OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA 2nd Year No . 30 ADDIS ABABA - 5h July , 1996 CONTENTS Proclamation No . 40 / 1996 Licensing and Supervision of Micro Financing Ins titutions Proclamation . . . . . Page 245 A PROCLAMATION TO PROVIDE FOR THE LICENSING AND SUPERVISION OF THE BUSINESS OF MICRO FINANCING INSTITUTIONS WHEREAS , it needs to provide for a legal regime that brings the activities of micro financing institutions within Ethiopia ' s monetary and financial policies ; WHEREAS , the monetary and banking laws in force do WHEREAS , it has become necessary to legislate on the institutions ; NOW , THEREFORE , in accordance with Article 55 ( 1 ) of the Constitution of the Federal Democratic Republic of Ethiopia , it is hereby proclaimed as follows : PART ONE General Short Title This Proclamation may be cited as the " Licensing and Supervision of Micro Financing Institutions Pro Unit Price www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com 2 . Definitions In this Proclamation , unless the context otherwise requires : 1 ) “ Bank ” means the National Bank of Ethiopia : 2 ) " Company " means a share company , as defined under Article 304 of the Commercial Code , the capital thereof owned fully by Ethiopian nationals and / or or ganizations wholly owned by Ethiopian Nationals and registered under the laws of , and having its head office in , Ethiopia ; 3 ) " Micro financing business ” means an activity of extending credit , in cash or in kind , to peasant farmers or urban small entrepreneurs , the loan size of which shall be fixed by the Bank ; 4 ) " " Micro financing institution ' ' means a company licen sed under this Proclamation to engage in micro finan cing business in rural and urban areas ; 5 ) “ Members ” means the shareholders of a micro finan cing institution or signatories to any type of member ship arrangement created by such institution ; 6 ) " Group guarantee " means a guarantee mechanism whereby a group of borrowers undertake to be liable jointly or severally to defaulted loan of any one of them ; 7 ) " Savings " means non - withdrawable mandatory or regular savings of members of a micro financing institution ; 8 ) “ Deposits ” means any regular or irregular Savings which may be withdrawn partially or totally at any time by the account holder ; 9 ) " Directors " means members of the board of a micro financing institution . 3 . Purpose and Duty 1 ) The purpose of micro financing institutions is granting credit , in cash or in kind , the maximum amount of which shall be determined by the Bank . 2 ) Subject to conditions set under this Proclamation , a micro financing institution may carry out some or all of the following activities : ( a ) accepting savings as well as demand and time deposits ; ( b ) drawing and accepting drafts payable within Ethiopia ; www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com ( c ) borrowing money for its business purposes against the security of its assets or otherwise ; ( d ) purchasing such income generating financial ins truments as treasury bills ; ( e ) acquiring , maintaining and transferring of any movable and immovable property including premises for carrying out its business ; ( f ) providing counseling service to its clients ; ( g ) encouraging income generating projects for urban and rural micro - operators ; ( h ) rendering managerial , marketing , technical and administrative advice to borrowers and assisting them to obtain services in those fields ; ( i ) managing funds for micro financing business ; and ( 1 ) engaging in other activities customarily undertaken by micro financing institutions . PART TWO Licensing of Micro Financing Institutions 4 . Conditions Required to Engage in Micro Financing Business 1 ) To carry out micro financing business , the following conditions shall be fulfilled : ( a ) obtain a license from the Bank ; ( b ) be formed as a company ; ( c ) deposit with a bank the minimum initial capital required by the Bank ; and ( d ) that the directors and other officers meet requirements set by the Bank . 2 ) The Council of Ministers may , upon recommendation by the Bank , exempt an applicant from the requirements of any of the provisions of sub - Article ( 1 ) of this Article inorder that other innovative financial intermediaries engage in micro financing business and for other causes consistent with the objective of this Proclamation . 5 . Prescribing Additional Conditions 1 ) The Bank may issue directives at any time and prescribe additional conditions to be complied with before a license is issued . 2 ) Where the Bank intends to change or vary the terms and conditions attached to a license , it shall notify the concerned micro financing institutions of such inten tions forty - five ( 45 ) days before the date it proposes tr carry same into effect . www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com 6 . Application for License 1 ) An application for license to carry out micro financing business shall contain the following : ( a ) the prospective place of operaiton ( indicating that of the head office and branches ) ; ( b ) the name , occupation , residence and nationality of the founders ; ( c ) form of organization of the undertaking ; ( d ) memorandum of association of the undertaking ; ( e ) proposed name of the undertaking ; ( f ) biographical data on each of the founders , proposed directors and officers ; ( g ) the proportion of contribution in cash and in kind and the manner of valuation of contribution in kind ; ( h ) the proposed transactions and operations of the undertaking as well as the manner for carrying out same ; and ( i ) such other relevant information as the bank may require . 2 ) An investigation fee , prescribed by the Bank . shall be paid at the time of submitting the application for license . 3 ) An applicant issued with a license shall commence operations within 12 ( twelve ) months from the date thereof . 4 ) No micro financing instituion shall , without the prior consent of the Bank , operate outside the area for which it has been issued with a license . 5 ) Every micro financing institution shall pay such annual license renewal fee as the Bank may prescribe . 7 . Authorization of Commencement of Operation Any micro financing institution may , before commencing operations , be required to meet certain conditions pres cribed in a directive to be issued by the Bank . 8 . Recovery of Monies and Securities Received by unlicensed undertakings Where any unlicensed person undertakes activities carried out pursuant to this Proclamation , and holds monies or property obtained through such act , the Bank may apply to the Federal High Court for orders in respect of the disposition of same ; the High Court shall give orders for the speedy and efficient return of such monies or property to the depositors or owners thereof . 9 . Revocation of License The license of a micro financing institution may be revoked by the Bank for any of the following reasons : 1 ) where it fails to commence operations within a period of 12 ( twelve ) months following the issuance of license ; 2 ) where it ceases to carry on its activity ; 3 ) where it is declared bankrupt or decided that it be liquidated ; www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com 4 ) where it is amalgamated with another micro financing institution or bank without prior written authorization of the Bank ; or 5 ) where confirmed that its registration was effected on the basis of false information . 10 . Application for re - Registration 1 ) where the savings mobilized by a micro financing institution equals Birr 1 , 000 , 000 ( one million Birr ) it shall apply for re - registration . 2 ) where application is made under sub - Article ( 1 ) of this Article , it may be required that additional conditions prescribed by directives issued by the Bank be met . 11 . Assistance 1 ) Where it deems it appropriate , the Bank shall extend technical assistance requested by a micro financing institution while being organized or in the course of operations 2 ) Micro financing institutions may obtain line of conces sional credit or any assistance from foreign sources for the purpose of on - lending or capitalization . 3 ) Any credit or assistance to be obtained under sub - Article ( 2 ) of this Article shall require the prior approval of the Ministry of Finance . PART THE Financial Requirement . J Limitations 12 . Minimum Capital Requirement and Powers and Responsibilities of the Bank 1 ) The minimum paid - up capital required to obtain license for micro financing business shall be determined by directives to be issued by the Bank . 2 ) The Bank may issue directives governing the follow ( a ) limits on the maximum credit extended by micro financing institutions to any individual or group ; ( b ) the loan period and procedures ; ( c ) periodic reporting , the accounting system and the ( d ) periodic surveys of loan and audits ; ( e ) standards regarding accountability , structure , savings system and financial performance ; ( f ) setting of special interest rate applicable to micro financing institutions . 3 ) The Bank shall have the responsibility to : ( a ) encourage banks and other financing institutions to engage in micro financing business or to expand their activities in same ; ( b ) offer or facilitate training for the personnel of micro financing institutions ; pro40pp5 . . 05 www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com ( c ) promote and develop traditional savings institutions such as Iqub inorder that the low - income section of society benefit most from them ; and ( d ) promote investment in micro financing business , especially in rural Ethiopia , pursuant to powers vested in it under the law . Consolidation and merger of micro financing ins titutions operating in adjacent areas shall be encouraged be granted to them . 1 ) Every micro financing institution shall notify its having opened a branch office , within fifteen ( 15 ) days of the commencement of operation of such branch . 2 ) The Bank may set general guidelines on donations of opening and operating branch offices by micro finan cing institutions . PART FOUR General Conditions Micro financing institutions may extend loan to members as well as to non - members . However , such credit schemes as operating under group guarantee shall exert themselves to bring borrowers into membership of the institutions . The minimum prudential framework of operation in respect of all micro financing institutions shall be in the manner and form to be prescribed by the Bank . 17 . Prohibitions Without the prior approval of the Bank no micro financing institution may : 1 ) enter into any arrangement or agreement for the sale or disposal by amalgmation or otherwise of its business or effect self restructuring ; 2 ) transfer or otherwise dispose of the whole or any part of its property , whether inside or outside Ethiopia , other than in the ordinary course of its business ; 3 ) effect reduction of its capital ; or 4 ) amend its memorandum of association or alter the name under which it is licensed . 18 . Circumstances Requiring Approval for Managerial The following shall not be allowed to manage micro financing institutions without the prior written approval of the Bank : www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com 1 ) persons declared bankruptor who have made a compromise with their creditors , whether in Ethiopia or elsewhere ; 2 ) persons convicted of offences of breach of trust or fraud , whether in Ethiopia or elsewhere . 19 . Tax Exemption The Ministry of Finance is hereby empowered to deter mine the period , manner and condition of exemption of micro financing institutions from income tax . 20 . Special Responsibility Every micro financing institution shall devise and ex ecute a policy whereby the low - income section of society , especially in rural areas , get access to credit and to this end it shall implement such means of substituting group guarantee for property collateral requirement . PART FIVE Miscellaneous Provisions 21 . Duty to Cooperate Where so requested by the Bank , all concerned bodies shall have the duty to cooperate in the implementation of this Proclamation . 22 . Audit Accounts of micro financing institutions shall be audited annually by an independent auditor acceptable to the Bank prior to the payment of dividends to shareholders . | 23 . Inapplicable Laws Any law inconsistent with the provisions of this Proclamation shall not apply to matters provided for under this Proclamation . 24 . Other Applicable Law With respect to matters not covered under this Proclamation , the Licensing and Supervision of Banking Business Proclamation No . 84 / 1994 shall apply , mutatis mutandis . 25 . Power to Issue Directives The Bank may issue directives necessary for the proper implementation of this Proclamation . 26 . Transitory Provisions 1 ) Undertakings engaged in micro financing business , prior to the coming into force of this Proclamation , may continue in their previous form until reorganized in compliance with the provisions of this Proclamation . 2 ) The conditions and time limit of non - applicability of this Proclamation to such undertakings shall be determined in directives to be issued by the Bank . www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com 27 . Effective Date This Proclamation shall come into force as of the 5th day of July , 1996 . Done at Addis Ababa , this 5th day of July , 1996 . PRESIDENT OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA www . AfricanLawArchive . com * * * The African Law Archive * * * www . AfricanLawArchive . com