-market rates to selected target groups. To fund cheap loans, deposit rates were often subject to regulatory ceilings. Hence financial inclusion later adopted the perspective of financial deepening and financial access which were considered weak substitutes. As time went these programs were typically unsustainable, as they didn't improve outreach of financial services to the poor, particularly in rural areas. By the end of the 1980s, a new approach that focused on the performance of financial institutions (mostly MFIs) emerged.  This approach delivered services to segments of the population with little or no access to finance. With time, the new approach shifted away from individual firms and households to institutions and their ability to offer services on a sustainable and widespread basis increased. Initial experiences in Indonesia, Bangladesh, Bolivia, and some other countries demonstrated that micro- finance and rural finance, conceived as “banking with the poor”, were indeed financially viable and had the potential of increasing outreach and sustainability. These encouraging examples led to a new view called the “Financial System Approach”. Over the past few years, financial inclusion has undergone a rapid transformation since its links to the formal financial system has expanded. With growing evidence suggesting that financial systems that serve low-income people, promotes pro-poor growth, financial inclusion has received global attention and recognition. It is against this background, that financial services to the unbanked has become a major area of interest for policymakers, practitioners, and academia who are increasingly viewing financial inclusion as a critical policy objective. The notion of building inclusive financial systems is built on, recognizing not only the goal of incorporating as many poor and previously excluded people as possible in the formal financial system, but  also in assigning to mainstream financial institutions the role of reaching out to the financially marginalized(Otero and Rhyne, 1994). As a result, financial inclusion has become an important aspect that complements the traditional pillars of monetary and financial stability, as well as other regulatory goals such as consumer protection. Policies to promote increased access for the previously unbanked must be adopted to increase inclusion. Thus, financial inclusion is a process that ensures ease access, availability, and usage of formal and informal financial products and services by all members of an economy. It is widely acknowledged that, financial inclusion can effectively unlock the bottlenecks that prevent poor women and men from reaching their potential With estimates indicating that 2.3 billion working-age adults do not have an account with a formal financial institution, a range of supply side initiatives have been designed to improve access, and equally there is need to tackle demand side barriers to financial inclusion. In particular, there has been significant appreciation of the role of financial education in improving levels of financial inclusion globally, as highlighted by three sets of principles, endorsed by G20 leaders: The G20 Principles on: Innovative Financial Inclusion, the G20 High-Level Principles on Financial Consumer Protection and the OECD/INFE High-level Principles on National Strategies for Financial Education. Each set of principles identifies the need for a joint policy response through an integrated framework of financial inclusion, financial education and consumer protection as well as SMART campaign that promotes consumer protection too. This trend is also clear in the AFI's Maya declaration (2011), which was endorsed by regulatory bodies in developing and emerging countries that incorporate the commitment to recognize 'consumer protection and empowerment as key pillars in financial inclusion for all.
Africa
In Africa, on average, less than 20 percent of households have access to formal financial services. High population densities, poor transport and limited communication infrastructure contribute to a lack of supply in extensive regions of the continent. Even where such services are available, low-income people and small and medium businesses may have difficulty in meeting eligibility criteria such as strict documentation requirements or the ability to provide collaterals. Those able to meet such demands may find themselves still excluded by cost barriers, in the form of high transaction fees or substantial minimum requirements for savings balances or loan amounts. Thus access to finance can be constrained by physical access, affordability or eligibility. Addressing these barriers will increase financial inclusion in Africa. Typically, four aspects of access to finance can be distinguished: informal finance, microfinance, finance for small and medium enterprises (SMEs) and mobile banking. Sub-Saharan Africa lags behind compared to the rest of the world when it comes to the number of people with a bank account. According to the World Bank (2012), 66% of Sub-Saharan Africa population do not have a bank account. This however, presents a huge potential for use of financial technology as a channel to reach remote areas that are not served by financial institutions. Indeed, while the 2015 World Bank Findex report found only 2% of people have a mobile money account worldwide, sub- Saharan Africa is the global leader in this field with 12% of adults having access to one. Financial systems in Africa, have generally been lagging behind compared with those in other developing economies, despite the fact that many significant improvements have been implemented in the past decade. An international comparison of private credit to GDP in Africa, which is a key indicator of financial depth, shows a gap with other developing economies (World Bank, 2012).
Trends & Bests Practice – Globally & in Africa
1.6
The main goals in global best practices are threefold: i. Maintain financial soundness and stability, consistent with international standards. ii. Encourage the provision of financial services to the poor and the not-so-poor, and iii. Protecting the interest of the customers or consumer protection. It is important to note that, recent developments witnessed in financial technology have transformed financial inclusion from the traditional access through brick-and-mortar branches and replaced it with new channels such as automated teller machines (ATM), credit/debit cards, internet banking, agent banking, mobile money transfers and online money transfers. Initially access to financial services was restricted only to certain segments of the society, but current trends indicate progression of reaching to a wider clientele owing to declining practices of decades of restricted financing. Despite this potential, many people still don't have even a basic bank account. Although ownership of a bank account is just but one dimension in financial inclusion, it signifies an entry point for customers to save money outside the household, access a loan or premium payments, or transfer funds within their country or across borders. Financial inclusion in Latin America and the Caribbean has been expanding in the past decade. This has been characterized by increased number of customers, increased multiplicity of institutions, and a wider range of services offered and a growing trend toward lower interest rates is evident.  According to Global Findex (2015), from 2011 to 2014, there was a 12% increase in the number of adults in Latin America and the Caribbean with formal financial accounts. Mobile financial services in the same region saw the fastest growth of any region in terms of newly registered mobile accounts. Countries in Asia have made progress in efforts to promote financial inclusion. As one of the pioneers of mobile banking, the Philippines shows how technological innovations, supported by good business models and government policies, can be harnessed to deliver low-cost and efficient financial services to the poor. Thailand's approach to financial inclusion is also unique in the sense that unlike other countries, the pursuit of inclusive finance is primarily driven by the government—and with significant results. Africa is now the world's second fastest growing region after Asia, with annual GDP growth rates in excess of 5%. The use of mobile technology, which is increasing access in Africa, has taken some countries by storm. Mobile money is now more popular than having banking accounts. The numbers are particularly high in East Africa and Southern Africa, with Kenya leading in the number of adults having mobile money accounts. The potential is high even in reaching remote rural locations. 1.7
Global Initiatives for Financial Inclusion
There are many organizations working on various aspects of the sector to advance financial inclusion globally.  These organizations offer important direction and resource materials on financial inclusion policies, majorly focusing on areas and initiatives that can add value to financial inclusion. Four of these organizations that have contributed the major themes in FI today are:
1.7.1
G20 Principles on Innovative Financial Inclusion.
The Global Partnership for Financial Inclusion (GPFI) is an inclusive platform for all G20 countries and relevant stakeholders working on financial inclusion.  The GPFI's efforts include helping countries put into practice the G20 Principles for Innovative Financial Inclusion listed below, which are widely regarded as standards for formulating relevant policies, regulations and intervention strategies. The G20 Principles on innovative financial principles are outlined below: i. Leadership. Cultivate a broad-based government commitment to financial inclusion to help reduce poverty. ii. Diversity. Implement policy approaches that promote competition and offer market-based incentives for the delivery of sustainable financial access and usage of a broad range of affordable services as well as diversity of service providers. iii. Innovation. Promote technological and institutional innovation to expand financial system access and usage, including addressing infrastructure weaknesses keeping in mind that inclusion will be driven by diverse institutions on the financial services continuum. Protection. Encourage a comprehensive approach to consumer protection that recognizes the roles of government, providers, and consumers. Empowerment. Develop financial literacy and financial capability. iv. v. vi. vii. Cooperation. Create an institutional environment with clear lines of accountability and coordination within government; and encourage partnerships and direct consultation across government, business, and other stakeholders. Knowledge. Utilize improved data to make evidence-based policy, measure progress, and consider an incremental "test and learn" approach by both regulators and service providers. viil. Proportionality. Build a policy and regulatory framework that is proportionate to the risks involved in such innovative products and services, and is based on an understanding of the gaps and barriers in existing regulation. Framework: This is to reflect on; international standards, national circumstances, and support ix. for a competitive landscape. 1.7.2
Alliance for Financial Inclusion (AFI)
AFI is a global network of financial policymakers from developing and emerging countries working together to increase access to appropriate financial services for the poor. AFI is involved in many types of financial inclusion policy related activities and has a wide membership, comprising central banks and other financial regulatory institutions from more than 90 developing countries. Some of COMESA country members are also members of AFI. Its current policy areas of focus are: i. Digital Financial Services Digital financial services can expand the delivery of basic financial services to the poor through new technologies like mobile phones, electronic money and new channels such as retail agents. ii. Financial Inclusion Strategy A financial inclusion strategy is a comprehensive framework developed through consultation with the public and private sector to systematically accelerate progress toward full financial inclusion. iii. Measuring Financial Inclusion Measuring the quality of financial inclusion poses a number of challenges and addressing these is a priority of AFI. SME Finance iv. SMEs are engines of growth and job creation, and they have an important role in poverty alleviation and the raising of living standards in developing and emerging countries. Other Financial Inclusion Policies v. Other areas AFI aims to offer support to constructively strengthen financial inclusion policy formulation include; micro-credit, micro-savings and micro-insurance 1.7.3
Centre for Financial Inclusion (CFI)
The Centre for Financial Inclusion at Accion (CFI) is an action-oriented think tank working toward full global financial inclusion. CFI undertook a global study on financial inclusion, mapping out challenges and opportunities and identified five priority focus areas that are key to achieving financial inclusion as listed below: i. Addressing Customer Needs, which is aimed at deepening our understanding of client needs and designing products to serve them better. ii. Technology-Enabled Business Models. This is aimed at expanding distribution channels to reach new consumers, lower operating costs, increase security, and diversify financial products available to low-income clients. iii. iv. Financial Capability, which focuses on empowering clients to know their rights as consumers, and have the skills, attitudes, aspirations, and confidence to exercise those rights. v. Client Protection, which outlines steps to deepen the implementation of client protection measures for the benefit of consumers and stability of markets. Credit Reporting, which promotes extending credit reporting systems to expand access for new clients while managing risk for financial institutions. 1.7.4
The SMART Campaign
The Smart Campaign is a global effort to unite micro-finance leaders around a common goal of keeping clients as the driving force of the industry. Its goal is to make sure that, consumers are aware and protected, and that the market conducts itself according to set regulations.  It is a campaign which believes that protecting clients is not only the right thing but also the smart thing to do. The campaign has come up with seven principles that are globally accepted as the best guide in consumer protection. i. Appropriate product design and delivery Providers will take adequate care to design products and delivery channels in such a way that they do not cause clients harm. Products and delivery channels will be designed with client characteristics taken into account. ii. Prevention of over-indebtedness Providers will take adequate care in all phases of their credit process to determine that clients have the capacity to repay without becoming over-indebted. In addition, providers will implement and monitor internal systems that support prevention of over indebtedness and will foster efforts to improve market level credit risk management (such as credit information sharing).
Transparency
iii.
Providers will communicate clear, sufficient and timely information in a manner and language clients can understand so that clients can make informed decisions. The need for transparent information on pricing, terms and conditions of products is highlighted.
Responsible pricing
iv.
Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable. Providers will strive to provide positive real returns on deposits.
Fair and respectful treatment of clients
v.
Financial service providers and their agents will treat their clients fairly and respectfully. They will not discriminate. Providers will ensure adequate safeguards to detect and correct corruption as well as aggressive or abusive treatment by their staff and agents, particularly during the loan sales and debt collection processes.
Privacy of client data
vi.
The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions. Such data will only be used for the purposes specified at the time the information is collected or as permitted by law, unless otherwise agreed with the client. Mechanisms for complaint resolution vii. Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients and will use these mechanisms both to resolve individual problems and to improve their products and services. Additionally, the contribution to financial inclusion by WB and CGAP cannot be under- estimated and as such Annex 1 gives details of their contributions. Further annex 2 gives the details on the best practices in financial inclusion.
1.8
Innovations in Financial Inclusion
There has been significant but uneven progress toward financial inclusion around the world in recent years. Some of these steps are driven by market-friendly policies, like embracing technology and innovation with the aim of expanding financial inclusion. The use of digital financial services has been, and will continue to be, one of the main drivers of financial inclusion according to the Alliance for Financial Inclusion (AFI) Network. Other innovations include; digital registry and agency banking models all geared towards creating an impact on advancing financial inclusion.

2.  Financial Inclusion in COMESA Countries
2.1 Study on Financial Inclusion in COMESA Region
To obtain an overview of financial inclusion in the COMESA region, a brief high-level study of the 19 countries was conducted. Thirteen (13) of these countries completed a survey questionnaire, while data for the rest was sourced through literature review. Annex 3 shows the status of financial inclusion in COMESA countries The study looked at the demand and supply of financial services; access to financial services; the existence of policies for financial inclusion; regulatory bodies involved in financial inclusion; financial inclusion innovations in the respective markets; and whether or not respondents have established targets for financial inclusion. Results of the brief study are presented as follows.
2.1.1
Demand and Supply (Institutions & Channels)
COMESA is a huge regional market accounting for about 35% of the 54 countries in African. The total population in COMESA region is over 444 million, accounting for 43% total population in Africa. Demand for financial services varies widely, from country to country, based on various factors. The study, estimates the demand for financial service to be approximately 220 million people, requiring financial services. The key assumption is this estimate is that all adults who are over 18 years of age need financial services. Of course there will be some proportion of this population who may not need financial services or may not have the capacity to use financial services. This would, however, be a small percentage, with insignificant impact on the estimated amount. Supply of financial services is provided by about 30,000 FSPs. This includes commercial banks, regulated and unregulated MFIs, SACCOs, pension institutions, mobile financial service, and others. The multiplicity of channels used by these providers for their services is estimated at about 95,000 outlets. They include physical branches, agents, MFIs, MNOs as well as ATMs among others.
2.1.2
Access 4
The study established that about 48.5% of the 220 million people have access to financial services. Estimated access by country and by four bands of access is shown in Table 1. As illustrated, over 50% of adult population in about 11 countries has no access to financial services. Only four or 21% of the countries reported an access level of over 76%, with as many countries reporting an access level of between 51% and 75%.
Source: Consolidated data collection from 13 COMESA Countries. Reported data as well that sourced from literature review, shows that access to financial services in COMESA countries, varies significantly.
Financial Inclusion Policies
2.1.3
Financial Inclusion Policies are an important driver for opening access to financial services. Figure 1, shows the number of COMESA member countries that reported having such policies, those that don't have and countries that reported to be working on, or developing policies on financial inclusion. Forty six (46%) of the countries reported having policies on financial inclusion, with 38% of the countries reporting that they have adopted and are implementing G20 principles for innovative financial inclusion. Sixteen percent (16%) reported that they are making progress towards developing policies on FI, while 38% reported that they did not have any FI policies, or were they working on them. Figure 1: Existence of Financial inclusion policies in COMESA Countries
2.1.4
Regulatory Bodies and Coordination
Bank regulators, who are often the custodian of financial policies, were considered to be only the key regulators prior to the introduction of financial inclusion initiatives. The advent of financial inclusion brought in other regulators, such as those overseeing telecommunication, insurance, capital markets, SACCOs or retirement benefits, into the fold. This is because of the broadened definition of financial services and the entry of new players (mainly MNOs and SACCOs) into the mainstream financial sector. The number of regulators that are considered to be playing a role in the financial sector is, therefore, an indicator of the maturity in the pursuit of financial inclusion goals. Four countries reported having between 4 and 6 regulatory bodies involved in financial inclusion policies. The four also reported having some form of arrangements (such as a memorandum of understanding) for collaboration and information sharing among the bodies. Unsurprisingly, these countries have also made major strides in pursuit of financial inclusion goals. Six countries that reported having between 2 and 3 regulatory bodies involved in financial inclusion have started working on many financial inclusion initiatives. However, the two that reported having only one regulatory body have yet to make progress. It is important to monitor the number of regulatory bodies involved in financial inclusion as well as collaboration among them.
2.1.5
Innovations
All countries that completed the questionnaire reported having at least one innovation in their respective financial markets. These include mobile banking, agency banking, digital credit registry, financial education and internet banking. This illustrates dynamism in all financial market in the COMESA region, even where financial inclusion initiatives are at nascent stages.
2.1.6
Targets
With respect to targets on financial inclusion, 92% of the respondents reported having established some. The targets are set in areas of access, multiplicity of providers & distribution channels, as well as promotion of financial education. However, these targets are not uniform across the countries that reported on the same.  Further, 62% of the surveyed countries have targets to improve financial inclusion in the identified areas of focus.
2.1.7
Conclusion
The findings of this study vindicate the vision and need for the two workshops, as well as the recommendations of the participants in this report. They confirm that a vast number of people in the COMESA region countries, who may need financial services, have no access. On the other hand, the market is ready to provide service, evidenced by the fairly large number of providers and the innovations taking place in most countries. Further, the findings show that even in countries that have yet to set policies on financial inclusion, innovations (especially digital finance or mobile banking) have proliferated. This is despite the fact that only 38% of countries reported that they have no policies on financial inclusion. This testifies to a well-known notion that the market is moving faster than policy makers and regulators in FI.  Policy makers and regulators, therefore, need to keep pace with developments in the market and play their rightful role in developing the financial sector. With respect to targets, 92% of countries reported having targets for FI. This is a positive indicator, which suggests that despite the lack of policies, FI is recognized as an important intervention by 92% of the countries. Lack of capacity or leadership could be the reason for this situation. Lastly, the data provided by the respondents or that which was sourced through literature review shows that many of the countries in the region have no quality data on FI. Data is very crucial for driving FI initiatives and efforts should be made to correct the situation. Further literature on Financial Inclusion in COMESA Region countries is provided under Annex 3.

2.2
Profiles of COMESA Region Countries
2.2.1
Burundi
Burundi's microfinance regulatory framework 5
The Bank of the Republic of Burundi (BRB) is responsible for regulating and supervising the financial sector.  Its main objective is to ensure stability in the entire financial sector.  Two departments are responsible for the regulation and supervision of the financial system, the Bank Supervision Department and the Supervision of Microfinance, Non-Banking Institutions, and Financial Inclusion Department. Burundi does have a regulatory framework for microfinance (Decree n° 100/203 of 22 July 2006 on the regulation of microfinance activities in Burundi, .which was enacted in 2006).  Prior to this, the microfinance sector was not regulated or supervised.  The Microfinance decree has 15 chapters covering various aspects of supervising the microfinance sector.  The main objectives of the decree are to ensure the integrity of the microfinance sector by vetting entrants and authorising the BRB to regulate and supervise the sector. To date, 33 MFIs have been licensed (Table 2).  There are 3 categories of MFIs; (1) savings and credit cooperatives (SACCOs), (2) microcredit programmes and (3) microfinance companies (which are limited companies).
At the microfinance sector, only the Microfinance Companies (corporations) category has a minimum capital requirement set at MBIF 200 (about USD 130,000). For the Savings and Credit Cooperatives category, a minimum of 300 members are required for the SACCO to be licensed. In the financial sector, the minimum capital requirement for commercial banks is 10 billion MBIF (about USD 6.5 million), while the minimum capital for financial institutions is MBIF 6 billion (USD 3.875 million). MFIs are licensed at national level and are not permitted to engage in the following activities: . Trade in non-financial products; . Foreign exchange transactions, transfer of funds, securities, financial lease and real estate credit; . Supply currencies and traveller's cheques; . Transact in securities; and . Issuing means of payment. The Department that deals with the supervision of microfinance and non-bank institutions oversees the microfinance sector and is separate from the one that oversees credit institutions. The supervision tools used to supervise MFIs are almost the same as those used for the supervision of banks, with the exception of prudential standards that are different. Currently, there are no laws or regulations governing banking agencies, although some banks operate through banking agents. In the microfinance sector, there are not yet MFIs that have banking agents. Similarly, there are no regulations for electronic transactions. However, a government bill on the national payment system and another on banking activities, which are at the National Assembly, give to the Central Bank the powers to issue regulations on microfinance activities and payment institutions activities including those related to electronic money. Although there is no credit reference bureau (CRB) in Burundi, MFIs are required to provide positive and negative credit information to the Information exchange Unit hosted by the Central Bank. The main points to bear in mind regarding the legislation as indicated by the participants in the training in Burundi are that the regulatory framework: . Improve the credibility and integrity of the microfinance sector by vetting entrants and participants into the sector; . Establish the Information Exchange Centre to prevent the over indebtedness of the microfinance clients; and . Increase the confidence in the sector by establishing minimum business conduct standards and improved transparency in the sector to minimise the exploitation of microfinance clients. Additionally, the microfinance sector has a professional network that consists of 22 members covering more than 98% of all activities of the microfinance sector.  85% of (the social) MFIs are located in the middle of the capital area of Bujumbura. Indicator of access to formal financial services As of 31/12/2014, the number of individual customers accounts stood at 83.7% for commercial banks and MFIs customers, of which 52% are male, 22% female and 26% were not categorized by sex for lack of information. 16.3% of customers are customers members of associations, of which 35% are male, 39% female and 26% not distributed by sex for lack of information.
Some challenges have been identified in the process of regulating and supervising the microfinance sector.  These were highlighted by the training participants and include the following: i. ii. Poor corporate governance; Lack of institutional capacity; iii. Poor MIS; iv. Inaccurate Financial statements; and v. Low capitalisation levels Other identified challenges are related to: . The lack of incentive regulation to promote the development of financial products and services for rural finance; . The non-involvement of MFIs in the effective ownership of legal and statutory instruments; . The delay in the compilation of the microfinance sector statistics because of MFIs with non- performing MISs; . The need to strengthen capacity for the microfinance sector inspectors because of innovations in the sector; . The lack of interfacing of the risk department of the banking sector with that of the microfinance sector ; The lack of interoperability between companies that perform transfer money transactions by mobile phone to promote financial inclusion. For the challenges identified, the Central Bank has tried to correct any non-compliance to the decree governing the activities of Microfinance and regulations by using the supervisory tools available.  Where there is a noticeable failure to respect the capacities of the legal and statutory framework, the Central Bank applies the matrix of the sanctions to refocus the MFI in breach.  Proposed solutions to the challenges identified are tabulated in Table 4.
Table 4: Challenges faced by Burundi's microfinance sector and recommended solutions
The Comoros' microfinance regulatory framework
The Comoros have a microfinance regulation, Decree No. 04-069/PR of 22 June 2004, which regulates the operations of financial institutions. This was replaced by the Banking Act No. 13-003/UA of 12 June 2013, which came into force in 2015. In total, eight credit institutions are licensed, including three MFIs. Article 47 of the Banking Act provides that the minimum share capital for each financial institution category be determined by the Central Bank. In January 2015, the Regulation No. 001/2015/BCC/DSBR set the amount of the minimum share capital of financial institutions, pursuant to Article 47 of Act 13-003/AU as follows (Table 5)
Table 5:  Minimum capital requirements for MFIs in Comoros The same Regulations have the following proposed minimum capital requirements for banks and NBFIs.
MFIs are allowed to operate at the national level and their umbrella organizations are allowed to have partnerships with foreign financial institutions to facilitate transactions such as money transfers. Related operations defined in Article 6 of Act 13-003/AU such as operations on gold and precious metals, foreign exchange transactions, electronic payment services and the supply of Islamic products by a credit institution are subject to prior authorization from the Central Bank. MFIs, classified as credit institutions, in accordance with Article 3 of the Banking Act No. 13-003/AU are regulated and supervised in the same way as banks. There are no major differences with the exception of the minimum share capital amounts, and the terms of payment of credits granted by these structures. For example, MFIs need the prior approval of the Central Bank before opening any branch and are also supervised by the same department that supervises banks within the Central Bank. A decree on the payment system, methods and incidents took effect in March 2015 and has integrated electronic money activities, including mobile banking. However, specific regulation for electronic money activities is being developed. Please note that all credit institutions, including MFIs, are obliged to adhere to the Payment Risk and Incident Department (CDRIP) pursuant to Article 1 of Regulation No 0013/2015 /BCC/DSBR.
Challenges faced by Comoro's microfinance sector
A number of challenges have been identified in the microfinance sector. The challenges and recommendations have been listed in Table 7.
Table 7:  Challenges in the Comorian microfinance sector and recommended solutions

2.2.3
Djibouti
Djibouti's microfinance regulatory framework
Microfinance is growing in Djibouti, but access to finance remains limited for SMEs, thus reducing the potential for self-employment.  Currently, only 4% of the population benefits from microcredit.  In future years, MFIs are expected to develop a range of new services including micro insurance and micro transfers.  Authorities are also working closely with banks to address these issues and further expand their range of financial products and services (such as ATMs, Islamic products, and products for SMEs). The Central Bank of Djibouti is the parent and supervisory institution of the microfinance sector. This task is performed by the financial institution supervision department, there is no structure dedicated to microfinance. Djibouti does have regulations for microfinance. Under this law, three major regional banks are licensed in the territory as microfinance institutions (MFIs). These banks are incorporated in the form of savings and credit cooperatives. The minimum capital requirements for MFIs are depended on the legal form of the MFI. The law regulating microfinance activities provides three types of legal form for the pursuit of this activity. These are: . Associative organizations (Associations, NGOs, Foundations, Savings and Credit Cooperatives, etc.); . Projects/Funds/Agencies set up by the Government to facilitate access to financial services by the population; . Legally formed Limited Liability Company (Limited Company). A minimum capital is not required for the first two categories. The minimum required capital for the third category is the one required by the regulations applicable to limited companies. The minimum capital requirement for commercial banks and non-bank financial institutions are as following. . Commercial banks: one billion Djibouti Francs, or the equivalent of 5.6 million US Dollars; . Specialized financial institutions: 200 million Djiboutian Francs (or 1.2 million US Dollars) . Money transfer agencies: 50 million Djiboutian Francs (281,373 US Dollars) . Manual bureau de change: 20 million Djiboutian Francs (112,549 US Dollars) MFIs are not allowed to issue payment instruments. Activities permitted on an ancillary basis (foreign exchange, money transfer, etc.) must not exceed 5% of the total volume of their activities. At present, there is no regulatory framework for mobile money/banking activities; the legal and regulatory framework for such activities is in the process of being adopted. In this context, the Central Bank authorizes such activities by regulating them by ad hoc arrangements. There is currently no credit reference bureau in Djibouti. A project to set up a risk centralization integrated platform (banks and MFI) is underway at the Central Bank level.
2.2.4
Egypt
Egypt’s regulatory framework®
Different authorities are responsible for regulating and supervising MFIs, depending upon the legal identity of the MFI.  The Central Bank of Egypt (CBE) is the (prudential) regulator of public and private banks and the Ministry of Social Solidarity (MSS) is the regulator of NGO MFIs.  The Social Fund for Development (SFD) is the coordinating and planning body for MFIs as designated by the Law.  MFIs wishing to capture savings and/or other deposits should be duly incorporated as a formal financial institution (a bank). The activities of NGOs, including financial service activities, are governed by Egypt's NGO Law 84 of 2002, which requires that NGOs operate as not-for-profit associations, foundations or unions.  All NGOs must register with the MSS before providing services.  NGO MFIs are permitted by law to offer loans to SMEs under the title of "activities to enhance the economic status of targeted community". The Non-Bank Microfinance Companies Law was recently enacted.  Four hundred and fifty microfinance companies have been registered.  The minimum capital requirement for microfinance companies is LES million (approximately USD700).  The minimum capital requirement for commercial banks is USD 50 million for foreign branches operating in Egypt.  MFIs are permitted to operate at national level.  They are however prohibited from providing savings, remittance and insurance products.  Branch opening requirements, especially with respect to security, are more relaxed than those for commercial banks as MFIs are not permitted to accept deposits.  There are some differences in the supervisory tools used, the most notable being the requirements with regard to legal reserves and provisions for bad debts to comply with microfinance best practices (i.e. PAR>90 days should be 100% provisioned). No regulations have been issued for agency banking.  Likewise, there are no regulations for mobile banking either.  At the moment, MFIs are not required to report to a CRB but they will soon be required to do so under the new MFI law. The Egyptian Financial Supervisory Authority (EFSA) is responsible for supervising nonbank financial activities.  As stated earlier, the MSS oversees NGO MFIs.  The MSS is permitted to inspect and audit the NGO's books and records.  The MSS may also attend NGO MFIs general assembly meetings and extraordinary meetings of the board of directors, as well as to retain copies of the minutes.  NGO MFIs are also required to submit copies of board minutes and audited financial statements to the MSS.
Initiatives
Further the Central Bank of Egypt initiated the following:- . The minimum capital requirement for commercial banks is USD 50 million (foreign branches operating in Egypt) not USD 7 million. . Required banks to direct 20% or more of their loan portfolio towards MSMEs financing. In turn, the required level of reserves with CBE has been reduced to encourage banks to pursue this strategy. This initiative aims at encouraging banks to expand in MSMEs financing, with a target of availing EGP 200 billion over the next four years, at an interest rate not exceeding 5%.
Challenges faced by Egypt's microfinance sector
The challenges faced by the a microfinance industry as presented by the training participants from Egypt were (1) the statutory requirement for NGO MFIs to have all cheques for loan disbursements signed by the board chairman (or a delegate thereof) and the treasurer and (2) the prohibition of lenders charging interest rates above those prescribed by the Civil Code.  Under the Central Bank law, this restriction does not apply to banks and there is no such exemption but for NGO MFIs.  While it has not been a significant problem in practice, in some cases, NGO MFI clients facing legal action for the non-repayment of their loans have counterclaimed stating that interest rates charged by the NGO MFIs violate the Civil Code.
2.2.5
Ethiopia
Microfinance landscape/financial landscape
There are 18 commercial banks in Ethiopia with 2,754 branches and sub-branches (June 2015), 35 MFIs with1,567 branches/ sub-branches (June 2015), one development bank with 32 branches across the country; 14,453 primary SACCOs with 1,736,122 members (676,237 (38.95%) women) and 2,745 unions; 5 lease finance companies and numerous informal financial service providers. MFIs have over 3.76 million active borrowers, 41% of which are women.  The outstanding loan balance was ETB16.8 billion (approximately USD840 million) and savings of ETB11.8 billion (approximately USD585 million).  MFIs have ETB5.6 billion (approximately USD280 million) and ETB24.5 billion (approximately USD1.2 billion) in capital and assets respectively.
permitted by law to lend up to1% of their capital for individual loans and 4% for group loans with group guarantees.
The microfinance network
The main responsibilities of the Network are to support the creation of an enabling policy and regulatory environment through a consultative process and build the capacity of MFIs and other inclusive finance providers.  The Network has also established the Ethiopian Inclusive Finance and Training and Research Institute (EIFTRI) whose mandate is to: create forums to discuss the critical issues of inclusive finance providers, to monitor financial and social performance, promote inclusive finance in Ethiopia, including innovations in the industry, research and knowledge management
Ethiopia's microfinance regulatory framework
The credit scheme was started in Ethiopia in the late 1980s as part of NGO relief and development programmes. The Proclamation for the licensing and supervision of microfinance businesses was issued in 1996 to separate charity from finance.  NGOs were prohibited from delivering finance.  This Proclamation (the Microfinance Regulations) was revised in 2009 (Proclamation 626 of 2009).  MFIs are allowed by law to mobilize public savings.  Microfinance is used as a tool by the Government to implement development policies and programmes. Ethiopia has developed a National Financial Inclusion Strategy during the end of 2015, albeit to be endorsed by Council of Ministers. To date, 35 MFIs have been licensed by the NBE.  The current minimum capital requirement for MFIs is ETB10 million7, for commercial banks, it is ETB500 million.  All licensed MFIs can operate at national level.  MFIs are not part of the payment system so although a cheque account may be opened, these cheques can only be used internally for the MFI issuing them.  MFIs are not allowed to carry out foreign exchange transactions. In contrast to banks which have to get prior NBE approval and follow strict branch opening specifications, MFIs are only required to notify the NBE that they are opening a branch. But, branch closure requires prior approval of NBE. The supervisory tool used by the NBE for MFIs and banks is RBS. MFIs are subjected to offsite monitoring and onsite inspections.  In 2004, a separate department for the supervision of MFIs was established and upgraded to directorate level in 2009.  Prior to 2004, the supervision of MFIs was done by the same department that supervises banks.  The MFI supervision department has 2 wings; (1) policy and licensing and (2) supervision, both of which are headed by principal examiners. The regulations for both agency and mobile banking are in place.  MFIs are permitted to have agents. Although there is a CRB, MFIs are not yet obliged to report to the CRB due to capacity constraints. Current MFIs MIS are not able to support the system. To resolve this problem, many MFIs have come together and formed a technology company which will deliver common MIS solution that suits their needs. The main laws regulating the microfinance sector are the Commercial Code, the Proclamation for Banking and Microfinance Business and supporting directives issued by NBE.  The provisions cover preventive measures (pre-crisis measures/actions that can be taken by the NBE). Table 9: Ongoing provisions cover:
The challenges in the microfinance sector have been summarised in Table 10 together with recommended solutions.
Table 10 :  Challenges in the Ethiopian microfinance sector and recommended interventions
Kenya's microfinance regulatory framework
Kenya's law covering microfinance, the Microfinance Act, was enacted in 2006.  The key features of the Act are highlighted in figure 2 and the regulations issued under the Act are listed in figure 3.  Although there is no specific law or regulations that deal with mobile banking, the regulation of mobile banking predominately falls within the scope of the National Payments Systems Act and accompanying regulations. Figure 2: Key features of the Kenyan Microfinance Law
Governance & Ownership
. . . . .
Governance
. . Vetting of senior officers (senior management board members). Adequate board oversight, with two mandatory committees, the Board Audit and Credit Committees. . . Assets & Liabilities Committee (ALCO) is a mandatory management committee. Key control functions to be in place (internal audit, external audit, and risk management). Capital . . . There are two categories of microfinance banks (MFBs) licensed by CBK. Nationwide-minimum capital is KShs. 60 million (US$674,157) Community-minimum capital is KShs. 20 million (US$224,719) Note: credit only MFIs are not supervised by CBK or any entity
Credit Risk
. . . . . .
Powers of the Central Bank
. Inspect . Receive information . . Issue directives and administrative sanctions for non-compliance Prompt corrective action . A microfinance loan is =<2% of core capital Figure 3: Regulations and guidelines issued under the Microfinance Act, Kenya 1. 2. 3. 4. 5. 6. 7. 8. Microfinance Act, 2006; The Microfinance (Categorization of Deposit Taking MFIs) Regulations, 2008; The Microfinance (Deposit Taking MFIs) Regulations, 2008; The Microfinance (Deposit Taking Microfinance Deposit Protection Fund) Regulations, 2009; The Microfinance (Deposit Taking MFIs Administrative Sanctions and Penalties) Regulations, 2009; Guideline on Operation of Third Party Agents; Guideline on Operation of Agencies and Marketing Units; Credit Reference Bureau Regulations 2013 (full file reporting from February 2014). Since the Microfinance Act came into effect 13 MFBs have been licensed to date and there are more than 5,000 MFIs under non- prudential regulation.  There are two categories of MFBs licensed by the Central Bank of Kenya (CBK), nationwide MFBs and community MFBs.  The minimum capital requirement differs for each type; KShs60 million (USD674, 157) for nationwide MFBs and KShs20 million (USD224, 719) for community MFBs.  The minimum capital requirement for commercial banks Limits on shares – 25% per person Provisions (25% limit) shall not apply to: A wholly-owned subsidiary of a bank or financial institution Any company exempted by the Minister on the recommendation of  Central bank of Kenya (CBK) No person shall transfer more than 10% of the shares without approval of CBK. The regulatory framework provides for limits on: Insider lending-limited to 2% of core capital for a single borrower and 20% for insiders combined. Single borrower (includes associates)-limited to 5% of core capital. 70% of loan portfolio must be microfinance loans. Large exposures-between 2% & 5% of core capital should not exceed 30% of total loan portfolio. All loans to directors must be approved by the board and reported to CBK within 14 days. and NBFIs is KShs1 billion (USD11.2 million).  Table 11 lists the different types of financial institutions in the financial sector.
Table 11:  The different types of financial institutions in the Kenyan financial sector MFIs are prohibited from engaging in a number of activities, these are: i. Trust operations, ii. Wholesale or retail trade, iii. Investing in enterprise capital, Underwriting or placement of securities, iv. Purchasing or otherwise acquiring any land except as may be reasonably necessary for the purpose of expending the deposit taking business and or any other activity that the CBK may prescribe. Branch requirements do not differ for MFIs from that of other financial institutions, other than providing for cheaper places of operation through the use of deposit taking marketing units and third party agents (as provided for in the prudential guidelines).There is no difference in the supervisory tools used for MFIs. The tools are the same as those for banks and other financial institutions.  Offsite and onsite surveillance apply to MFIs.  With effect from February 2014, MFIs are required to report to the CRBs. Kenya has continuously applied a tiered approach to regulation and supervision, based on the risks posed by the FSPs to the country's financial system. In this regard, CBK adopted Risk Based Supervisory approach (RBS) for institutions under its purview in 2004. In line with the country’s policy framework to ensure safety, soundness and efficiency of   the financial system, the Sacco Societies Regulatory Authority was established in 2010 to regulate and supervise the deposit taking Saccos. Kenyan Sacco subsector has remained the largest and most vibrant in Africa, while registering an improvement of in the global rankings to 11th position from 13th position (World Organization of Credit Unions (WOCCU) 2014). There are other three financial sector regulators in Kenya namely; CMA, IRA and RBA in addition to CBK and SASRA. Non-deposit taking MFIs are currently not under prudential regulation while the ASCAs and ROSCAs (Rotating Credit and Savings Association) are not regulated. 9 The training participants highlighted a number of aspects of the legislative framework worth noting. These included: . The Guidelines that provide for cheaper places of business (through the use of deposit taking marketing units and third party agents); . The National Payments Act and Regulations which cover the operations of payment systems, including mobile financial services; . Full file reporting to the 2 licensed CRBs which results in the building of information capital; . Deposit insurance for all clients of CBK licensed DT financial institutions up to a limit of KShs100,000 (USD1,100); and . The SACCO Societies Act of 2012 which covers all DT SACCOs (of which there are approximately 215 SACCOs that account for 78% of total assets and 77% of total deposits and 184 have been licensed).
Challenges faced by Kenya's microfinance sector
In regulating and supervising the microfinance sector, a number of challenges have been identified that affect the development of this The challenges cover balancing the sector. requirements of prudential oversight and enabling financial inclusion (particularly of women and the youth), poor corporate governance and ensuring legislative framework keeps up with the innovations in the market.
Table 12: Challenges in the Kenyan microfinance sector and recommended solutions
Mobile Phone Financial Services (MFS) – beyond transfers MFS in Kenya's banking sector The development of linkages and the integration of mobile payment platforms with financial institutions in the delivery of financial services have made the delivery of financial services more cost efficient and increased accessibility to financial services.  Examples of the services and products that have since been developed include M-Kesho, Pesa-Pap, KCB connect, Faulu Popote and M-Shwari, M-Akiba.
MFS: Critical success factors
The critical success factors identified in the MFS sector are listed below: . . Partnerships between financial institutions and MNOs - leveraging on core competencies – telecommunication companies' core competency of voice and data transmission and financial institution's competencies in the provision of financial services; . Coordination and information sharing amongst regulators; Dialogue between the private sector and regulators to enable regulators to understand business models and value propositions for the private sector; and for the private sector to understand the rationale for regulation; . . Government as a partner in MFS systems to support business models; and Consumer adoption (Master Card Survey, 2012)
Beyond payments: second- generation MFS
Where the regulators have provided a conducive Box 2  Credit Reference Bureaus (CRBs) regulatory environment, e.g. by developing smart The Central Bank of Kenya Act, the Banking Act, the policies and regulations that provide appropriate Microfinance Act and requisite Regulations and incentives that encourage the private sector to Prudential Guidelines were amended to provide for drive business interests and scale up MFS, MFS sharing of both positive and negative credit information have progressed quickly to offer additional by financial institutions with the licensed Credit services beyond person-to-person (P2P) payment Reference Bureaus (CRBs). FSP's licensed by the Central Bank of Kenya are required to submit credit information services, including business-to-person (B2P) and to licensed CRBs including micro loans issued through business-to-business (B2B) payments, credit, mobile phones to mobile money customers of savings, insurance, agent banking and other telecommunications companies. The law allows other financial services such as credit history credit provides to submit information to CRBs but it is information.  The transition from person-to- not mandatory. There has been increase in reporting of person (P2P) to second generation MFS has also credit information by other credit providers in the been market led and symbiotic where there has recent past. been an attractive business value proposition. The advancement of MFS to second-generation MFS beyond payments is critical in the modernising of payments systems and deepening of financial systems. Agency banking was introduced in 2010 which has resulted in an increase in financial inclusion in unserved and underserved areas of Kenya.  MBFs have increased significantly since March 2007, thus narrowing the financial infrastructure gap where costs of distance and time are very high for formal banking services, facilitating trade by making the transfer of funds across large distances much cheaper, providing a safe storage mechanism (i.e. a platform for the transfer of payments, savings and credit) 10 and improving the availability of market information. These improvements/developments are evidenced by the numbers as shown in the following subsection and Table 13.  Financial access surveys in the last 8 years show improvements.
Table 13: MFBs outreach indicators showing access of the poorer segments of the economy
Achievements from April 2007 to June 2014
The training participants highlighted a number of achievements from April 2007 to June 2014.  These are listed below: . Mobile phone money transactions were valued at an average of Ksh6.3 billion per day (4.6% of annual GDP) in June 2014 compared with Ksh0.22 billion (0.01% of GDP) in April 2007; . The number of mobile phone money customers increased from 0.05 million in April 2007 to 25.9 million by June 2014; . The number of deposit accounts has increased from 2.55 million in 2005 to 27.4 million at end of June 2014. The take-off (dominated by small accounts) seems to have started in 2007; . The number of micro accounts (below Ksh100, 000) has increased from approximately 2.14 million accounts in 2005 to 26.33 million accounts at the end of June 2014. These are covered by the Kenya Deposit Insurance Corporation (KDIC); . . Growth is attributable to the reduced costs of maintaining micro accounts and introduction of innovative instruments in the financial market; Increased branch outlets have solved the disadvantages of physical distances; and . Barriers to entry and opening/maintaining accounts have been reduced significantly. The number of loan accounts has increased from 0.6 million in December 2005 to 3.8 million in June 2014: . . 2013-2014 acceleration is noticeable: the new mobile phone savings accounts modalities e.g. M-Shwari platform M-Shwari platform increased loan accounts from 13,000 in 2011 to 897,242 at the end of 2013 and further to 1,399,114 in June 2014.
Madagascar
2.2.7
Madagascar's microfinance regulatory framework
Madagascar has a legal and regulatory framework for microfinance operations. One of the regulatory targets is to professionalize the sector and reduce the level of informality. The first law, Act No. 96_020 did not take into account non-mutual MFIs; it affected only mutual MFIs. In the new law, Act No. 2005_016, MFIs are classified into 3 categories (as shown in Table 14): MFI 1 MFI 2 and MFI 3, according to operations they are allowed to conduct, operational and control structure, the importance of risks, management regulations and/or prudential standards required. To date, 25 MFIs 11 have been licensed by the Bank and Financial Supervisory Commission (CSBF).  All credit institutions (banks and MFIs) are supervised by the CSBF under Act No. 95-030 relating to the activities and monitoring of credit institutions.  Licensed MFIs have 856 access points¹²and 1,000,489 clients.  The outstanding credit balance was MGA271 million (approximately USD84 million) and an outstanding deposit balance of MGA 214 million (approximately USD67 million).  MFIs have been divided into different categories with each category having a different minimum capital requirement (Table 14).
The minimum capital requirement for commercial banks is MGA3 million and MGA100, 000 for financial institutions.  Licensed MFIs can operate at the national level, but newly set up agencies must obtain a license from the CSBF. MFIs are not permitted to open cheque accounts or engage in foreign exchange transactions.  Level 1 MFIs (MFI 1) are merely "monitored" (i.e. they are not subject to prudential regulation), whereas level 2 and level 3 MFIs are subject to prudential regulation and supervision similar to other financial institutions.  MFIs are required to report to the SG-CSBF all the loans granted to their customers or members, regardless of their outstanding amount, as well as the information on these beneficiaries through the Microfinance Risk Department (CRM) that is hosted by the Central Bank of Madagascar. Measures have been taken to strengthen the security of inclusive finance through supervision and improve the ability to report malfunctions and make optimal use of the intervention mechanisms. Territorial representation branches of the Central Bank have begun to be operational and functional, the number of on-site inspection missions has increased and a census of institutions conducting microfinance activities was carried out in order to establish the database. In the future, it is desirable that (1) CRM be effectively operational and up to date day and an early warning system with appropriate monitoring responses be developed for the microfinance sector, (2) the ability of the supervisory authority be further strengthened, (3) the publication of information on defaulting customers that cannot be found be authorized, (4) the CSBF supervisory authority be extended to informal microfinance institutions.
2.2.8
Malawi
Malawi's microfinance regulatory framework 13
Malawi enacted its Microfinance Regulations in 2010 and benefited from the experience of countries that had developed their laws earlier.  The Regulations fall under the Financial Services Act (FSA), which also makes provisions for financial cooperatives.  MFIs are tiered into the 6 categories shown in Table 16.  The Microfinance Regulations takes into account the existence of NDT financial institutions.  The minimum capital requirements for each category of the financial institutions are shown in Table 15, as is the authority responsible for supervising each category.
Table 15:  Minimum capital requirements for financial institutions in Malawi The Financial Services Act (FSA) provides for the delegation of supervision to other regulatory bodies and or sector specific associations.  The spirit of the Law is to promote financial inclusiveness by regulating those financial institutions that are large enough that their collapse would put the financial sector at risk while ensuring that all players follow best practices of lending and customer protection.
Box 3  Framework for Financial Literacy
Driven by the objective of building a financially literate Nation, the Reserve Bank of Malawi drafted, with support from the Financial Sector Technical Assistance Project, Secondary school sourcebooks for eight subjects in which financial education was incorporated. The education materials facilitate learning and teaching of financial literacy concepts to children in secondary school. MFIs are permitted to operate at the national level but prior approval is required before opening a new branch.  Branch opening requirements are the same as for other financial institutions but DT MFI branches must have operational and security infrastructure.  NDT MFIs and microcredit agencies (MCAs) are not permitted to open cheque accounts or conduct foreign exchange transactions.  Differences in the supervisory tools lie in the provisioning for asset classification for the uncollateralised portfolio. Other provisions remain the same. Regulations do exist for agency banking and MFIs are permitted to operate through agents.  There are provisions for mobile banking in the Microfinance Regulations.  MFIs are not yet required to report to the CRB, however, the legislation is being reviewed to make this possible. The participants also identified what they considered to be foresightedness in the design of the microfinance regulatory framework, some of which have already been highlighted above.  These include the recognition of all forms of microfinance delivery channels such as banks, DT MFIs, microcredit agencies and financial cooperatives; provision for the establishment of DT MFIs; the acknowledgement of the role of technological solutions in financial inclusion; the promotion of branchless banking, agency banking and mobile banking Box 4  Collateral Registry Malawi promote financial to Access to credit is crucial for economic growth and employment, and the difficulty of inclusion; tiered capital accessing credit at a reasonable cost has been one of the top three limitation on requirements for MFIs and private sector growth in Malawi. Many active citizens were not accessing credit due the enactment of a new law, to lack of real property to use as collateral which was until recently the main form of the Personal Properties Act, collateral accepted by most financial institutions. Movable property was not being readily accepted because of registration and recovery challenges under past the establishment of for legislation. To remove this barrier, the country introduced new regulation for collateral registries. personal property to be used as collateral for loans and set up, with support from the Malawi's legal and regulatory World Bank, an electronic platform known as Personal Property Security Registry (PPSR). The purpose of the PPSR is to facilitate the use of movable assets such as framework is designed to vehicles, machinery, inventory, and accounts receivable as collateral for loans in the facilitate competition with a financial system. This online service allows financial institutions to register their view of increasing sector security interest in movable assets they accept as collateral for loans remotely. efficiency. As such the law Prospective lenders are also able to search the registry to check that proposed allows a diverse range of collateral is not already registered as security against a loan somewhere else and then determine their property status before advancing the loan. Ultimately, the new players in terms of size, type, legislation and the PPR enable borrowers to use movable assets as collateral in order and legislation as well as to access finance in addition to more traditional forms of immovable collateral such collaboration and linkages as buildings and land. The registry was set up by the Ministry of Justice and amongst various types of Constitutional Affairs and is housed in the Department of Registrar. payers - banks, microfinance, insurance and village savings. Regulation and supervision is tiered accordingly, taking into account the various forms of market players as follows: A Prudential Regulation and Supervision of Deposit taking institutions and large non deposit taking institutions vis: o Banks (3) and Deposit taking MFIs (1); o Non- deposit Taking MFIs (9) which are allowed to collect collateral savings provided they pay interest on the savings and do not on-lend  them; and, o Financial Cooperatives (33). Supervision of these is delegated to the Malawi Union of Savings and Credit Cooperatives (MUSCCO). V Non- Prudential Regulation  and Supervision of Micro-credit agencies (20) supervised by the Malawi Microfinance Network (MAMN) V Exemption from regulation of ROSCAs (Rotating Savings and Credit Associations) which are allowed to exist unregulated. Since the inception of the regulation, supervision of financial cooperatives has been conducted by the Malawi Union of Savings and Credit Cooperatives (MUSCCO) while that of Microcredit agencies has been undertaken by the Malawi Microfinance Network under delegated authority. This was done in order to allow the regulator of financial institutions time to build adequate capacity for the same.  The Regulator has now indicated its intention to take over such responsibility from 2017.
Challenges faced by Malawi's microfinance sector
The following challenges have been identified and are summarised in Table 16.  In addition to the challenges and recommended solutions noted below, the participants also highlighted the need to for fit  and  proper  regulations introduce shareholders, the approval of auditing firms that are not necessarily the traditional "big name auditing" firms by the Reserve Bank and the review, updating and harmonisation of the old laws that also govern the provision of credit and contradict more recent legislation (such as the CRB laws) as areas for improvement.
Table 16:  Challenges in the Malawian microfinance sector and recommended solutions
2.2.10 Mauritius
Access to finance (based on 2015 figures) 16
Mauritian households have almost universal access to savings accounts and reasonable access to basic personal credit, but term and higher-risk financing is more limited. Mauritius has a well-developed financial system. Basic financial sector infrastructure, such as payment, securities trading and settlement systems, are modern and efficient, and access to financial services is high, with more than one bank account per capita.  Based on end-2015 figures, the number of depositors and loan accounts with commercial banks per 1,000 adults was 2,024.61 and 409.36 respectively, the highest density of accounts in Africa. The outstanding deposits and loans as a percentage of GDP were 179.45% and 90.36% respectively.  The number of ATMs per 1,000 km² was 228.57 and 45.71 per 100,000 adults and there were around 464 ATMs across the country as at end 2015.  The number of commercial bank branches per 1,000km² was 108.87 and 21.77 branches per 100,000 adults. The value of mobile money transactions was 0.04% of GDP.  Five banks have recently partnered with two Mobile Network Operators, namely Orange and Emtel, as they offer mobile banking services to their customers. In order to improve access to finance for Small and Medium Enterprises (SMEs), the Government announced in its Budget Speech 2012 that the banking sector would extend credit facilities to SMEs at 3 percentage points above the prevailing Key Repo Rate (policy rate) over the next three years. The initial amount earmarked in the Budget was Rs3 billion or approximately USD12 million. The measure became effective in December 2011 and was subsequently extended by another three years. The budget measure has allowed SMEs to obtain loans from banks at favourable rate of interest. No processing costs and related charges with respect to those credit facilities are charged by banks to the borrowers. One of the measures of the Budget 2016/2017 is to continue the scheme for three additional years up to 2019 at an interest rate of 6% per annum (from 7.4% per annum).
The banking sector (based on 2015 figures)
The country's highly developed and efficient banking system consists of 22 banks with 221 branches. All banks remain comfortably liquid and profitable, with NPLs representing 6.4% of total loans as at end 2015. Banks operating in Mauritius are generally well capitalized, sound and profitable. Banks maintain almost a third of total deposits in liquid or near liquid assets, have limited exposure to equities and hold long foreign exchange positions offering some protection against adverse exchange rate movements. The introduction in 2011 of Islamic banking offering Sharia compliant products and services contributed to diversify the country's financial products. The proportion of formally served adults is high in Mauritius, with 85% of banked individuals, 90% formally served and only 10% financially-excluded (Finmark Trust, 2014).
2.2.11 Rwanda
Rwanda's microfinance regulatory framework
Rwanda does have a law for microfinance, Law No. 40/2008, supplemented by Regulation No. 02/2009 (both the microfinance law and regulations are under revision to cope with the current developments in the sector). Four hundred and ninety four (494) MFIs have been licensed to date, 15 limited liability MFIs, 416 Umurenge SACCOs and 63 Non Umurenge SACCOs with a total of 757 branches and sub- branches (headquarters included).  Eighty seven per cent (87%) of the branches and sub-branches are located in rural areas. The following tables present additional data.
Table 18:  Number of financial institutions in Rwanda, 2014 & 2016. MFIs are tiered into the categories as shown in Table 19. Table 19:  MFI categories in Rwanda
The minimum capital requirement is shown in Table 20. Table 20:  Minimum capital requirements for Rwandan financial institutions
MFIs are permitted to operate at the national level and licences are signed by the Governor of the National Bank of Rwanda (NBR).  MFIs are typically allowed to provide credit and mobilize savings.  Other activities such as foreign exchange transactions, holding equity in enterprises, money transfers, etc., are decided on a case by case basis. 19 The Law and Regulation clearly define activities that MFIs are allowed to perform - . The law highlights various approvals required from the Central Bank (opening of branches, approval of Directors and Heads of Departments, Approval of External Auditors, etc.). This improves Governance of MFIs. . . The Law highlights the details of the reports that MFIs need to submit to the Central Bank (To date, all MFIs submit Financial Reports to the Central Bank for regular monitoring of their performance and risk analysis). The Law sets key prudential norms for sound microfinance sector (CAR min 15%, Liquidity Ratio Min 30%, Insider Lending Max 20%, Single Borrower's limits Max 2.5% of Deposits and 5% of Equity, Investment in Fixed Assets Max 75%, etc. . The Law sets good governance and internal control requirements and penalties for non- compliance. There is no difference between branch opening requirements for MFIs and those for other financial institutions.  MFIs are also required to provide information on individuals who will be running the branches, branch feasibility studies, branch minimum internal controls and cash security arrangements, MIS, etc.. 20  All MFIs in Rwanda are subject to prudential supervision. The supervisory responsibility for all financial institutions (banks, MFIs and insurance companies) lies with the Central Bank.  Rwanda does have Agency Banking Guidelines issued by the National Bank of Rwanda (NBR) in place, currently 1 MFI was authorized to have agents.  Regulations on mobile money services and mobile banking are in place.  There is a specialised department at the NBR for the regulation and supervision of payment systems.  All MFIs in Rwanda are required by law to report to the CRB. There is only one CRB in Rwanda, TransUnion, with penalties for non-compliance. 21
Important features of MFI laws and regulation
With the economic development outlook of Rwanda as detailed in the "Vision 2020" paper and the Economic Development and Poverty Reduction Strategy (EDPRS 1 and 2), Rwanda put in place various policies and strategies to develop the economy of which the microfinance sector was to play an important role. In September 2006, the Government put in place the National Microfinance Policy.  In this Policy, it was recommended that the NBR should develop a legal and regulatory framework for the microfinance sector.  Implementation of this policy included the creation of the Association of MFIs in Rwanda (AMIR) and enactment of Law No 50/2007 governing cooperatives in Rwanda (cooperatives also include SACCOs).  Additional initiatives included the Financial Sector Development Program 1 and 2, the National Financial Education Strategy and the National Savings Mobilization Strategy which gave birth to the Umurenge SACCO Strategy.
Innovative Features of MFIs' Regulation
A number of innovative features are contained in the design of the regulatory framework for the microfinance sector.  These are the distinction between SACCOs (member based MFIs) and other MFIs owned by shareholders, the licensing of SACCOs created in line with Umurenge SACCO Program and regulatory framework for Modern Payment Systems and the establishment of Access to Finance Forums²² in each of the 30 districts of Rwanda.  These innovations have contributed significantly to more adults accessing and using formal financial services. As of September 2014, the National Bank of Rwanda (BNR) has been awarded the Alliance for Financial Inclusion (AFI) Policy Award for 2014 in recognition of its "innovative and impactful financial inclusion policies" which is the UMURENGE SACCO Program. In addition, UMURENGE SACCO Program was published in 2014 global microfinance gateway as a key success story to promote financial inclusion.
Challenges faced by Rwanda's microfinance sector
A number of challenges have been identified with respect to the Rwandan microfinance sector.  These are listed in Table 21 together with the recommended solutions.  In addition to the recommended solutions, some suggestions were made as to the way forward.  These were: (1) decentralised supervision (making more use of inspectors located at the Central Bank's branches); (2) the computerisation of MIS and consolidation of SACCOs; (3) the introduction of a deposit insurance scheme; (4) the establishment of an “Institute of Cooperatives, MFIs and Entrepreneurship”; (5) Fin- Scope surveys; (6) the harmonisation of the MFI laws and regulations at regional level; and (7) the creation of a framework for bringing together synergies between financial stability, financial inclusion, consumer protection and financial integrity.

The Sudanese microfinance regulatory framework
Policies to encourage the microfinance sector date back to 1994/1995 with the Central Bank of Sudan (CBoS) financing policy that incorporated "craftsmen, professionals and small producers including the productive families" as a priority sector for financing, with some preferential treatments.  Microfinance was included as a priority sector, with a minimum allocation of 12% of the banking loan portfolio to microfinance clients.  Moreover, a regulatory and supervisory framework to establish MFIs was introduced in 2011. To improve financing to this sector, the CBoS identified 15 types of guarantees/ collateral suitable for microfinance.  The CBoS also identified Islamic lending modes of microfinance and introduced the Comprehensive Insurance Documents to act as insurance and a guarantee at the same time (covering moneylending, assets and Takaful - physical disability or death).  Work to establish the Wholesale Guarantee Agency (Kafalat) is underway. This government agency is meant to guarantee wholesale finance from commercial banks.  The CBoS, included microfinance as a priority sector, with a minimum allocation of 12% of the banking portfolio to microfinance clients. Moreover, a Regulatory and Supervisory Framework to establish MFIs was developed in 2011.
The Regulatory framework
Sudan has had a microfinance regulatory framework since 2006.  There are 24 MFIs licensed by the Central Bank.  The minimum capital requirement for MFIs ranges from USD88, 000 to USD175, 000 depending on the scope of services and deposit mobilisation.  Microfinance clients are associated with “limited income” and described as economically active poor.  A Microfinance client is defined as an individual aged between 18 to 70, and a monthly income less than double the minimum wage, or has "productive assets" less than SDG20,000, and above all, has not benefited from official lending sources. This includes many targeted clients in different microfinance categories such as productive families, craftsmen, technical and vocational training graduates, university graduates, professionals, rural women, pensioners, etc. MFIs are permitted operate nationally but are prohibited from mobilising deposits, issuing circulating bonds and bills, collecting money or providing banking instruments, investing in NDT MFI money in securities and bonds without the CBoS written prior approval.  Prior notice must be given to the CBoS before opening a branch.  Supervisory tools used include the types of collateral, the minimum ratio for capital adequacy, provisions and liquidity.
Challenges faced by Sudan's microfinance sector ²³
Microfinance is mainly viewed as an intervention to reduce poverty and is not necessarily integrated in national macroeconomic development objectives.  In addition, microfinance is narrowly defined as the provision of credit with little consideration of other financial services such as Islamic micro insurance, micro saving, money transfers, etc.  Most prospective microfinance clients believe that finance is a prerequisite to the existence of the project (enterprise) itself.  Some policy makers believe that microfinance profit margins (Murabaha margin) should be centrally controlled and microfinance should be offered at a subsidised rate to make it more affordable to the poor.  In this regard, policy makers view microfinance as a form of charity and not a lucrative business. The challenges faced by Sudan's microfinance sector as highlighted by the Sudanese participant included changing the mentality of politicians and government officials, integrating microfinance into the formal financial system, changing the charitable image the public has of microfinance and the high operational costs.  The recommended solutions are contained in Table 22.

2.2.13 Swaziland
Programmes to improve access to financial services ²⁴
The Ministry of Finance has initiated a Rural Finance and Enterprise Development Program to develop microfinance in rural communities.  The Government also operates a Small Scale Enterprise Loan Guarantee Scheme through the Central Bank of Swaziland. The FSRA is developing a National microfinance Policy and the Consumer Credit Bill is currently being debated in parliament.  Financial cooperatives are also an important source of financial services and a large number of people save and borrow from these institutions.  Cooperatives are supervised by the Ministry of Agriculture and Cooperatives, through the Cooperative Societies Act.  Supporting the cooperative movement is considered to be one of the strategies that can be used to support increasing the financial services to the poor.
Swaziland's microfinance regulatory framework
The Central Bank of Swaziland's (CBS) main objective is to foster financial sector stability and the smooth functioning of the financial system in order to maintain confidence in the financial system, to protect financial sector consumers and prevent adverse spill over effects onto other sectors of the economy. The Financial Institutions Act (FIA) of 2005, prior to the enactment of the Financial Services Regulatory Authority (FSRA) Act in 2011, provided the legal framework for the regulation and supervision of banks and nonbank financial institutions.  The FIA empowered the Central Bank to license these institutions. Two kinds of licences were issued by the FIA; (1) the banking licence and (2) the credit institutions licence.  The FSRA is the authority now authorised to issue licences to and supervise nonbank financial institutions. The FSRA Act provides the legal framework for regulating and supervising the activities of nonbank financial institutions.  These nonbank institutions include SACCOs, insurance companies, and pension funds.  The main objective of establishing the FSRA was to ensure that all financial institutions are regulated and supervised.  The FSRA has not yet started supervising nonbank financial institutions that were not supervised by the Central Bank.  Swaziland has a vibrant microfinance industry with more than 100 institutions.  The microfinance industry is still essentially unregulated and very little information is available on the size and nature of their operation.  Although the FSRA covers a number of aspects of the nonbanking financial sector, there is currently no credit or consumer protection legislation.
What will a successful launch of the microfinance regulatory framework depend on?
The Government believes that it is important to introduce a Microfinance Regulatory Framework to improve the protection of Swaziland's financial system, protect consumers, prevent fraud in the financial sector and restrict entry of players to the market to those who are credible.  A successful launch will depend on the acceptance of the Microfinance Regulatory Framework by major stakeholders, the use of a marketing strategy and campaigns that will necessarily include workshops and consumer education, and Government's buy in, Government being a major source of funding for the FSRA.
National strategies for financial inclusion
Swaziland would appear to be on the right path in getting its regulatory and supervisory framework in place.  It has the advantage of being able to draw on other country experiences that have advanced significantly in this respect.  Moreover, Swaziland can also draw on work that has been done by a number of organisations that focus on matters of financial inclusion and making sure it adheres to principles that have been promulgated²5. In 2012, the Ministry of Finance set up a Financial Inclusion Task Team comprising representatives from the Microfinance Unit, the Central Bank and the Financial Services Regulatory Authority.  The Financial Inclusion Task Team serves as steering committee for the MAP project and is mandated to develop a financial inclusion strategy for Swaziland.  In May 2013, Swaziland joined the Alliance for Financial Inclusion (AFI) and will no doubt benefit from being a member of this Alliance.  Swaziland now has a draft Microfinance Policy (May 2015) that is awaiting approval.  In addition to the work already done in gathering data in this space, such as the FinScope Consumer Survey 2014, the FSRA, together with FinMark Trust is to conduct research on the charges and fees being charged by this sector.  At present, the charges and fees are considered exploitative and exorbitant by the public.
2.2.14 The DRC
The DRC’s microfinance regulatory framework
The DRC does have a legislative framework for the microfinance sector.  The sector is governed by the following laws: Law No. 003/2002 ²6 which provides the legislative framework for credit institutions . . Law No. 002/2002 ²  which provides the legislative framework for SACCOs Law No. 11/020²² which governs microfinance activity in the DRC . The Central Bank of Congo (BCC) is responsible for regulating and supervising the microfinance sector as mandated by Law No.005/2002 ²³ which it does through the Microfinance Supervision Division.  This Division is housed in the department that supervises all financial institutions.  MFIs are subject to offsite monitoring and onsite inspections.  To foster the smooth functioning of the microfinance sector, the BCC issued 10 Directives which SACCOs and MFIs are expected to adhere to.  The areas covered by the Directives are listed in figure 4. Figure 4 : Areas covered by the Directives issued by the BCC for the microfinance sector Guidelines issued by the BCC include: . Prudential standards . Loan classification and provisioning Performance indicators . . Capital funding . The use of the chart of accounts of Savings and Credit Cooperatives and Microfinance Institutions (PCCI) Governance . . The organization of internal control of Savings and Credit Cooperatives and Microfinance Institutions . . Communicating periodical situations Fixing of the minimum capital of Microfinance Institutions The operation of an apex organisation . There are broadly two types of MFIs in the DRC.  These are SACCOs which have a social objective and only cater to their members and MFIs which have a profit motive and provide financial services to the general public.  To date, 120 MFIs have been licensed of which 98 are SACCOs, two cooperative unions and 20 MFIs located in all parts of the country.  MFIs are permitted to operate at national level.  The minimum capital requirement for MFIs is USD100, 000 for microcredit enterprises and USD350, 000 for microfinance societies, whereas the minimum capital requirement for commercial banks is USD10 million.  MFIs are not permitted to offer cheque accounts as a service and foreign exchange transactions require prior approval from the Central Bank.  There are no differences in the branch opening requirements for MFIs.  MFIs are required to meet the same criteria as other financial institutions.  There are no regulations for agency banking.  There is no requirement as yet for MFIs to report to a CRB.
Supervision – offsite monitoring
This principally involves the review of documents submitted to the Central Bank on a periodic basis.  The BCC has adopted Risk Based Supervision (RBS) and the monitoring and inspections are conducted in accordance with the principles of RBS.  The review of these documents facilitates ensuring compliance with regulatory provisions; follow up where applicable of matters raised from an onsite inspection and the collection of data and information for monitoring both at the institutional and industry level of the microfinance sector.  The BCC makes use of the software “FinA” which was acquired with donor funding and technical assistance from The United States Agency for International Development (USAID).  The software makes it possible for MFIs to submit data/information to the Central Bank electronically and highlights corrections that institutions may be required to make where data/information may be incorrect or incomplete so that the consistent monitoring is enforced.  The software also produces reports and makes it possible for supervisors to focus on the analysis rather than data consistency.
Rating of MFIs
To strengthen the supervision of MFIs, the DISF/CPMF has developed, with the assistance of Planet Rating, a categorisation of MFIs in the DRC according to their risk profiles.  This categorisation allows the BCC to focus its supervisory resources on the institutions that pose the greatest risk to the smooth functioning of the microfinance sector and consequently the financial sector in general.
Challenges faced by the DRC's microfinance sector
The challenges faced by the DRC's microfinance sector were identified as follows: i. With regard to control based on documents - production of unreliable financial statements by the institutions, late submission of financial statements, non-submission of reports, lack of audit firms in some parts of the country, costs relating to the certification of financial statements and an inadequate number of supervisors. ii. With respect to onsite inspections - the high costs of onsite inspections (i.e. deployment of the supervisors), the inaccessibility of some MFIs due to the poor state of the roads, the insecurity in some parts of the country and the inadequate number of supervisors. The DRC participants at the training highlighted the following for considerations going forward. . The promulgation of consumer protection laws and regulations; . The promulgation of agency banking laws and regulations; . The modernisation of the MFIs risk management system; . The implementation of a deposit guarantee scheme; and . The elaboration of financial inclusion initiatives within the Country's national strategies and policies.

2.2.15 Uganda
Uganda’s microfinance regulatory framework
Uganda has a tiered framework which provides for the possible graduation of Micro Finance Deposit- taking Institutions (MDIs) from one tier to the next.  The tiers are detailed in Table 24.
Table 24: Tiered Framework
The regulatory and supervisory framework for Tier 3 Institutions
The Microfinance Deposit-Taking Institutions Act 2003
There are five (5) licensed microfinance DT institutions (MDIs) that operate on a national level.  The minimum capital requirement for an MDI is Shs.500 million compared to Shs.25 billion and Shs.1 billion for Commercial banks and Credit institutions respectively (Average exchange rate, August 2015 to August 2016, is about Shs.3, 400 to 1 USD).  MDI's are supervised under the Microfinance Division of the Non-Bank Financial Institutions Department which falls under the Supervision Directorate of the Central Bank. The same supervisory tools and enforcement mechanisms are used for MDI's, Credit institutions and Commercial banks. All Supervised Financial Institutions must meet the minimum standards for business premises prescribed by the Central Bank, which are geared towards ensuring the safety of public deposits.  There are a number of activities that MDIs are not permitted to engage in without Central Bank approval. These are listed in figure 5 below. Figure 5 : Prohibited activities for Ugandan Microfinance Deposit-taking Institutions
Prohibited activities
An MDI shall not, without the approval of the Central Bank, whether alone or with others, engage in the following activities and dealings – a.  Opening and operating demand cheque accounts; b. Engaging directly or indirectly for its own account or on a commission basis, in trade, commerce, industry, insurance or agriculture, except in the course of the satisfaction of debts due to it for the purpose of carrying on its business; c.   Acquiring or holding, directly or indirectly, in the aggregate, any part of share capital of, or make any capital investment or otherwise have any interest in enterprises engaged in trade, commerce, industry or agriculture in excess of 25% of its core capital, except in the course of the satisfaction of debts due to it; but in such a case all shares and interests shall be disposed of at the earliest reasonable opportunity; d.  Underwriting and placement of securities; e. Transacting in computer networks or electronic commerce; f. Engaging in trust operations; g.  Taking deposits and lending in foreign exchange; h.  Intermediating loan insurance funds; i.    Purchasing a non-performing or low quality loan from any of the directors, officers or affiliates j. of the institution or their related interests; and or Dealing in derivatives. In addition to the MDI Act of 2003, MDIs are subject to the Microfinance Deposit Taking Institutions Regulations of 2004 regarding Licensing; Liquidity and Funds Management; Capital Adequacy; Asset Quality and; Reporting.  They are also supposed to comply with various guidelines covering Consumer Protection, Risk Management, Outsourcing, Business Continuity, Duties and Responsibility of Directors of Supervised Financial Institutions.  Table 26 lists the key prudential requirements that MDIs have to comply with.
Table 26 : Key Prudential requirements for Uganda's MDI
The MDI Deposit Protection Fund is under reform following the amendment of the FIA 2004 in January 2016 and shall be merged with the Deposit Protection Fund for Commercial Banks and Credit Institutions into a single Fund. The Fund shall be a separate legal entity from the Central Bank; and the Fund may act as a receiver or liquidator of a financial institution, if appointed for that purpose by the Central Bank.
Financial Inclusion
Currently a number of institutions are involved in promoting the financial inclusion agenda in Uganda; notably these include the Ministry of Finance Planning and Economic Development.  The Minister of Finance, Planning and Economic Development constituted an Inter Institutional Committee on Financial Inclusion to drive the process of developing and implementing a National Financial Inclusion Strategy.  While  the  Central  Bank  is the Secretariat of thiscommittee, it continues to pursue its Financial Inclusion initiatives, in conjunction other financial sector players. Strengthening Financial Inclusion is one of the initiatives in the Central Bank's Strategic Plan (2012-2017). The Central Bank is implementing various initiatives to improve financial inclusion in Uganda as a response to financial innovations, gaps in financial education, financial consumer protection issues, as well as issues of access and quality of financial services. To this end, The Central Bank established a Financial Inclusion Project under the leadership of Supervision Function, formulated a 'Strategy paper on Financial Inclusion (2012-2015)' and established a Financial Inclusion Division.
The Financial Inclusion Project is built upon four pillars:
Pillar 1: Financial Literacy
The Central Bank spearheaded the development and implementation of a 'Strategy for Financial Literacy in Uganda' in 2013. This was done in partnership with a wide range of stakeholders. Financial Literacy Core messages (translated into seven languages) were developed which cover the areas of; Personal Financial Management, Savings, Loans, Investment, Insurance, Planning for Old age, Making payments and Financial Service providers.  Financial Literacy is being addressed in the 5 focus areas/ strands of Schools; Youth; Rural outreach; Work places, Clubs and Associations; and Media.
Pillar 2: Financial Consumer Protection
In addition to the MDI Act 2003 requirement for display of financial statements, the Central Bank publishes MDI charges and fees on a quarterly basis. Further the Bank issued Financial Consumer Protection Guidelines in June 2011 and developed and issued Key Facts Documents for loan and savings products provided by all supervised financial institutions. The Key Facts Documents 30 enhance transparency in the sector and thereby enable customers to make informed decisions, while the guidelines stipulate requirements on fairness, reliability, transparency, and Complaints Handling & Consumer recourse.
Pillar 3: Financial Innovations
The Central Bank has sought to establish an effective regulatory framework for financial sector innovations in order to broaden financial inclusion while ensuring system stability and safety. This has entailed a holistic and comprehensive consideration of Agent Banking and Mobile Financial Services. The Central Bank issued Mobile Money Guidelines in 2013 which among others cover the roles and responsibilities, interoperability, system standards, and competition, AML & CFT, Consumer Protection and Supervision. The MDI Act 2003 is to me amended to cater for, amongst others, Agent Banking.
Pillar 4: Financial Services Data and Measurement
The Central Bank aims to enhance the framework for financial services data and measurement and provide a mechanism for monitoring and measuring financial inclusion indicators in Uganda. This is being done in conjunction with a wide range of stakeholders including the Uganda Bureau of Statistics, the Uganda Cooperative Savings and Credit Union, the Insurance Regulatory Authority, the Association of Microfinance Institutions in Uganda (AMFIU), relevant Government Ministries and Departments, SFIs and the Bill and Melinda Gates Foundation, among others. Key elements under this pillar include: . Formulation of a contextually relevant definition of financial inclusion and identification of key indicators to develop a financial inclusion data set. . The collection, compilation, and dissemination of financial inclusion indicators relating to access, usage and quality on a regular basis.
The proposed regulatory and supervisory framework for Tier 4 MFIs
Tier 4 Microfinance Institutions and Money Lenders Act, 2016
The Government of Uganda passed the Tier 4 Box 6  Meso-level Conflict Resolution Microfinance Institutions bill 2016 on May 04, 2016. This legislation will guide the operations of AMFI Uganda which provides a service to the public by this formerly unregulated sector that includes undertaking the resolution of complaints that are raised by consumers of financial service providers in Uganda. NGOs, SACCOs, Microfinance Financial How it started;  In the early 2000's there was a Companies, Community Savings and Credit deteriorating image of the microfinance business Groups and Money Lenders. The legislation aims because the MFIs had shifted their focus from the client at promoting the safety and soundness of the as the canter of their service provision. A growing financial system, the safety of member savings, concern of mistrust between the clients and MFIs the legitimacy of and confidence in the coupled with constant accusations from various microfinance sector, consumer protection and stakeholders made it inevitable for AMFIU to look for solutions. How it works;  A complaint handling system social economic development.  The provisions of was developed to document the processes take in Act  cover among  others:  (1)  the the conflict resolution and what needs to be done further. establishment of an autonomous regulatory and A toll free number was introduced, use of media, and supervisory body, the Uganda Microfinance public complaints handling materials were distributed. Regulatory Authority (UMRA), its governance Once a complaint is registered, both parties are invited, structure and functions and (2) the regulation issue is discussed and course of action reached. The system is really working and appreciated. and supervision of SACCOs, NDT financial institutions, moneylenders and Community Savings and Credit Groups. The Act has also provided for MFIs to engage in Islamic Microfinance.
Challenges faced by Uganda's microfinance sector
A number of challenges to microfinance development were highlighted by the participants.  These are listed in Table 27 together with the recommended solutions.
Table 27 : Challenges and recommended solutions for microfinance institutions in Uganda

2.2.16 Zambia
Zambia's microfinance regulatory framework³¹
Financial sector laws Zambia's financial sector is governed by a number of laws and regulations, as listed in Figure 6. Figure 6 : Principle acts governing the Zambian financial sector
Financial Sector Acts
. . . . . . . . Bank of Zambia (BoZ) Act Banking and Financial Services Act (BFSA) as amended - applicable to commercial banks, financial institutions³² and financial businesses³³ National Payment Systems Act, 2007- applicable to payment systems and payment system businesses Building Societies Act Development Bank of Zambia Act National Savings and Credit Act Prohibition and Prevention of Money Laundering (PPML) Act of 2001 Financial Intelligence Centre Act
Regulations and directives
. . . Microfinance Regulations (MFRs) of 2006 (issued under the BFSA) Bureau de Change Regulations of 2003 (issued under the BFSA) BoZ Anti Money Laundering Directives (issued under the PPML Act Draft bills and regulations . . Draft Microfinance Services Bill Draft Credit Reporting Bill Draft Movable Property Security Interest Bill . . . Draft Agency Banking Regulations Draft Electronic Money Directives Amendments to the Bureau de change Regulations
The Banking and Financial Services (Microfinance) Regulations, 2006
The Regulations (MFRs) define microfinance service as "the provision of services to small and microenterprises and to low income customers and includes the provision of credit facilities usually characterised by frequent repayments and acceptance of remittances and any other services that the Bank of Zambia may designate".  The MFRs has eight sections covering the definitions and terminology 22 Section 2 of the BFSA defines a financial institution as "a person other than a bank conducting a financial service business which includes receiving deposits from the public but does not include chequing account and current account deposits". ³³ Section 2 of the BFSA defines a financial business as "a person that conducts a financial service business but does not accept deposits". used; BoZ's authority; licensing; the categorisation, governance, operations and supervision of MFIs; and lastly, general provisions including penalties. MFIs are categorised into 3 tiers, Tier 1 which are DT MFIs, Tier 2 – NDT MFIs and Tier 3 – MFIs with a capital of less than K100,000 (USD16,000) (Tables 28 and 29).  Tier 3 MFIs are regulated and supervised under the Money Lenders Act (MLA); the Cooperative Societies Act, No. 20 of 1998; and the Societies Act, CAP 119. Savings and Credit Cooperatives (SACCOs) or credit unions registered under the Cooperative Societies Act are exempt from the application of the BFSA, rightly so because they are owned and operated by their members as closed-user-groups to act for the unified group as a banking service. However, the Bank of Zambia is aware of the global trend for central banks to assume the responsibility for the prudential supervision of all deposit-takers including credit unions. In some countries, central banks have limited this to only the largest credit unions. In this regard, the Bank of Zambia made submissions for a prudential oversight mechanism as part of the review of the Cooperative Societies Act.
Table 28 :  Categories of MFIs in Zambia
Table 29 :  Characteristics of Tier 1 and Tier 2 MFIs in Zambia
The microfinance landscape
There were 33 MFIs licensed by the BoZ as at 30 November 2014 of which 10 were DT and 23 were NDT MFIs.  Of the 33 licensed MFIs, only 10 are “developmental” MFIs.  The minimum capital requirement for financial institutions is shown in Table 30. Table 30 :  Minimum capital requirements for financial service providers in Zambia
MFIs can operate in any part of the country.  They are only required to provide the BoZ with 14 day notice when opening a new branch.  This differs from other financial service providers, including banks, which require prior BoZ approval before opening a branch.  Branch requirements are less stringent for MFIs than other financial service providers.  DT MFIs are permitted to provide credit facilities, savings facilities, linkage banking, money transfers and any other service that the BoZ may authorise.  On the other hand, NDT MFIs may only provide credit facilities. In line with the specific characteristics of microfinance, the provisions relating to microfinance in a number of areas are stricter than those for other financial institutions.  These differences include the following: The capital adequacy ratios for MFIs (15% of RWA) are higher than for banks and other NBFIs (10% of RWA).  As MFIs rely heavily on the loan portfolio as the single most important asset, it necessitates having a high quality loan portfolio to maintain the overall health of the institution. Furthermore, the MFRs on asset quality provide for shorter periods when recognising problem loans, e.g. starting at 29 days past due as opposed to 90 days for banks. Banks and DT MFIs are required to submit prudential returns on a monthly basis.  NDT MFIs, which are non-prudentially regulated, are required to submit quarterly returns mainly for statistical purposes.  The Regulations on agency banking are still in draft form.  The BoZ has, however, on a case by case basis, allowed MFIs to engage agents in the provision of financial services.  All MFIs that are licensed by the BoZ are required to report to and use the services of a credit reference bureau when granting a loan to a borrower. The microfinance supervision function is located in the Non-Bank Financial Institutions Supervision Department of the BoZ.  The BoZ has adopted risk based supervision and MFIs are supervised using offsite monitoring and onsite examinations.
Challenges faced by Zambia's microfinance sector
A number of challenges to the development of the Zambian microfinance sector have been identified. These include dealing with the unique characteristics of microfinance operations; the need to update, revise and harmonise, where appropriate, legislation in the financial sector so as to minimise regulatory arbitrage, and the need to take into consideration the costs and benefits of regulating the sector to ensure optimal outcomes. In addition to the challenges identified above, the participants recommended that regulators and supervisors focus their attention on defining microfinance in a way that excludes consumer lenders from taking  advantage, reviewing the interest rate cap as it inhibits the sustainability of MFIs, considering a regime of incentives to encourage MFIs to increase outreach and build capacity; and speeding up the promulgation of agency banking and mobile banking regulations so that there is clarity in the regulatory environment for financial institutions to adhere to. Despite the challenges noted above, a number of factors were identified as having been helpful in the development of the microfinance sector. These factors include the legitimisation of market operators through the licensing of “microfinance”; improved corporate governance, increased levels of transparency with respect to ownership and management financial performance, interest rates, fees and charges and financial performance; higher capital levels and the supervision of microfinance thus fostering the smooth running of the microfinance sector and ultimately the financial sector. Furthermore, the introduction of the Regulations has resulted in additional benefits, specifically the promotion of competition, improved governance structures, increased number of access points, and increased access to credit and increased levels of transparency.  However, the MFRs can be improved by making a distinction between salary- backed lenders (“consumption lending”) Box 7  Why the Bank of Zambia lifted the interest rate caps and traditional/ conventional microfinance. The Bank of Zambia lifted the lending interest rate caps in Secondly, the recently introduced interest November 2015 due to the unintended consequences which rate cap has had a detrimental effect on the mainly included the following: market, especially for the “developmental” 1.It had an adverse impact on their financial sustainability as the This needs to be reviewed going MFIs. implementation of the interest rate caps led to credit rationing to forward to prevent the possible stifling of micro, small and medium enterprises (MSMEs) (as they were Thirdly, the microfinance the industry. considered as high risk) by the financial service providers , a sector should be incentivised to increase situation which was at variance with the Government's objective outreach in rural areas and build of increasing financial inclusion; capacity. Lastly, institutional the 2.The average loan sizes in most MFIs had increased, meaning introduction of agency and mobile banking that they were no longer catering for the lower end of the market; should be speeded up so as to provide and clarity in the regulatory framework for 3. Financial service providers which were able to charge interest microfinance. rates lower than the caps increased their lending rates to the level
2.2.17 Zimbabwe
The microfinance regulatory framework
of the caps. The microfinance sector is regulated in terms of the Microfinance Act (Chapter 24:29), which provides for the licensing and supervision of deposit taking microfinance institutions (DTMFIs), and credit-only microfinance institutions (MFIs).  As at 31 December 2015, there were 149 licensed credit-only microfinance institutions and three (3) deposit taking microfinance institutions under the supervision of the Reserve Bank of Zimbabwe. Zimbabwe has adopted a four tiered approach to regulating the financial services sector, as indicated in Table 31.
Microfinance licences are issued at a national level, and currently, are issued on an annual basis. However, amendments to the Microfinance Act have been drafted which seek, among others, to increase the tenor of the microfinance licences and increase investor confidence in the sector. The current minimum capital requirements for MFIs and other financial institutions are shown in Table 32
Table 32 :  Minimum capital requirements for MFIs and other Financial Institutions
DTMFIs are prohibited, in terms of the Microfinance Act, from: i. Issuing cheques; ii. Opening current accounts; iii. Foreign trade operations; iv. Trust operations; V. Investing in enterprise capital; vi. Underwriting or the placement of securities; or vii. Wholesale or retail trade; viil. Purchasing land except as may be reasonably necessary for the purpose of expanding the microfinance business. Branch opening requirements for both credit-only MFIs and DTMFIs are the same as for other banking institutions.  The intention is not to differentiate DTMFI branch specifications from those for banks.  The Regulations to prescribe the specific prudential requirements for DTMFIs are yet to be promulgated or issued. In the meantime, operational guidelines have been drafted which will eventually be incorporated into the Regulations that will be issued in terms of the Microfinance Act. Under the Act, MFIs are allowed to conduct their business through agents³⁴ .  The Agent Bank Guidelines to complement the Act are being finalised which will apply to all institutions supervised by the Reserve Bank.  Financial services providers including banking institutions and microfinance providers are encouraged to partner with mobile network operators (MNOs) to provide mobile financial services to the banking public, including the marginalised and vulnerable groups.  The Reserve Bank is currently working on the development of agent banking and mobile banking guidelines. The Banking Amendment Act, 2015, which was gazetted in October 2015, provide for the establishment of a credit reference system.  The provisions will require banks and microfinance institutions to submit credit information to a Credit Registry System.
Challenges in the Zimbabwe's microfinance sector
A number of challenges have been identified.  These, together with the recommended solutions, have been highlighted in Table 33. Table 33 :  Challenges in the Zimbabwean microfinance sector

Implementation of the National Financial Inclusion Strategy
Financial Inclusion Strategy was launched on 11th March 2016, Thematic working groups have been set up to facilitate implementation of the strategy. The working groups and their broad terms of reference are shown in the table below
Further, the Reserve Bank will be putting in place a number of policy guidelines which are meant to promote the buidling of inclusive financial systems Prudential Standards on Agent  Banking , to provide guidance to financial institutions in reaching a) out to th unbanked through agent baking; Financial Consumer Protection Prudential Standards which will provide minimum standards of b) market conduct for financial services providers on acceptable consumer protection when conducting their business; c) Agriculture and Rural Finance Policy which is aimed at addressing the challenges of access to finance for the agriculture sector; Financial Literacy Framework to facilitate implementation of tailored financial literacy programs for d) target groups such as school children, women entrepreneurs and SMEs under the National Financial Inclusion Strategy; and e) SME Finance and Development Policy to facilitate improved access to financial services for SMEs. Section Three Recommendations on Policy and Regulatory Framework for Inclusive Finance A COMESA Region Country Representatives Initiative

w.
Recommendations
This section contains the recommendations made by the participants and also serves as a guide on financial Inclusion policies and on regulation and supervision framework.
3.1
Introductory Remarks
The recommendations outlined in this section summarises the outcome of the two workshops which were arrived at after an extensive review and discussions on a CGAP authored- Guide to Regulation and Supervision of Microfinance Consensus Guidelines; the G 20 Principles for Innovative Financial Inclusion; Policy/Focus Areas for Financial Inclusion recommended by the AFI and CFI, respectively; SMART campaign principles on consumer protection and experiences shared during the workshops. In considering these recommendations, one needs to take into account the fact that the social, economic, political, financial-infrastructure and other conditions are different in each country. The recommendations, therefore, do not constitute a one fit all solution. It may be necessary to make adjustments to suit prevailing circumstances.  Further, these recommendations may not cover all possible areas that each country needs to address. The focus is on areas that all participants considered being the most challenging or crucial. It is also evident that many countries have or are in the process of implementing most of the recommendations herein. Indeed, some countries are at fairly advanced stages in this regard, and others are yet to implement some or all of these recommendations. The recommendations can therefore be used as a reference guide, source of experiences shared or as training material, depending each country's circumstances. Additionally, the FI profiles of each country under section 2, can also be used to ascertain where to source specific experiences.
3.1.1
Thematic Categories & Areas of Focus in the recommendations
The recommendations cover seventeen areas of focus outlined below, which are organized under four thematic categories as shown in Table 35 below. Table 35 : Thematic Categories & 18 Areas of focus in the Recommendations The overarching objective in these recommendations is presented under sub-section 3.1.2 below. Specific recommendations are contained under each area of focus, preceded by objectives set by the participants and some contextual background to explain the recommendations.
Overarching Objectives
3.1.2
The overarching objective in these recommendations is to strike a balance between financial Stability and Financial Inclusion". The following points were highlighted to explain the overarching objective: i. The advent of financial inclusion and developments in microfinance, has brought in many innovative products, offered by both conventional and non-conventional FSPs. This has opened access to the poor, low income, unserved and underserved groups.  Micro finance has expanded from provision of microcredit to provision of a wide range products, such as micro- savings, micro-payments, micro-transfers, as well as micro-insurance underwritten by insurance companies and distributed by a wider range of providers. ii. Access to finance is now provided by a multiplicity of providers, including banks and non-bank financial institutions, microfinance institutions and mobile network operators (MNOs) – working with retail agents who act as the primary interface with customers. The multiplicity of regulators – including non-financial regulators are involved in FI, as the institutions they regulate are now providing financial services. iii. iv. The pace of change in the financial services sector is rapid and calls for timely and innovative regulatory responses.
3.1.3
Context: Overarching objective
The overarching objective mirrors the G20 Framework Principles and AFI's of Balancing Inclusion, Integrity, and Stability. The need for this balance is informed by the fact that regulators and policymakers largely rely on standards set by Global Standard Setting Bodies (SSB) when crafting policies, laws and regulations. Yet the application of such standards, without considering their impact on financial inclusion, can result in adverse impact on financial inclusion goals. It, therefore, highlights the need for careful consideration and proportionate application of the standards so as to allow for innovations. On the other hand, there is also need to manage emerging and evolving risks that financial inclusion bring, for which no standards exists. Engaging SSBs in this regard is therefore equally important. Further, there is need for appropriate and proportionate application of global standards such as KYC and POCAMLA.
3.2
Policy and Regulatory Framework
3.2.1
Legal & Regulatory Framework Objective 3.2.1.1 The objective under the legal & regulatory framework area of focus is to create a conducive and enabling environment for financial inclusion.
3.2.1.2
Context
This objective is consistent with the G20 Principle of Cooperation, which recognizes that innovative financial services and new delivery channels span across multiple institutions and regulatory authorities. It also emphasizes the importance of coordination across the different regulatory authorities. This may be accomplished by having a lead agency that serves as the custodian and main driver of FI policies, or through any other arrangement that is preferred. Understanding the incentives or interest of each player in the value chain is an important aspect of creating the required environment. 3.2.1.3 Recommendations Specific recommendations for the legal and regulatory framework are as follows: i. Clarification of roles & responsibilities of different regulatory authorities The roles and responsibilities of the different bodies that regulate the various institutions involved in the financial inclusion ecosystem, be clearly defined. Some of these bodies have existed for long but their roles and responsibilities were created when financial inclusion was not a priority. There may be need to review existing roles and responsibilities to give priority to FI initiatives. ii.
Specifying licensing agencies
The Law should specify which regulatory authority will license, register, monitor/ supervise the different types of institutions providing financial services. This is because some of the institutions are engaged in activities that cut across two or more regulatory agencies.   For example, a mobile network operators providing financial services should also be required to be registered or licensed by regulators of financial institutions. iii.  Providers of e-money Where non-financial institutions provide e-money as one of the primary activities, the framework should require these to be registered or licensed by the banking regulators. This should include SACCOs which should have their own regulatory framework. iv.    Categorization of Financial Institutions The regulatory framework should provide for categorization of financial services providers with a clear indication of the type of regulation, that is prudential, non-prudential or market conduct supervision.
v.
Collaboration
The framework should provide for collaboration among different regulators such as bank regulators, telecom regulators, and SACCO regulators.
3.2.2
Legal forms of different types of FSPs
3.2.2.1 Objective The objective under this area of focus to identify those FSPs that should be prudentially regulated and those that should not. 3.2.2.2 Context The diversity of institutions providing financial services is an important FI principle, strongly supported by the G20 and the World Bank Financial Inclusion Support Framework. It promotes competition and enhances the development of market-based solutions. It has been demonstrated that diversity in products, providers, and delivery channels opens access to the poor significantly. A separate regulatory body for SACCOs is recommended largely because they are fundamentally different from other FSPs, especially in their ownership and governance structure. The need to prudentially regulate SACCO is informed by the fact that, they are increasingly venturing outside their traditional model of serving only its members. Today many of them take deposits from the public and use most of the delivery channels used by conventional FSPs. Further, they are growing fast and a number of them are even larger than MFIs or some banks. It is, therefore, imprudent to continue monitoring them in the traditional fashion.  Additionally, the emerging issue of "lender of last resort for SACCOs", could be address in regulations. The rationale for regulating MFIs is now widely accepted in the region. Most countries in the region have such regulations. The main message in these recommendations is to improve existing regulations and guidelines. One of the areas of focus is the recommendations is the ownership of FSPs by NGOs. When MFIs owned by NGOs apply for licenses to become regulated deposit taking institutions, they are often required to transform into for profit companies limited by shares.  Further, they may also not be allowed to exceed a given maximum shareholding limit. This presents challenges of seeking other investors, as well as that of ceding ownership to other investors who may not share their social mission. Such requirements are not only an entry barrier for NGOs that are unable to attract enough investors but are also changing ownership profiles from a social-public interest orientation to profit maximization one. There are good reasons for these requirements, such as the inability to meet future capital calls and enhancing the governance capacity. On the other hand, the social mission pursued by NGOs is crucial for continuing to focus on the poor. Good evidence of mission drift by MFIs whose ownership has changed after transformation exists. It may therefore be necessary for regulators to consider this issue and come up with innovative ways of sustaining the creative tension between social impact and profit maximization. 3.2.2.3 Recommendations Specific recommendations with respect to legal forms of different types of FSPs are provided below: i. Tiered approach A tiered approach, where all deposit taking financial institutions are prudentially regulated is recommended. Those that are not taking deposits be subject to non-prudential or market conduct supervision. In this approach, financial service providers be categorized under those to be subjected to prudential regulated and those to fall under Non-prudential regulation. The former, should include: a.    All institutions that take deposits.  In this regard, it is important to define what constitutes a deposit so as to protect all depositors. b.    Deposit Taking Microfinance Institutions and SACCOs that are likely to cause systemic risk. Non-Prudential Regulation ii. FSPs that don't take deposits or are small enough not to cause systemic risks should be placed under the non-prudential regulation to mitigate the risks such as financial crimes, as well as facilitate monitoring market conduct and consumer protection. An example of this approach is provided under the Uganda country profile. iii.
Risk Based Supervision
The recommendation is to focus regulation on institutions that can cause material risks on the financial system. A risk based approach to supervision is one that focuses on areas of greatest risks and concerns in individual FSP and can improve effectiveness and efficiency of supervision. This may be accomplished by using a risk rating framework to determine where the greatest risk lie. Supervision is then tailored to focus on the identified FSPs and risk areas. Examples of some countries that reported to be using this approach are Rwanda, Uganda, Zambia, and Zimbabwe. iv.  Regulations for SACCOs & DTM Large SACCOs and deposit taking microfinance (DTMs) institutions be prudentially regulated.  For SACCOs, a separate regulatory is recommended, while for DTMs a separate regulatory category under the regulator supervising banks is recommended. V. Guidelines on capital calls for NGOs owning FSPs Develop clear guidelines for capital calls for NGOs that own FSPs registered as companies limited by shares. vi. Different forms of MFIs MFI with any legal form be allowed to provide financial services. Trusts should be allowed to run DTMs, provided the ultimate beneficial owner can be clearly identified. vii. Single Regulator A single regulator to supervise the financial sector, such as the central bank, reserve bank or national bank is recommended.
3.2.3
Transparency
Objective
3.2.3.1 The objective under transparency is to protect customers from unfair or hidden cost in interest rates, charges or fees.
3.2.3.2
Context
Financial inclusion policies often result in a big influx of not so experienced customers. This introduces many new risks such as fraud, abuse, errors and others. Further, most of these customers are vulnerable to being charged costs that they not only don't understand well, but cannot also afford. Transparency from the perspective of legal & regulatory framework is a disclosure requirement that aims at providing accurate relevant information to all stakeholders. It is also a consumer protection issue. Disclosure of charges, interest rates (and profit sharing rates in case of Islamic Banking) and fees enhances both transparency and consumer protection.  For investors and the public at large disclosure, is also very crucial for assessing risks. Disclosure may be made through the media, posting at FSPs outlet at given times as may be required by the regulator. 3.2.3.3 Recommendations Specific recommendations for disclosure transparency are outlined below: i. Disclosure of charges. The Law should provide for disclosure of the effective interest rates, plus all other charges and fees in a prescribed form that specifies the content and method of calculation of interest and charges. Such disclosures be simple and explained to customers before commitment, in a language that customers can understand. In the case of Islamic finance, where interest and charges are based on sharing of profits or losses, the disclosure must include Murabaha margins, profit sharing account (PSA), any fees/costs charged such as insurance. ii. SMART Campaign Principle on Transparency The SMART Campaign principle on transparency, which states that FSPs communicate clear, sufficient and timely information in a manner and language clients can understand so that clients can make informed decisions. The need for transparent information on pricing, terms and conditions of products is highlighted.
iii.
Expanding List of External Auditors All regulated institutions be audited by external auditors that are approved the regulators. While this is the case in most countries, the list of approved auditors often comprises large international audit firms, which may be too costly to small financial institutions such as MFIs and SACCOs. It is therefore recommended that such lists be expanded to accommodate less costly firms. To reduce reporting and supervision costs submission of reports electronically is recommended.
iv.
Standardized formats
To facilitate and reduce costs of reporting and disclosure, provision for standardized formats on reports and disclosures to be published periodically, be made. Such standardized formats should include simplified key fact statements, such as that contained in the CGAP focus-note for designing disclosure regimes for responsible financial inclusion. An example of such a format is provided by Uganda as Annex 4.
V.
Simplified Contracts
Financial service providers be required to simplify contracts in clear formats and language understood by intended customers. Financial inclusion brings in customers who may not have much education or are not used to scrutinizing contracts. Often, contracts are written in a complex legal language, which is difficult to decipher.  It is important that they be simplified in point form, especially on key points such as charges and method of calculation, as well as the rights of the customer.
3.3
Consumer Protection
3.3.1
Framework for Consumer Protection
3.3.1.1 Objective The key objective under this thematic category is to protect consumers from risks that come with the proliferation of new FSPs, products, and channels. 3.3.1.2
Context
Consumer protection is a sacrosanct principle of financial inclusion which must be included in all regulatory frameworks.  Increasing access to financial services is very important. But just focusing on the number of people having access (the quantitative aspect of FI) could result in adverse impact. Access without protection could seriously erode all gains made in financial inclusion, especially when you are considering that most of the new entrants are poor people. Educating and protecting consumers can protect these gains by promoting informed access to financial services. Financial education (discussed in sub-section 3.3.2 below) and consumer protection are therefore complementary policy objectives which increase the effectiveness of each other.  The SMART campaign principles discussed under section 1, provide a comprehensive guide to consumer protection. These principles were fully endorsed by the participants and form an important part of these recommendations.  Lastly, effective consumer protection initiatives must involve all regulatory bodies as well as all stakeholders. Embedding the principles in the regulatory guidelines is as important as involving stakeholders in their development. Recommendations on consumer protection fall under six Areas of Focus presented below: 3.3.1.3 Recommendations Specific recommendations on the framework for consumer protection are as follows: i. Consumer Protection Regulation Establish a regulatory framework for the issuance of consumer protection regulations with alternative dispute resolution mechanisms in place and powers to enforce compliance. ii. Stakeholders Consultation Establish mechanisms to ensure stakeholders consultation in the development of effective consumer protection regulatory framework, as well as address inconsistencies and overlaps in legal and regulatory frameworks. iii. Business Conduct The frameworks should provide for responsible business conduct on the part of all FSPs and their respective agents. The code of conduct should cover all aspects including the impact of providing unsuitable financial products to the poor and marginalised.
iv.
Protection of Consumer Assets
Regulations should require FSPs to protect consumers' assets that are placed as collateral for loans, against fraud and misuse. This will promote consumer confidence, especially in SACCOs and microfinance most poor and low income people access services from.  This could be accomplished by requiring FSPs to take appropriate insurance cover against such losses. V.
Protection of Consumer Data & Privacy
Protect consumers' data and privacy by requiring FSPs to keep them confidential at all times, except where legally required to share or disclose. Regulations should also include the steps to be taken under such circumstances.
vi.
Conflict Resolution
Require all FSPs to have conflict resolution procedures in place, which should be communicated to all customers at appropriates stages of their involvement with the provider. The procedures should specify the entity, within or outside the FSP that is responsible for resolving any conflicts. vii.   Conflict management Establish conflict management policies and redress procedures in consumer protection, by ensuring that the regulatory framework provides for, at the: . Micro-level: Adequate internal complaints handling procedures at the level of FSPs, including identification of the staff member or unit responsible for receiving complaints. Procedures must also require submission of periodic reports with statistical information on the complaints received. . Meso-level: The redress mechanisms to address consumers' complaints that are not adequately resolved at institutional level, be established. Preferably, apex organizations should carry this responsibility. A good example of this recommendation is provided in Section 2.2.17 Uganda BOX 6. . Macro-level: Establish an independent tribunal to handle complaints and or mediation. This could be a commercial court, ombudsman or a consumer association. viii.   Deposits Protection Establish Deposits Guarantee Schemes (DGS) where they don't exist and require participation by all deposit taking institutions. The guarantee should cover deposits that are held electronically by MNOs, ostensibly through trust accounts held by partner FSPs. Where DGSs exist amendments maybe required to include all new types of deposit taking institutions.
3.3.2
3.3.2.1
Financial Education
Objective
The objective in financial education intervention is to develop a framework for raising awareness in financial literacy at the national level.
3.3.2.2
Context
Perhaps the most important hurdle in financial inclusion is the lack of financial literacy not only among the poor population but also where the general literacy level is high.  It takes a long time to inculcate a nationwide general awareness of financial intricacies. Regulators may not be well equipped to play this role effectively. The most effective role they could play is to lobby relevant government functionalities to take it up as part developing life skill for the general population from early stages of education. 3.3.2.3 Recommendations Specific recommendations for financial education interventions are outlined below: i. National Financial Education Strategy Establish a national financial education strategy involving all stakeholders. Such a strategy should include the introduction of financial education curriculum in schools. In addition, regulators should lobby respective national governments to invest in financial education in their countries as a long- term strategy for raising the general level of financial literacy in each country. ii.
Framework for Financial Literacy
Regulatory frameworks should provide for the establishment of financial literacy/education on issues such as the obligations of FSPs and their agents. This should mostly focus on the rights and responsibilities of consumers. Malawi provides a good example of such an initiative as discussed in BOX 3 under sub-section 2.2.8 Malawi. The framework should also provide for mandate and responsibilities of the regulatory authority including enforcement and sanctions.
3.3.3
Over-indebtedness
3.3.3.1
Objective
The objective in this area of focus is to prevent possibilities of poor people from accumulating debts that they can't service.
3.3.3.2
Context
Over-indebtedness became a concern as collection problems led to the collapse of MFIs and suicide cases, caused by the inability to repay loans in India. Although available evidence does not suggest the prevalence of over-indebtedness in most countries in this region, it is prudent to effect preventive measures. Lack of evidence does not necessarily mean that the region is totally free from this vice.  It could be concealed by several factors such as cultural dispositions or collapse of MFIs that are not investigated. One of the causes of over-indebtedness is bad behaviour or conduct of FSPs, accentuated by aggressive marketing tactics to defeat competitors. Typical signs of this bad behaviour include, relaxing of lending conditions, pressure for customers to take additional loans or failure to communicate costs clearly. Often, this quickly translates into poor quality of the loan portfolio but is hard to detect when masked by aggressive collection procedures. It can also be caused by bad decisions from consumers. An influx of new products or providers in a market that was previously starved of both, often results in decisions to borrow for ventures that are not well thought through. The use of loan proceeds for consumption or other purposes different from what the loan was applied for, often leads to over-indebtedness. Lastly, external factors such as sudden drastic changes in market conditions, the weather or political clashes and disturbances could impact on the ability to repay loans. To prevent over-indebtedness one needs to define and measure it, which is not easy, especially for regulatory purposes. Over-indebtedness can be defined in many ways but most definitions have challenges and may be impractical to measure or monitor.  It is important to define over-indebtedness so that all stakeholders understand what it is. Some definitions of over-indebtedness that can be considered are discussed below.  : . Multiple concurrent borrowing can be used as a definition although it is very common and not a conclusive. . Loan Repayment Sources - using proceeds of a new loan or savings to repay a current one is a good definition but hard to monitor especially where customers borrow from several providers and CRBs don't exist. . The struggle to repay loans, where loans are repaid in distress or sacrifice such as selling assets, is another indicator. To prevent over-indebtedness, apex organization or industry associations can establish a code of conduct to guide FSPs. Such a code of conduct could embrace the SMART campaign principles and should require all players to abide by. An apex body or the regulator could then serve as the enforcing arm to the code of conduct. Further, regulators can periodically conduct studies to determine if or not over-indebtedness is prevalent. Financial education, combined with consumer protection principles, is the best tool for addressing over-indebtedness. It must be noted that the responsibility of curbing over-indebtedness is a two- way obligation for both FSP and customers.  FSPs, especially MFIs should be encouraged enforce practices that prevent over-indebtedness, such as: . Designing flexible loan products and avoiding loans with automatic increments on a graduated scale, as this does not take into consideration ability to repay. . Good marketing practices, fair disclosure of loan terms and contribution to financial literacy. . Sound loan underwriting systems, focusing on the viability of project, debt-service ratios and loan repayment history. Such a system could be manually done or automated through computer applications. The latter is recommended because the former is laborious and prone to errors. . Fair and respectful loan collection systems that are free of abuses and inappropriate interest penalties. . Staff incentives that don't promote over-lending, by focusing more on the growth of loan portfolio and not the long-term quality of the loans. . Training on over-indebtedness and specialized portfolio audits may provide early warning signals. 3.3.3.3 Recommendations Specific recommendations for prevention of over-indebtedness are provided below: i. Credit Reporting System Established and promote mandatory credit reporting systems. Although the reporting systems alone cannot promote credit discipline in a market nor replace sound loan underwriting practices, it can help providers manage credit risk and create incentives for repayment among borrowers. ii.
Tools to prevent over-indebtedness
Regulations to provide tools for determining limits for client indebtedness, for example deductions not to exceed a given percentage of salary or income.  The provision should state FSPs' responsibility for conducting due diligence to avoid over-indebted customers, based on the principle of responsible lending.
iii.    Uttering False Documents
Where the law so provides, encourage enforcement of the civil law on uttering false documents to prevent customers getting into an over-indebtedness situation by presenting false evidence on their ability to repay loans. iv. Interest Rates/Cost of finance Guidelines Establish the In Duplum Rule , a common law rule that provides that arrear interest ceases to accrue once the sum of the unpaid (accrued) interest equals the amount of capital outstanding at the time (and not the amount of capital originally advanced). The rule must specify if or not, other charges are included in the computation of the limit, or if a partial payment is made further interest can accrue.
3.3.4
Credit Reference Bureaus
3.3.4.1 Objective The objective in this area of focus is to provide FSPs with credit history information of potential borrowers. 3.3.4.2 Context Credit Reference Bureaus complement the role played by FSPs, by facilitating fast and accurate decisions on credit. They collect, manage and disseminate customer information to lenders within a provided regulatory framework, for a fee. Consumer protection can be enhanced by providing FSPs credit history of potential borrowers. 3.3.4.3 Recommendations Specific recommendations on CRBs are: i. Mandatory Reporting Requirements Require all FSPs to provide credit history information for all their clients and enforce compliance, by penalties for non-compliance. Where MNOs provide loans in partnership with regulated FSPs they need not report directly to CRBs. Instead, the FSPs are to provide the report for loans that are made in this partnership. ii. Fair Play Promote fair-play by requiring FSPs and CRBs to provide and report, respectively, both positive and negative aspects of credit history information in describing the character of potential borrowers. iii. Credit Reference Requirements Require FSPs to obtain credit reference reports from the CRBs when considering loan applications. There should be a consideration for waiving the fees for accessing this information, in cases where potential borrowers have no credit records. iv. Personal Financial Identification Number Introduce personal financial identification numbers to facilitate use of unique identifier in CRBs databases. Where national identity cards exist they could be used as the unique identifier. V. Develop regulations & an environment to attract CRBs. Develop regulations for CRBs and an environment to attract new players. Where there are no credit reference bureaus the following could be considered: . Encourage information sharing through MOUs or via industry associations. . Encourage the private sector to invest in credit reference bureaus . Establishing a national credit registry at the central banks. . Establishment of guarantee registry housed at the central bank, which could also open access to customers that use alternative collaterals, as well as protect FSP from accepting securities that have already been pledged to other FSPs.
3.3.5
3.3.5.1
Interest rate caps / Cost of Finance
Objective
The objective in this focus area is to protect consumers from exploitation. 3.3.5.2 Context Some countries have interest rates ceilings or are contemplating introducing them, ostensibly to protect consumers from exploitation by preventing FSPs from charging high interest rates. Interest rates caps are usually accompanied with prescribed minimum rates payable to depositors. This is usually prompted by political and social pressure, where outrageous lending practices exist or interest rates are perceived to be unreasonably high.  The situation is prevalent in markets where there is no transparency or requirements to disclose tariffs and charges. Limited financial literacy and lack of competition could also contribute to this scenario. But it can also happen in relatively stable markets with fairly good practices. On other hand, FSPs are at times forced to charge high interest rates because of prevalent high operating costs, which are not necessarily brought about by their inefficiencies. Lengthy and costly foreclosure procedures and prevailing high staff costs, which FSPs are not in full control of, largely contribute to high operating costs. When CRBs and lending through mobile phone applications were introduced in some countries, it was thought that it would result in reduction of operating costs, and consequently interest rates. But this has yet to happen and the pressure to reduce interest rates continues to build.  The intention to cap interest rates may seem noble but has far reaching repercussions on the financial sector and the economy at large. This is illustrated in Box 7 "Why the Bank of Zambia lifted the interest rate caps" under sub-section 2.2.15 Zambia. 3.3.5.3 Recommendations Specific recommendations on Interest rate /Cost of Finance caps are presented below: i. Market driven Interest Rates Interest rates should be market determined based on competition. Imposing interest rate caps in Law is not recommended. ii. Reference Rates FSPs should be guided by a reference rates set by the regulator. Although interest rate caps are not encouraged, where necessary they should be set at a level that ensures sustainability of FSPs, while abolishing bad practices. iii. Framework The framework should provide for transparency on interest rates and other charges through full disclosure of effective rates and fees charged by FSPs. iv. Checking Reasonability of Interest Rates Regulators could check reasonableness of rates charged by FSPs and advise them accordingly. Tools to do so can be guided by CGAP's sustainability interest formula.
3.3.6
Collateral
3.3.6.1 Objective The objective in the following recommendations is to protect depositors from non-performing loans and to facilitate use of alternative forms of collateral. 3.3.6.2
Context
Collateral is an important consideration in financial inclusion. Lack of collateral can be a barrier to access loans for poor people, small & micro-entrepreneurs. On the other hand, FSPs and regulators need to protect depositors' funds and find it difficult to lend without some form of acceptable collateral. In addition, suboptimal flow of credit to sectors of the economy can occur because of inadequately secured loans.  What is important therefore, is to balance the need to protect depositors' funds and facilitation of access to loans by using alternative forms of collateral, where applicable.  MFIs have for a while now demonstrated the effectiveness of using alternative collaterals in place of tangible conventional ones. For examples: . Peer pressure coupled with a pledge over compulsory savings of a group, as well as character based/cash-flow lending. This works best under the group-based lending system, for small loan sizes. However, increasingly customers prefer individual loans. . Simple pledge over household belongings, underpinned by initial low loan sizes, with gradually larger amounts in subsequent loans. This works well for both individuals and group based loans but must be limited to a maximum size beyond which other forms of collateral should be required. . Chattel mortgage over stocks or other properties. Alternative forms of collaterals vary from country to another dependent on several factors. Each country has to determine what is acceptable. The use of modern secured transactions registries can increase the availability of credit and reduce the cost of credit. It will also ensure that assets that are encumbered are not used as collateral to access loans in another institution. 3.3.6.3 Recommendations lt is therefore recommended that: i. Voluntary Collateral Requirement Collateral should not be a mandatory regulatory requirement, instead FSPs should determine whether or not to take collaterals and the type of collateral they prefer. This approach will facilitate competition and innovations in product design. ii.
Collateral Registry
The regulatory framework should provide for establishment of a Collateral Registry System to facilitate use of movable collaterals by low income and underserved people, for the purpose of easing access to loans. Examples of this registry are provided under Box 1 in sub-section 2.2.6 Kenya and Box 4 sub-section 2.2.8 Malawi. iii. Valuation Guidelines on valuation of collateral for non-performing loans be established, depending on circumstances in each country. iv.  Recovery Regulatory framework should provide for the easy recovery and disposal of collateral in the event of default.
3.4
Innovations
3.4.1
Policy & Regulatory Framework
3.4.1.1 Objective The objective in innovations is to ensure access to financial services by underserved and unserved. 3.4.1.2 Context The main area of innovation is digital financial services or financial technology (FinTech). Promoting innovations that can open access to financial services for large sections of underserved/unserved population, is crucial. This is not only consistent with G20 principle on innovation, but is also in tandem with FinTech developments taking place in most areas of the COMESA region. Fintech, is perhaps the most important innovations in financial inclusion. For one, it can overcome many challenges that exist because of poor infrastructure which has impeded efforts to take financial services to rural areas. Delivery of basic financial services to the poor, especially in rural areas is now feasible with Fintech solutions. Innovative technologies like mobile-phone-enabled solutions, electronic money models and digital payment platforms are already happening in many parts of Africa. They hold the promise of reaching millions of people who were previously excluded due to location or pricing. The financial sector is facing a wave of digital disruption that is reshaping the sector.  This is exemplified by how Kenya has managed to increase access to financial services to 75.3% of Kenyans, who are now formally included. This is a 50% increase in the last 10 years, and has more than halved those with no access to 17.4% since 2006. In supporting innovations such as e-banking initiatives by MNOs, it is important to ensure that customer funds that are held in electronic stored value, are protected. This is usually accomplished by requiring MNOs to open a trust account with a regulated financial institutions, where deposit protection requirements apply. Trust accounts are separated in management and oversight from those of the MNOs, by trustees. Further, requirements to maintain customer transaction accounts, facilitates reconciliations, identification and protection of the funds held in electronic value. It is critical therefore to have policy and regulatory framework for DFS covering all key areas. 3.4.1.3 Recommendations Specific recommendations on innovations are outlined below: i. Develop Regulations Develop and enact regulations that enhance technological innovations, such as mobile money, and promote innovation soundness of the financial institutions and systems.
ii.
Payment Systems
Amend or develop regulations on payment systems to take into account, authorisation and regulation of payment service provider, through electronic retail payment systems and issuance of E-Money. These regulations should include authorization of service provider and products or services. Registration of MNOs providing financial services could also be covered under by the payment systems regulator.
iii.
Agency Banking
Development and issuance of agent banking guidelines, containing rules for registering and authorizing banks or MFI agents, as well as operations and consumer protection guidelines. In reviewing applications, regulators should ascertain the type and license under which the potential agent operates, evidence of funds and other important aspects of due diligence.
iv.
Compliance with AML/CFT requirements.
Compliance of KYC, AML/CFT requirements should be mandatory for providers registered under the payment systems, as well as banks & MFI agents. This should take place at the point of SIM card registration or registration of new customers by agents. They should also include limits of transaction amounts per day and per customer. Compliance should be enforced with sanctions or penalties.
v.
Collaboration
Structures for collaboration and inter-agency cooperation should be ensured, possibly through legal arrangement with clear lines of responsibilities, accountability and co-ordination. vi. Protecting customer funds held as electronically stored value Develop regulations and guidelines for protecting customer funds that are held as electronically stored value. vii.   Ensuring safety and reliability of services Develop guidelines to requiring FSPs using innovative channels such as mobile banking to ensure safety and reliability of services to its customers.
3.4.2
3.4.2.1
Interoperability and Interconnectivity
Objective
The objective in this area of focus is to ensure efficiency in DFS. 3.4.2.2
Context
Fostering interoperability and effective interconnection within different digital financial services models is an important element in DFS policy & Regulation. Interoperability can create value and attract large volumes of customers. Benefits can only be fully realized when any actor in the financial system can easily transact and exchange information across other actors in the system.  The financial services sector is dynamic. Regulators and supervisors should be open to new innovations and provide for a conducive and facilitative environment. 3.4.2.3 Recommendations Specific recommendations are that: i. Interoperability and interconnectivity The Regulatory framework should provide for interoperability and interconnectivity among all MNOs that provide financial service. This aims at ensuring that customers are not restricted to transacting only with customers affiliated with their own network.  Interoperability requires technical compatibility between systems, which can only take effect when commercial interconnectivity agreements are entered into. ii.
E-Money Eco System
The frameworks should provide for the establishment of a mobile payment eco- system based on a shared e-money platform, where MNOs and the FSPs can compete in quality of service and product offering. iii. Enabling Environment An enabling environment that encourages innovation and commercial or market driven interconnectivity agreements, to support required compatibility between systems be promoted. Market led initiatives are innovative and add value which often results in benefits to consumers.
3.5
Capacity Building
3.5.1
Exposure for Regulatory Bodies
3.5.1.1 Objective The objective here is to build capacity of the regulators so that they can understand what they are regulating.
Context
3.5.1.2
The financial sector is very dynamic and is developing fast. Banking and finance are facing major disruptions, especially from financial technology which is bringing in new players, products, and delivery channels. Financial inclusion and microfinance have also introduced many new products, service delivery methodologies and other aspects that are different from conventional banking.  Yet regulators who were primarily trained in supervising conventional banks now have to acquire new skills to effectively regulate and supervise the new developments. Regulators are by necessity risk averse. This stance could stifle innovations and negatively impact financial inclusion initiatives. As was demonstrated with Mpesa in Kenya, a benign or a try and test approach in approving innovations could result in products or channels that have immense impact. To keep abreast with new developments, there is a strong need for capacity building which could be addressed through appropriate exposure programs. 3.5.1.3 Recommendations With respect to exposure programs the following interventions are recommended: i. Needs Assessment A needs assessment be undertake to establish gaps in knowledge and skills, so as to facilitate the design of capacity building interventions. ii. Rapport with Players Create a rapport or some kind of relationship between regulators and industry players to facilitate discussions and sharing of skills for the promotion of financial inclusion initiatives. iii.
On-going capacity building
Implement capacity building activities, including attachments to FSPs, Banks, MFIs and MNOs, on an on-going basis. iv.    Attachment to other regulatory bodies Promote attachments to other regulatory bodies that have success stories to facilitate sharing of skills, information, and knowledge. v. Study Visits Conduct study visits to countries that have success stories to learn how things are done differently in other countries. vi.  Specialized Courses Sponsor regulators to attend workshops and courses on financial inclusion organized by bodies such as Boulder MFT and those organized by CGAP. vii.   Broaden Understanding of Fl The supervisory team should include experts from various disciplines- mathematics, statistics, risk experts, accountants, IT, economics and others to ensure that they too appreciate and understand practicalities of financial inclusion.
viii.  Information Exchange
Promote information exchange between countries based on a memorandum of understanding signed by all COMESA countries to facilitate exchange of experiences. ix.    COMESA Institute Initiatives Develop courses for regulators at the COMESA Institute of Monetary Studies and consider: . Establishing a specialised institution for financial inclusion . Provision of technical assistance . Organise meetings/seminars for member countries on a regular basis.
3.5.2
Cost of regulation/ supervision
3.5.2.1
Objective
To facilitate innovative approaches in regulatory and supervision framework as a means of addressing limited capacity.
Context
3.5.2.2
The cost of regulating and supervising the expanding number of FSPs contributes adversely to the limited supervisory capacity. This is exacerbated by the fact that many of the new small FSPs are located in rural areas and spread throughout the country, where transport and communication infrastructure is poor. Further, in many cases, regulators have to supervise new FSPs, especially MFIs and SACCOs who may not have the capacity or experience of preparing for supervision. As a result, supervising them is often more costly than banks, especially in the initial stages. With maturity however, the cost of supervising MFIs and SACCOs does come down. A delegated approach is an arrangement where supervisors delegate direct supervision to an outside body while monitoring and controlling the work. Responsibilities may include data collection and processing, off-site monitoring, on-site inspections, recommendations for action, corrective enforcement, and cease-and-desist orders. However, rarely do intervention and liquidation functions get delegated. For prudential supervision, agencies other than the bank supervisor may lack adequate resources and expertise, operational independence, and remedial powers to fulfil their responsibilities. The challenge in this approach is that it is not easy to delegate supervision effectively. The principal supervisor still has to closely monitor delegated entities. Although this has worked well with financial cooperatives outside Africa, there is not many successful examples.  It is advisable therefore that innovative cost cutting approaches in supervision are considered, without sacrificing quality and effectiveness. 3.5.2.3 Recommendations It is recommended that: i. Tiered & Delegated Approach The regulatory framework should provide for tiered and delegated supervisory approaches to assist in reducing the cost of regulation. ii. Charging fees for supervision Charging fees to cover costs of supervision was not recommended. This is because FSPs pay a fee to be licensed and regulation and supervision is a public good which should be funded by public funds. It is further recommended that where supervisory fees exist it be abolished. It was also observed that FSPs are contributing to financial inclusion and should not be penalized or charged for their supervision. iii.
Stream-line Reports
Reports that are submitted to the prudential regulators, such as the quarterly reports on financial inclusion indicators and those on the financial condition of FSP, should be streamlined to facilitate analysis and risk rating. This could lead to a reduction of costs of supervision. Further, electronic submission of reports, in a given format, can simplify analysis and compilation, as well as reduce costs.
iv.
Encourage Mergers
In cases where there are many small institutions such as SACCOs and MFIs, mergers can be encouraged to reduce the number of institutions to be supervised. In addition, merges could create strong institutions. Box 5 in sub-section 2.2.8 Malawi provides an example of this recommendation.
3.5.3
3.5.3.1
Governance of FSPs
Objective
The objective here is to instil a culture of good corporate governance in FSPs as a means of capacity building, which in turn could facilitate supervision processes. 3.5.3.2 Context Strong and well governed institutions are not only stable and well managed but also facilitate effective and less costly supervision processes. One of the roles of regulators is develop the financial sector, which can be accomplished by instiling a culture of best practice in corporate governance. A corporate governance code or guideline, which provides for the processes and structures to be used in directing and governing the affairs FSPs, is a very useful. Best practice recommends that regulators require all FSPs to have a corporate governance manual, which complies with the corporate governance code. The code, should covers the overall environment in which the financial institution operates, as well as system of checks and balances that promote a healthy balance of risk return. To ensure the effectiveness of such a code, compliance is enforced by regulators. It is important that regulatory frameworks ensure that all key principles of the sound corporate governance are observed by the institutions that they supervise. With regard to independence of directors, three perspectives of independence should be considered: i. Independent from management. These are non-executive directors, who are not engaged in any management function. They must be in majority, accounting for 80% or more of the board members. Executive directors normally constitute the managing director and possibly one more employee holding a senior position. ii. Directors that are neither shareholders nor nominated by shareholders. Often, this type of independent directors are nominated by the board to enhance skills or bring in views of other stakeholders. In many cases they constitute at least one third of the board. iii. Lack of Independence arising from having continuously served on a board for a long time. Board members that have served for long durations are in many jurisdictions considered to have lost their independence. The duration varies from 7 to 9 year. The principle here is that when one serves on a board for a long time, one loses their independence. This is because they become too familiar with management and or other board members to the extent that they refrain from expressing contrary views. 3.5.3.3 Recommendations Recommendations for enhancing the governance capacity for FSPs are: i. Existence of Board of Directors The regulatory framework should require all FSPs to have a board of directors and that the board applies all governance principles, such as those embedded in a corporate governance Act. ii. Fitness and Probity Tests All significant shareholders, directors and members of senior management must undergo a fitness and probity test. This must be clearly stated in the law.  The assessment is to determine the fitness and probity of persons that perform defined functions. Regulators are required to form an opinion on whether there are any grounds to withdraw or deny approval given to such individuals. It is further recommended that this assessment be made at least once every year. iii.
Independence Directors
FSP boards must have adequate representation of independent directors.  The expectation is that independent directors bring objective views to board deliberations and are concerned with the interest of all shareholders and other stakeholders. iv. Board Structure, activities and other requirements. Regulators should also enforce requirements on the structure and activities of FSPs' boards, such as: a. Board chair and board committees must be and comprise of, respectively, independent non-executive directors. b. Induction & on-going training for board members & senior management be conducted regularly, on areas such as governance & risk management. C. Compliance with stipulated minimum qualifications for senior management. d. On-going vetting of the board and senior management to ensure continue to be fit and proper even after licensing. e. Board evaluation and management appraisals. f. Approval of the auditors. The existence of a governance guide or charter. g.
3.5.4
Capacity of FSPs
3.5.4.1 Objective The objective here is to facilitate responsible provision of financial services by building the capacity of financial services providers.
3.5.4.2
Context
Capacity building for FSPs is equally important. Some of the FSPs such as MNOs and banks, have resources and can attract professionals in all areas to boost their capacity. Others such as MFIs & SACCOs, are not so well endowed. But even those with resources, require to build their capacity because they may be new to the financial sector, which requires a different kind of capacity, especially in governance and compliance. Although capacity building is largely a responsibility of individual FSPs, regulators have a role of requiring them to undertake various capacity building activities. The eco-system can only be as good as the capacity of the individuals that govern and manage financial institutions. Capacity building requirements, therefore, are an integral part of the regulatory process and must be embedded in the regulatory framework. Secondly, considering the importance of financial inclusion in national development goals, capacity building must be viewed from a broad perspective. 3.5.4.3 Recommendations It is recommended that the regulatory framework provides for, at the: i. MICRO Level. Training and capacity building of staff at the institutional level be promoted, by requiring each FSPs have a budget allocation for proper training and development of staff. As example of this approach is provided by Ethiopia, where the regulator checks to verify if planned training activities have been implemented. In the event that they have not implemented, FSPs are required to transfer the equivalent budgeted funds to a national capacity development program pool. In Malawi, it is a legal obligation that each FSP allocates certain percentage of the wage bill towards the training levy
ii.
MESO Level.
Capacity building initiatives by apex bodies, association or networks through workshops, courses and seminars be promoted. Support from development partners should be sought. iii. MACRO Level. Regulators in cooperation with sector networks or associations could recognize FSPs that excel in staff development activities, by awarding them with certificates of merit. This could help shape behaviour. Professional trainings can be introduced in training colleges and universities where FSPs can take their staff.
iv.    Regional level
At the regional level capacity development activities through information exchange be promoted.
3.5.5
Management information systems (MIS)
3.5.5.1 Objective The objective for the following recommendations is to facilitate efficient and accurate reporting, as well as to manage risks. 3.5.5.2 Context Having good quality MIS is very crucial to any financial institution, as well as to the overall strategy in financial inclusion. The absence of good systems will undermine customer confidence and ultimately financial inclusion goals.  At the institutional level, timely and accurate information is required for both good customer service, protection of customer information, as well as for management of operations and overall management of the institution. At the industry level, sound systems enhance customer confidence and predictability. For regulators, good information systems facilitate supervision, monitoring and collection of industry data for analysis and decision making. The advent of new players and FinTech innovations, introduced new fraud risks, which is a major challenge that is likely to increase. Besides having good quality systems, there is an urgent need to address security features of the core banking systems and software applications used. In the early stages it was thought that MFIs are unique organizations that require specialized core- banking systems tailored for their processes and products. Most MFIs sought to develop their own systems, as opposed to purchasing existing ones. This has since been found to be untrue. Most off- shelf systems provide all basic functionalities that are required to run any financial institution. Further, a good number of them are mature with proven track record. What is important is the customization of such off-shelf systems to fit unique processes of each provider, internal capacity to manage systems and availability of support, locally. MFIs should therefore be discouraged from developing their own systems from scratch. The main challenges for most MFIs and SACCOS, is acquisition costs and implementation/customization capacity, which is fairly pricy and out of reach for smaller providers. Regular independent audit of system and penetration tests is increasingly becoming important, given the rise in fraudulent cases. The fast changing environment requires regular interrogation to ensure all required standards, especially those relating to security, are met. In addition, sharing of information on fraud cases, particularly those perpetrated by compromising systems, raises awareness of the loopholes being exploited and facilitates development of solutions. Systems depend on good technology infrastructure to function efficiently. While this is improving fast in the region, there are still many parts that are underserved. There is need to therefore to provide or enhance an enabling environment for service providers, at the national level. Systems can only be as good as the people that implement and manage them. One of the challenges in many countries is not having enough qualified personnel to manage core banking systems. Governments may need to invest in the development of such skilled personnel and or encourage private sector initiatives in this regard. It is, therefore, important that regulators facilitate and enforce processes that will ensure that FSPs have secure, efficient and accurate information systems. This will work towards building a foundation for a sound industry-wide system for reporting, risk management, fraud prevention, and consumer protection. 3.5.5.3 Recommendations It is therefore recommended that the framework should provide for: i. Mandatory Requirements of MIS Mandatory requirement for all FSPs to establish some form of MIS with minimum functionalities, as stipulated by the regulators. Regulators should develop standards that list minimum required functionalities. Further, regulators should conduct a pre-opening inspection and evaluation of MIS for all deposit taking institutions. Affordability ii. To address affordability of systems by small FSPs and to enable them to grow, regulators may consider: a.    A graduated scale in functionalities, A graduated scale in functionalities, based on the size of provider.  This will allow small FSPs to start with systems that are less costly because of having few functionalities, which are adequate for their size and types of transactions. As they grow and more transactions are added, they can upgrade the systems. b.    Shared Core Banking Systems For small MFIs that cannot afford to purchase core-banking systems, it is recommended that regulators explore the options of encouraging them to share core banking systems platforms. MFI association can manage such systems on behalf of its members. External Support C. Apex organization, COMESA, and donors could team up to help MFIs & SACCOs acquire basic systems. Establishment of a development fund to enhance the MIS of member countries could be considered
4.
Conclusion
The recommendations contained herein are extensive and cover most of the recommended policy and regulatory areas of focus. As mentioned earlier their application will vary from country to country and they may not be applicable to all. They are however extremely useful in many perspectives. Firstly, for countries that have yet to institute policies and regulatory frameworks for financial inclusion or those that have started but are still working on various areas, the recommendations serve as a good guide. For those countries that have applied all the recommendations, the recommendations could serve as a good guide for developing the knowledge base for the region, as well as reference material for the improvement of existing initiatives. Secondly, considering the desire to share information and of mutual support, the recommendations serve a baseline and checklist that can be used to monitor progress towards instituting a structure for monitoring progress towards the establishment of best practice in financial inclusion in the region. In this regard, it is advisable that each country prepares a checklist of all the recommendations and indicate the status of their application or otherwise. Progress can then be gauged periodically by indicating what has taken place since the last review. It is also advisable that each country establishes targets for financial inclusion goals which can also be monitored regularly. Lastly, is also recommended that the country representatives agree on; definition of Financial Inclusion including what is meant by access, as well as data to be collected, monitored and measured. This will facilitate comparison across all countries.
Annex 1: CGAP and World Bank on Principles of Financial Inclusion
There are a number of organizations that are working on various areas to advance financial inclusion globally.  These organizations provide important directions and resource materials on financial inclusion policies, areas of focus and initiatives that can add value to these initiative. In addition to the four (4) identified in the report, the following institutions are also supporting the same course. The World Bank (WB) undertakes projects that facilitate financial inclusion and thus measures financial inclusion along the following dimensions of Access, Usage, and Quality.
Access
It is defined as the availability of affordable and appropriate financial products, services and delivery channels to the target market to facilitate universal access. The capacity that financial institutions have to provide financial services and products, which is linked to the regulatory, market, and technology environments. Access indicators reflect the depth of outreach of financial services, such as penetration of bank branches or point of sale (POS) devices in rural areas (information that can be obtained from supply-side data) or demand-side barriers that customers face to access financial institutions, such as cost or information.
Usage
This is the act of employing or utilising a financial service or product. Access is of no use if the targeted persons are not using the product or service therefore real inclusion should be accompanied by usage. The way in which clients use financial services, such as the regularity and duration of the financial product/service over time (for example, average savings balances, number of transactions per account, number of electronic payments made). Having access does not mean that everybody will use financial products. Thus, not every firm or individual who does not use financial services should be classified as “excluded” or “unbanked,” and likewise every firm or individual that has theoretical access to financial services is not automatically financially included. Usage indicators can be developed from demand-side information, which can also capture financial services provided by informal financial providers
Quality
Describes how financial services are provided. Quality financial inclusion includes the following traits: affordability, simplicity, convenience, product-fit, safety, dignity of treatment, and client protection. Quality refers to product design and delivery traits that enhance the value of services to clients. The ability of the financial service or product to meet the needs of the consumer. Quality measures reflect the degree in which financial products and services match clients' needs, the range of options available to customers, and clients' awareness and understanding of financial products. Indicators of quality proxy for convenience, product-fit, transparency, safety, consumer protection, and financial capability. Hence, quality indicators can be developed with information from both demand- and supply-side surveys Consultative Group to Assist the Poor (CGAP), priorities are in the following aspects in expanding financial inclusion. These includes; . Understanding demand to effectively deliver for the poor . Financial innovation for smallholder families . Developing robust provider ecosystems . Building and enabling protective policy environment globally . Promoting effective and responsible funding for financial inclusion l Annex 2: Best Practices in Global Financial Inclusion - Pillars of global best practices Commitment from public and private sector organizations to broaden financial inclusion which 1. has explicit, strong and sustained over time. Guiding Principle Legal and Regulatory Framework -The legal and regulatory framework will underpin financial 2. inclusion by effectively addressing all relevant risks and by protecting consumers, while at the same time fostering innovation and competition. Financial and ICT Infrastructures -Robust, safe, efficient and widely reachable financial and ICT 3. infrastructures will be effective for the provision of transaction accounts services, and also support the provision of broader financial services. 4. Transaction account and payment product design- The transaction account and payment product offerings effectively meet a broad range of transaction needs of the target population, at little or no cost. Guiding Principle Readily available access points- The usefulness of transaction accounts is augmented with a broad 5. network of access points that also achieves wide geographical coverage, and by offering a variety of interoperable access channels. 6. Financial literacy -Individuals gain knowledge, through financial literacy efforts, of the benefits of adopting transaction accounts, how to use those accounts effectively for payment and store-of- value purposes, and how to access other financial services. Guiding 7. Large-volume-recurrent payment streams Large-volume and recurrent payment streams, including remittances, should be leveraged to advance financial inclusion objectives, which will be by increasing the number of transaction accounts and stimulating the frequent usage of these accounts. Global Best Practices can be mainly grouped into three categories, namely; a)     Supply side oriented best practices 1. Establishing partnerships with long term view and trust 2. Customer care management and customer education a priority 3. Focusing on products that have ease of adoption and usage features (Product market). Clear business model with value for all stakeholders/partners 4. Effective utilization of interface services 5. Digitize processes and sharing of KYC information 6. Building dedicated financial institutions. Balancing integrity and inclusion 7. Confidentiality b)    Demand side oriented best practices Transparency, 2  Reasonableness, 3  Truth while seeking for services 1. Regulation and supervision side oriented best practices c) Globally, financial inclusion has been a major policy concern for governments across the world, this has been caused by the lack of access to the formal financial sector hence a genuine global policy concern. 1. A lighter licensing regime may be generally appropriate to allow digital financial services to thrive. Innovative licensing schemes for market entry, including provisional and temporary licences, can be envisaged. 2. Need to develop holistic and balanced privacy and data protection legal frameworks in accordance with internationally-agreed core principles to promote trust in new financial digital services, 3. Need to broaden the enforcement powers of the ICT regulator and strengthen sanctions in the case of a fault, fraud or abuse. All regulators should consider transposing international best practices and guidelines for financial inclusion at the national level. Right regulations in place to enhance consumer protection. 4. 5.
Annex 3: Literature on Combined data for COMESA Countries
About COMESA Region
COMESA is the largest economic grouping in Africa with 19 members comprising of Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. The notable milestones toward the Vision of COMESA is to have a fully integrated internationally competitive regional economic community within which there is economic prosperity and peace as evidenced by political and social stability and high standards of living for its people. COMESA's Mission is to achieve sustainable economic and social progress in all Member States through increased co-operation and integration in all fields of development particularly in trade, customs and monetary affairs, transport, communication and information, technology, industry and energy, gender, agriculture, environment and natural resources. COMESA is a regional economic community made up of 19 Member States with a population of 450 million people. The main focus of COMESA is outward-oriented with the vision of promoting regional integration through trade development, investment promotion and sustainable utilization of natural resources for the mutual benefit of all the citizens of the Region. COMESA has made considerable progress towards beneficial economic integration. To this effect, COMESA has registered significant progress in areas of customs management, transport facilitation, trade and project finance, institutional development, technical co-operation and capacity building and many others.
The Financial Sector in COMESA Region
Financial inclusion has played a critical role in the economic empowerment of the poor in many countries. An enabling regulatory and supervisory environment plays a key role in enhancing financial inclusion by affecting the viability of financial service providers and increasing the access to finance for the poor and vulnerable groups. The COMESA region's desire to enhance financial inclusion has therefore, prompted the need for effective regulation and supervision that would enhance the provision of diversified microfinance services on a sustainable basis for economically active poor and low income population. Financial systems in Africa generally lag behind those in other developing economies, despite the fact that many significant improvements were implemented within the past decades. An international comparison of private credit to GDP, the main indicator of financial depth - shows a gap with other developing economies (World Bank, 2012). For example, the ratio of private credit to GDP averaged 24% of GDP in Sub-Saharan Africa in 2010 and 39% in North Africa, compared with 77% for all other developing economies, and 172% for high income economies. An estimated 2.5 billion adults worldwide are currently without access to even basic formal financial services. In mature economies, rates of exclusion tend to be low – for example, only an estimated 4% of the population in Germany and 9% in the United States go without basic access to services. 35 But in the world's smaller and less mature economies, financial exclusion rates reach exorbitant levels—approximately 88% of the financially excluded live in Latin America, Asia or Africa. In this sense, financial inclusion poses policy challenges on a scale and with an urgency that is unique for developing countries. 36 Since its establishment, COMESA has made considerable progress towards regional economic integration, particularly in areas of trade liberalization, customs management, infrastructure facilitation, trade and project finance, institutional development, technical support and capacity building. Progress has also been made in policy coordination and cooperation in productive sectors. The net result has been tangible growth in intra trade and increased cross boarder investment. With an estimated population of over 450 million people and a combined GDP of over USD 446.9 billion, (World Bank 2012) the COMESA Region is one of the largest markets on the continent. In addition, over a five year period from 2007 to 2011, total trade grew by 103.1% from US$ 9.1 billion to US$ 18.4 billion. Exports grew by 124.2% from US$ 4.5 billion to US$10.1 billion in 2011, whilst imports increased by 82% to US$8.3 billion. (COMESA stat 2012). Furthermore, COMESA global trade reached US$ 237.04 billion in 2011 (though a contraction of 7.6% from the previous year's performance) exports dropped by18% to US$94.3 billion in 2011, while imports marginally increased by 0.8% to US$$142.7 in 2011. COMESA's global trade deficit widened by US$11.36 billion (30.7%), compared to 2010 registering US$ 48.37 billion in 2011, making the COMESA Region a net importer. (Comstat, 2012).
The table below shows intra-regional variations in financial inclusion. Source: Adapted from Klapper and Singer (2015), based on Demirguc-Kunt and Klapper 2013 Overall, 23% of adults in the Africa region have an account. Within Africa, there is a large variation in account ownership: 24% of adults in Sub-Saharan Africa report having an account at a formal financial institution, though this ranges ranging from 51% in Southern Africa to 11% in Central Africa.³ In the Democratic Republic of Congo and Central African Republic, more than 95% of adults are —unbanked|| (i.e. do not have an account at a formal financial institution). In North Africa, 20% of adults have an account at a formal financial institution ranging from 39% in Morocco to 10% in Egypt.
Demand for Financial Services
A study by World Bank reported that half of the adult population in the world, 2.5 billion people, were 'unbanked' by end of 2012. This means that they do not have access to a bank account at a formal financial institution. This figure significantly reduced to 2 billion as of the 2014 surveys which indicated that in Africa financial systems are still generally lagging behind just like in other developing economies. With studies showing that Africa is the second lowest region in the globe in terms of adults with a bank account. Overall, 34% of adults in the Africa region had an account as of 2014. As of 2011, within Africa, there was a large variation in account ownership: ranging from 51% in Southern Africa to 11% in Central Africa. The low level of financial inclusion in Africa is reflected in constraints on both the demand and the supply side of the economy. Existing financial systems are underdeveloped, credit reporting from financial institutions is lacking and the level of financial literacy is often poor. Financial inclusion is further limited by low-quality financial infrastructure and the small size of many African economies. As COMESA is a huge regional market in Africa, accounting for 35% of the 54 countries on the African continent. COMESA's total geographic area of 11.6 million square km covers 38% of the African continent; and its population of 444 million inhabitants (in 2011) accounts for 43% of Africa's total population. Financial inclusion varies widely within the COMESA Region as shown below, with 8% being the lowest proportion of adults (age 15 and above) with an account at a formal financial institution (Libya) and 80.1% being the highest (Mauritius) in terms of averages between 2009 and 2011. As of 2014, the region average of adults with a bank account was 19.2% and 31.8%, a significant improvement from 19.2% in 2011.
Supply of Financial Services
Supply-side data on the geographic or demographic coverage of financial services highlight the prevalence or scarcity of financial institutions. The Basic Set captures points of service through the number of commercial bank branches per 100,000 adults. High-income economies have 37.1 bank branches per 100,000 adults; developing economies have 13.6. Among developing regions, Latin America and the Caribbean has the highest level of penetration, with 28.8 bank branches per 100,000 adults, followed by Europe and Central Asia with 25.4. Sub- Saharan Africa has only 4.3 bank branches per 100,000 adults. Formal financial services are dominated by banks with deposits being more common than loans while other financial services are now provided by SACCOs, MFIs, mobile money service providers besides other informal organizations like the ROSCAS, shylocks among others. One of the challenges faced by member countries in the implementation of macro-economic convergence criteria in COMESA is undiversified nature of the financial markets and instruments and weak monetary transmission mechanisms. Financial inclusion may improve both of these obstacles. COMESA being one of Africa's largest economic community, accounting for 35% of the countries, 38% of the area and 43% of the population, in Africa.  Formal financial services are dominated by banks. With estimates indicating: 8 ATM's and 7 bank branches per 100,000 adults. Access indicators were highest in Seychelles with 45 bank branches and 43 ATM’s per 100,000 adults and lowest in Burundi, 2.0 ATM’s and Congo DR with 0.5 bank branches per 100,000 adults. Although it must be indicated that Intra Regional trade in the COMESA states however, has not followed the same trend as a significant number of traders are financially excluded.
Access to Financial Services
The financial markets are deepening and diversifying very quickly in almost all countries. Appetitive for lending and innovation in the financial sector has improved and increased remarkably. Diversification into inclusive financial products, particularly mobile enabled products such as money transfers, payments and lending over the mobile phone are redefining financial services in Africa. There is also greater activity in non-lending financial services, such as leasing, insurance, warehouse receipting, etc. Risk aversion of financial institutions towards SMEs is reducing in many countries, not least due to increased competition in the financial sector, though there is still room for improvement. Low financial innovation restricts the responsiveness of many financial institutions to the requirements of SMEs. Lack of access to vital facilities such as communication, working premises, cost, and availability of raw materials, and limited choice of appropriate technology impede the ability of MSMEs to develop a capital base. This, in-turn implies that they have difficulty meeting conditions set by financial institutions such as collateral, etc. The figure below shows low levels of financial inclusion Levels of financial inclusion Source: Beck and Cull (2014)
Financial Inclusion Policies
The policy objectives are to create and maintain an enabling environment for long term growth within the COMESA Region, through building competitive productive capacities to expand the supply of value -added goods and financial services to regional global markets. Policy Focus Areas include: 1) Access to markets and market information, regional and international 2) Productivity and access to technology 3) Access to business development services 4) Access to financial services 5) Conducive policy, legal and regulatory environment The guiding principles for policy implementation include: Inclusivity: ensuring gender equity, attention to youth, those with disabilities and addressing geographical, i. historical and structural disadvantage and marginalization Competitiveness: adopting the acceleration and expansion of value addition as the central Strategy for ii. regional and global market penetration and wealth creation Sustainability: embracing approaches that enhance African self-reliance and environmental soundness-led iii. growth. Areas that need agent policy frame work a)    There is need to develop a policy on information and market infrastructure to address collateral issues, and limit excessively intrusive interventions and dominance. A Policy frame work to address interventions that support technological innovation, promote competition, b) and create infrastructures can help achieve economies of scale and reduce costs in financial services provision. Require a concomitant widening of the regulatory and supervisory perimeter to minimize regulatory C) arbitrage and financial system risks. Due to the rapid expansion of non-bank intermediary sector, which traditionally has been outside the d) regulatory remittances, a policy needs to be developed to address challenges posed to ensure financial stability.
Regulatory Bodies
The regulatory framework for banking is established by the government of the each country and is governed by Central/Reserve Banks Act together the Banking Act. The Central Bank also supervises the compliance on the part of the banks and also it gives prudential guidelines on governance, management, and control. Other subsidiary legislations are enacted from time to time beside the Act. A revision of the Acts is carried out once there is need to address certain matters related to the banking sector. The banking sector has recently been hit by the mobile money transfer where the mobile banking has taken up a share of banking services without a clear regulation. The mobile banking or mobile money platform operates under two regulators, telecommunication and banking/ Financial services. Other bodies that regulate the finance sector are in insurance, pension firms and even Micro finance associations, Sacco's body that regulates operations of Sacco's, within different countries but all of them are regulated by  the central bank.
Innovations
Financial systems within the COMESA region have rapidly undergone financial innovation, driven mainly by advances in information and communication technology (Digital money). Both the banked and unbanked public can move money and effect payments much faster and with greater convenience. Of all the innovations, mobile money growth has developed and proliferated across the region at such a remarkable rate not forgetting internet banking and agency banking which all have integrated the aspect of technology in operations hence leading to better financial inclusion. Other notable innovations include the agency banking model now adopted in different countries in the COMESA region.
Targets
Targets can be a powerful tool to translate the ambition of goals into practical outcomes. When well defined, publicized, and monitored, targets can have a rallying effect. The targets can help countries' efforts to analyse their financial inclusion challenges, craft policies, monitor progress, and set targets that align stakeholders. The targets range from increasing access, payments systems, branchless banking, financial education, consumer protection, data, national strategies, laws, and regulations, increasing the range of products, and financial infrastructure (e.g., credit bureaus, national IDs). It must be noted that Overall, consumer protection, and financial literacy are so far the most "popular" policy areas for targets. The following may be among targets to be set by COMESA countries. 1) Governments to support widespread access to finance by promoting existing access points, including public networks and government offices, as well as innovative distribution channels, including third-party correspondent and mobile service providers. 2) COMESA leaders to eliminate barriers to entry for providing financial services through easing the transition for financial providers to transform into regulated institutions; creating a favourable legal environment, including considering the elimination of interest rate and profit caps. 3) Attention needs to be given to over indebtedness. Leaders to support further financial education especially for the un- and under banked besides other 4) vulnerable groups, and SMEs. Need to support efforts by all countries to improve data on SME finance, in particular, bank access to credit 5) data.
REF NO: 2 (Licensed and Supervised by Bank of Uganda)
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