Legal Alert | Lending to SACCOs

Prior to 2016, Savings and Credit Cooperative Organizations (SACCOs) were regulated exclusively under the Cooperative Societies Act of 1991 (the ‘’Cooperative Societies Act’’). In 2016, Uganda reformed its laws by enacting the Tier 4 Microfinance and Money Lenders Act 2016 (the ‘’Act’’).  One of the reforms included the classification of SACCOs as Tier 4 Microfinance Institutions and thereby making the Act applicable to them.

The Act defined a SACCO to mean a registered society licensed under the Act. The Act mandates that a SACCO shall not borrow an amount which in aggregate exceeds the limit prescribed by the Uganda Regulatory Microfinance Authority. (the ‘’Authority’’) The Act does not prescribe a limit.  The Authority advised that the limit is yet to be prescribed under the regulations that will be passed under the Act. Once a limit has been prescribed by the Authority, this will mean that any lender extending credit facilities to a SACCO shall be advised to inquire into whether the SACCO is borrowing within approved limits.  This is because a lender may have a challenge when seeking to enforce recovery of any credit extended that exceeds the prescribed limit.

In addition, the Act requires that all SACCOs obtain licenses issued by the Authority. There has been a lot of speculation on whether a license is required given that SACCOs are regulated under the Cooperative Societies Act.

a. Looking at various provisions of the Act, Section 36 (1) of the Act provides that a SACCO shall not carry on the business of financial services unless it is a registered society and is licensed under the Act. Section 36 (3) however provides that subject to Section 36 (1), a SACCO may carry on the business of financial services if it is operating on a probationary period pending registration under the Cooperative Societies Act; or if it has applied for a license under the Act;

b. It is operating on a probationary period pending registration under the Cooperative Societies Act; or

c. It has applied for a license under the Act.

There exists an absence of clarity around whether SACCOs are regulated exclusively under the Cooperative Societies Act or whether they fall under a double regulatory regime that includes both the Cooperative Societies Act and the Act.

Section 36 (1) of the Act may be interpreted to mean that a SACCO has to be a registered society under the Cooperative Societies Act and also licensed under the Act.  Section 36 (3) on the contrary may be interpreted to mean that a SACCO may carry on the business of financial services if it either has a license issued under the Act or is pending registration under the Cooperative Societies Act. The use of the word subject to in Section 36 (3) therefore leads one to the conclusion that a SACCO is required to be registered under the Cooperative Societies Act and then additionally apply for a license under the Act.

The Act also mandates that a registered society which is not a licensed SACCO shall not include the words ‘’Savings and Credit Cooperative’’ or SACCO in its name.  In addition, a SACCO that intends to carry on the business of financial services shall apply to the Authority for a license. Some of the documents to be attached to the application include:

a. a certified copy of the certificate of registration issued under the Cooperative Societies Act;

b. the organizational structure and management of the registered society;

c. the business plan of the registered society;

d. the credit policies and lending policies of the registered society.

The requirement to attach these documents confirms that SACCOs have to be registered under the Cooperative Societies Act and the Act. The Act also provides that the Cooperative Societies Act shall not apply to SACCO’s regulated under the Act except as expressly provided by the Act. Application of the Cooperative Societies Act in respect to a SACCO is restricted to:

a. governance of a SACCO;

b. investment of funds;

c. dividends or bonus;

d. reserve fund;

e. share transfer fund; ands

f. contribution to the education fund.

Thus, for entities intending to lend to SACCOs, it is important to verify if the SACCO has a certificate of registration and a license issued under the Act.


CONCLUSION

It is apparent that SACCOs are governed by two separate laws, they are registered under the Cooperative Societies Act and licensed under the Tier 4 Microfinance and Money Lenders Act 2016 Act. It is also clear that while the law prescribes limits of SACCO borrowing amounts, there has been no move to set this prescribed limit. Indeed, the Uganda Microfinance Regulatory Authority has taken the position that the limit hasn’t been set and its likely to be set when regulations under the Act have passed.

Although the limit on the amount to be borrowed is aimed at protecting members of a SACCO, it may discourage lenders from lending to SACCOs with the lingering concern of failure to enforce the lender’s rights should any amounts be deemed to have exceeded a particular limit.  Most lenders in Uganda are trying to make the loan application process easier and requirements for proof of approval from Uganda Microfinance Regulatory Authority for the limits on the amounts extended to a SACCO may only complicate things.


Please do not hesitate to contact the people below should you require further clarity/assistance in this regard.

   
Gloria Matovu Kawooya
Partner
kawooya@ug.africalegalnetwork.com
Doreen Nawaali
Associate
nawaali@ug.africalegalnetwork.com