Recently, The Bank of Uganda /BoU (Uganda’s Central Bank) issued the National Payment Systems Regulations, 2020 (the NPS Regulations) for stakeholder comments. The Ortus Advocates and Ortus Africa Capital team issued a market update and analysis of the same.
In this edition, we analyze the proposed minimum capital requirements proposed under the Regulations and whether they will facilitate growth of the fintech industry if preserved in the current form. In undertaking this analysis, we shall review the current minimum capital requirements across some select business categories in the financial services sector for comparative purposes.
Tier 1 Financial institutions
The Financial Institutions (Revision of Minimum Capital Requirements) Instrument issued by the Minister of Finance, Planning and Economic Development in 2010 governs the aspect of minimum capital.
Clause 2 states that an entity transacting financial institution business as a bank must have a minimum paid-up share of not less than one million, two hundred and fifty thousand currency points (Uganda Shillings Twenty-Five Billion Only/UGX25,000,000,000) invested as liquid assets. That is the required minimum capital funds unimpaired by losses.
Section 26(5) of the Financial Institutions Act, 2004 (as amended) gives the Minister of Finance, Planning and Economic Development the discretion to revise the minimum capital requirements of financial institutions by a statutory instrument on the advice of the Central bank. However, such a ministerial statutory instrument revising minimum capital requirements of financial institutions must immediately be laid before Parliament. This process was done in 2010 with the coming in force of the current minimum capital requirements for commercial banks.
On the basis of this core capital and risk (ongoing capital), commercial banks are authorized to mobilize deposits from the public, savings, and time deposit accounts for individuals and institutions in local and international currencies. They are also authorized to buy and sell foreign exchange, issue letters of credit, and make loans to depositors and non-depositors.
Tier 2 Financial Institutions
These entail credit and finance companies which may accept customer deposits, open savings accounts, and issue laons backed with collateral or without collateral to saving and and non-saving customers.
Their minimum capital requirements are established by the Financial Institutions (Licensing) Regulations, 2005. Regulation 6(3) provides that an applicant proposing to transact business as a non-bank financial institution must have a minimum paid up cash of not less than Uganda Shillings One Billion Only (UGX1000,000,000)
Tier 3 Financial Institutions
This tier includes microfinance deposit-taking institutions (MDIs) that are allowed to accept deposits from customers but only in the form of savings accounts. However, they cannot offer checking accounts or to trade in foreign currency. They are regulated by the Micro Deposit Taking Institutions Act, 2003.
Section 15 of that Act states that a company must not be granted or hold a licence unless it has a minimum paid-up capital of twenty-five thousand currency points (Uganda Shillings Five Hundred Million/UGX500,000,000) invested in such liquid assets in Uganda as the Central bank may approve. The Minister of Finance, Planning and Economic Development is empowered to vary this minimum paid-up capital from time to time by statutory instrument with approval of Parliament.
Forex Bureaus and Money Remittance Companies
These are currently governed by the Guidelines for the Licensing and Operation of Forex Bureaus and Money Remittance Companies, 2018. These Guidelines were issued under the Foreign Exchange Act, 2004.
Regulation 5(b) requires entities intending to conduct such business to have minimum unimpaired paid up share capital of not less than Uganda Shillings twenty million (UGX20,000,000) in case of a forex bureau and Uganda Shillings fifty million (UGX50,000,000) for money remittance business.
Credit Reference Bureaux (CRBs)
These entities are regulated by the Financial Institutions (Credit Reference Bureaus) regulations, 2005/
Powering the Nation: Beyond Blame, Toward ESG-Driven Electricity Governance in UgandaRegulation 11 provides that the minimum capital for establishment of a credit reference bureau (CRB) shall be ten thousand currency points (Uganda Shillings Two Hundred Million Only/UGX200,000,000) invested in such liquid assets as the Central Bank may approve. However, these regulations are currently being reviewed.
| PROPOSED MINIMUM CAPITAL REQUIREMENTS AND FEES FOR FINTECHSIN UGANDA |
| S/N | LICENCE TYPE | PERMISSIBLE ACTIVITIES | CAPITAL REQUIRED (UGX BILLION) | APPLICATION/ LICENCE/ ANNUAL FEES (UGX MILLION) |
| 1 | PSP/PSO (Electronic Money Issuer) | Issuance of electronic money, recruitment and management of agents, creation and management of wallet. Wallet based domestic money transfers including transfers to and from bank accounts, cash in and cash out transactions, investment, savings, credit products only in partnership with banks, insurance and pension products only with authorised insurance and pension companies and cross-border payments or transfers. | 10 | 10/25/10% of total income |
| 2 | PSO (Switch) | Routing of payment transactions, authorisation and settlement request from merchants, acquiring and issuing banks. | 5 | 10/25/10% of total income |
| 3 | PSP/PSO (Aggregator Licence) | Aggregation of merchant services, processing services, provision of hardware and software, printing and personalization of EMV Cards, Inward International remittances services, merchant acquiring, Point of sale deployment, Payment aggregation. Payment Gateway and Portals/payment aggregation which is connected to Enhanced PSP. Training and support of merchants. Printing of non-cash payment instrument, development of market platforms, payment application/solution for Credit, Savings and Investment products in partnership with Banks. | 3 | 5/10/10% of total income |
| 4 | PSP/PSO (Standard Licence) | Payment Gateway and Portals/payment aggregation which is connected to Enhanced PSP. Training and support of merchants. Printing of non-cash payment instrument, development of market platforms, payment application/solution for Credit, Savings and Investment products in partnership with Banks. | 2 | 5/10/10% of total income |
| 5 | PSO (Standard License) | A payment application solution/development, merchant development platform, a payment solution. | No capital required. To leverage on enhanced licence. | 0.5/1/0.2% of total income. |
Conclusion
Even by comparative means, the proposed minimum capital requirements are very high and prohibitive. If maintained, very many players will be locked out of the fintech space. Since the prospective licensees will not be holding any public/deposit of funds, we propose that the core capital requirements should be left discretional and subject to periodic review by BoU depending on size, risk profile and business model of the fintech in question since most of the fintech risks tend to be operational. For instance, regulated platform lenders may be subject to minimum capital requirements to ensure that they operate prudently in monitoring and managing their business and financial risks.
As noted by the World Bank in its 2019 publication, Prudential Regulatory and Supervisory Practices for Fintech: Payments, Credit and Deposits;
“In banks, capital and liquidity requirements go together. For e-money and P2P platforms, liquidity requirements may be much lower, depending on precise institutional and contractual arrangements. Some major jurisdictions such as the United States and the United Kingdom do not have liquidity requirements for e-money providers. This makes sense when an e-money provider is required to associate any funds held for its customers with a segregated account in a commercial bank, because the liquidity requirement naturally falls on the bank. That is, any quick demand for funds from e-money customers could be met by drawing down the segregated account. Then the only additional liquidity requirement needed from the e-money provider would be what might be needed to cover any operational lag between changes in e-money accounts and the corresponding segregated bank account.”
Other regulatory approaches to safety nets that might be considered include insurance similar to deposit insurance for banks covering deposit-like products that fintech firms such as e-money providers offer. Such a scheme would be triggered if a fintech firm failed and there were no back-to-back segregated bank accounts. Where back-to-back segregated bank accounts are required, the scheme could be activated if the holding bank in question failed. Coverage by deposit insurance for deposit-like products is particularly relevant for jurisdictions like Uganda where e-money providers such as mobile money platforms have systemic importance and the failures of such providers could undermine public trust and confidence in the financial system as a whole and cause system-wide disruptions due to integration with financial services such as banks and other service providers such as utilities.
Silver Kayondo
Partner | TMT/IP
Kenneth Legesi
CEO/CIO | Ortus Africa Capital
Moses Baguma
Associate| TMT/IP