Regulating and Supervising Financial Cooperatives in Malawi. SACCOs (Savings and Credit Co-operatives) were introduced in Malawi in the 1960s-1970s and have since grown to over 90 active SACCOs serving around 74,000 members. However, the regulatory environment is weak. The document proposes strengthening regulation by: 1) Creating an independent Regulatory Authority; 2) Introducing enabling legislation specifically for SACCOs; 3) Requiring minimum governance and internal control standards for SACCOs. This would help formalize SACCOs, protect members, and support the continued growth of the sector.

1. REGULATING AND
SUPERVISING FINANCIAL
COOPERATIVES IN MALAWI
Presentation by Noel Mkulichi
Financial Co-operatives Regulators Roundtable,
Pretoria
November 24-25, 2008

2.  Historical Background of SACCOs in Malawi
 Overview of SACCO Movement in Malawi
 Regulatory Environment for SACCos
 Roles of the National Association
 Observations on SACCOs Regulatory Environment
 Consequences of the Regulatory Environment
 Regulatory Direction for SACCOs
 Broad objectives of the Regulation
 Strengthening Governance and Internal Controls
 Regulation and Supervision of SACCOs
 Regulatory Relationships
 Concluding Thoughts
Presentation Outline

3. Historical Background of
SACCOs in Malawi
 SACCO philosophy was introduced by Catholic Fathers in 1962
 In 1968 an African Body called ACCOSCA was formed in Nairobi in
order to facilitate development of SACCOs.
 In 1969 leadership of ACCOSCA visited Malawi and discussed with
Government officials on SACCOs in the country.
 In 1971 three nuns went to Swaziland to study SACCO philosophy.
 In 1973 first SACCO was registered in Malawi.
 In 1979/80 SACCO feasibility studies were done.
 In 1980 MUSCCO was registered as a National Association.

4. Overview of the SACCO Movement
 The Movement is still at its nascent stage, but relatively developed
compared to other movements in the region
 Comprises:
 The Regulatory Authority (Registrar of cooperative societies)
 A national association (MUSCCO) with 60 affiliates
 Three chapters (regional groupings of SACCOs)
 Individual SACCOs (about 90 of which about 70 are active)
 Total membership of SACCOs stands at about 74,000 against adult
population of about 5 million
 Outstanding loans amount to 232,500 with value totallingK1. 04
billion ($7.4 million)
 Deposits stand at K1.09 billion ($7.7 million) of which:
 K116.6 million ($0.8 million) are savings and
 MK974.0 million (6.9 million) are share deposits

5. Regulatory Environment for
SACCOs
 SACCOs are registered under Cooperative Societies Act, 1998 (primary
law), and Cooperative Societies Regulations, 2002 (subsidiary law)
 The Registrar of cooperative societies in the Ministry of Industry and
Trade (MoIT) administers the laws
 Each SACCO is further guided by its own bye-laws approved by Registrar
 The Registrar does not however supervise affairs of SACCOs on account
of capacity
 Delegated the inspection function to the National Association to ensure
safety and soundness of SACCOs
 MUSCCO is also mandated to conduct external audits in SACCOs to
ensure compliance with statutes

6. Roles of the National Association
 MUSCCO was set up to develop, promote and
safeguard a safe and sound network of SACCOs
in Malawi
 In addition to inspections and external audits,
MUSCCO:
 Operates a central finance facility which assists
SACCOs in liquidity management
 Operates in-house financial protection plan, an
insurance scheme for SACCO members targeting life
savings and loan protection
 Provides technical support on accounting procedures
and systems, management information systems, and
data base development, etc

7. Observations on SACCOs Regulatory
Environment
 No established position of the Registrar for cooperative
societies in MoIT as required by law, only puts on the
hat in times of need
 Both the primary and subsidiary laws are not enabling
for financial cooperatives development
 Conduct of inspection and external audits by one
institution (MUSCCO) is cause for conflict of interest
 Both inspection and external audits may not be
independent (principal – agent dilemma)

8. Observations on SACCOs Regulatory
Environment (Cont’d)
 Some SACCOs, especially those not affiliated
with MUSCCO can escape regulation
 Some SACCOs have registered growth overtime
thereby requiring stringent input and
involvement of board
 Weak governance structures at both board and
management level
 Weak internal controls within SACCOs

9. Consequences of the Regulatory
Environment
 The office of the Registrar for cooperative societies has
no budget and hence depends on the ministry
 The Registrar reports to the Minister through the
Principal Secretary, hence has no final say.
 Weak governance arrangements and internal controls
have led to frauds, insolvency and ultimately, failure of
SACCOs
 Loss of confidence by members
 SACCOS lack formal recognition among non-members as
portrayed by low membership

10. Regulatory Direction for SACCOs
 Introduce a specific and enabling
legislative framework for SACCOs
 Create a Regulatory Authority that is
independent, has capacity to regulate;
and
 Strengthen governance and internal
controls

11. Broad Objectives of the Regulation
 Place the regulatory authority under the Registrar for financial institutions
to ensure effective oversight
 Create a prudential, proportional and predictable legal and regulatory
framework for SACCOs in Malawi.
 One central piece of legislation recognizing the banking, cooperative and
microfinance aspects of SACCOs
 Protect deposits and shares of members while preserving ability to serve
the members
 Limit the scope of regulation so the regulator is not overburdened
 Balance interests of regulation and supervisory capacity through
delegation of regulatory powers to an independent body.
 Put in place effective governance and internal controls in order to gain
public recognition

12. Strengthening Governance of
SACCOs
 Registrar to introduce minimum standards for
board of directors
 The Registrar to subject directors to ‘fit and
proper’ test before rising onto the board
 Also to determine composition, frequency of
meetings, rules of appointment, responsibilities
and additional qualifications for directors

13. Strengthening Governance of
SACCOs (Cont’d)
 SACCOs to be managed by a CEO and
another senior management officer
 CEO to pass ‘fit and proper’ test
 Must also have hands-on experience

14. Strengthening Internal Controls
 SACCOs shall be expected to
 conduct business with integrity, prudence and
professional skill
 engage only in bona fide transactions
 truth in lending by disclosing terms of any
credit or savings product offered
 Comply with minimum standards of good
practice

15. Strengthening Internal Controls
(Cont’d)
 Registrar to issue directives on
 minimum capital or loan fund requirements
 Aging and provisioning of loans
 Insider lending
 Certain classes of credit facilities, investments
and risk-bearing commitments
 Any other transactions affecting the solvency
or liquidity of a SACCO

16. Strengthening Internal Controls
(cont’d)
 SACCOs to appoint external auditors for
production of audited financial statements

17. Regulation and Supervision of
SACCOs
 Registrar to determine threshold for
placing a SACCO under prudential
supervision
 SACCOs to submit periodic returns to
Registrar
 SACCOs to submit annual financial
statements to Registrar

18. Regulation and Supervision of
SACCOs (Cont’d)
 Minister shall issue regulations on
administration of the Act
 Remedial measures and winding up
covered under the umbrella law, the
Financial Services Act

19. Regulatory relationships
 The Registrar for cooperative societies shall
maintain registration of cooperative societies
according to Cooperative Societies Act
 The Registrar for financial institutions shall
consider application from registered societies for
licensing under the Financial Cooperatives Act
 The Registrar for financial institutions may
delegate the supervision function to MUSCCO
(non-prudential)

20. Concluding Thoughts
 Access to financial services by the poor is likely
to accelerate economic development and
poverty eradication
 An enabling cooperative law is likely to:
 reform and modernize the functioning of the SACCOs
 create a strong foundation for regulation and
supervision of SACCOs
 provide a platform for prudent growth and innovation
in financial cooperatives industry
 provide a level playing field

21. Asante Sana!
Yebo!
Merci!
Thank You!