Microfinance firm faces probe over illegal deposits

Tuesday December 10 2019

A microfinance institution is taking people’s deposits despite being licensed only to give out loans.

The Development Microfinance (DMF) was licensed by Uganda Microfinance Regulatory Authority (UMRA) on January 23, 2019, to operate as a non-deposit taking microfinance institution.

However, DMF is providing loans and taking deposits, sparking fears that depositors could lose their money in case the company shuts down.
In Kampala, DMF operates in Namugongo-Sonde and Seeta, and has upcountry branches as well.

These include Kaliro Post Office Building (Kaliro) Kisozi-Gombolola Road (Kamuli), Irundu and Bukungu (Buyende), Busembatya (Iganga) and Mwengura and Rwentuha (Bushenyi).

Non-deposit taking microfinance institutions fall under Tier 4 of financial institutions, which consist of Savings and Credit Cooperative Societies (Saccos), member-based organisations such as village and credit institutions, and community-based organisations engaged in microfinance services.
These are regulated by UMRA, which was established to restore investor and consumer confidence in the microfinance industry.

Law says
According to Section 69 (3) of the Tier Four Microfinance Institutions Act and Money Lenders Act 2016, non-deposit microfinance institutions shall not raise money in form of deposits from individuals.


The Act also stipulates that UMRA shall not renew a licence where a non-deposit taking microfinance institution violates the provision of the Act or a condition of a licence.

DMF officials, who preferred to speak on anonymity, told Daily Monitor that they have on several occasions advised management to stick to only giving out loans but the latter acted contrary.

According to a database seen by this newspaper, the company has more than 2,000 clients in three branches.
However, we could not verify how much money they have saved with the institution.

Our investigations show that Igara East MP Michael Mawanda is one of the directors.

Mr Mawanda confirmed last week that he is one of the directors and acknowledged that DMF was licensed as a non-deposit taking microfinance institution.

However, he said DMF was doing the same business before the law came into place, adding that they are now in transition to non-deposit taking microfinance institution.

“We are in transition because very many people have been doing it and that is why that law was put in place. UMRA is now sensitising people about the law and everybody is in that transition,” Mr Mawanda said.

He added that they have been scaling down on deposit taking operations since the law came into force about one year ago.
“We have just finished the computerisation system and we shall be running as a non-deposit taking microfinance institution,” Mr Mawanda said.
He allayed fears that people are likely to lose their deposits in case DMF closed, saying the institution had existed for 15 years before the current law regulating microfinances and Saccos was created.

Asked why they do not register as a microfinance deposit taking institution (MDI) at Bank of Uganda (BoU), Mr Mawanda said DMF is supervised by UMRA and, therefore, cannot be regulated by two entities.

MDIs are licensed by BoU and can receive deposits from clients and offer loans as well.
On November 29, the central bank published all MDIs as at September 30, 2019 in local newspapers.

They include Finca, Pride Microfinance, Ugafode, Entrepreneurs Financial Centre and Yako Microfinance.
MDIs are required by law to save a reserve fund with BoU. This money helps to compensate members who have savings in a microfinance in case it runs bankrupt.

On December 3, I went to DMF Seeta Branch on Mwebaza Building and deposited Shs40,000 to verify the claims that DMF was taking deposits.
I was asked to first open an account number on which the deposits would be saved and after paying Shs10,000, I was given an account number 205003271101.

I also deposited Shs40,000 using two different deposit slips, which were duly stamped by the teller.

The details on the slips were copied and entered in a client’s deposit book bearing the DMF name.

The teller indicated the deposits which I had made and handed me both the passbook and deposit slips.
I was told to carry the passbook whenever I went back to deposit money.

Many people were making deposits at the counter despite an operational licence from UMRA that hang on the DMF wall reading; ‘Non-Deposit taking microfinance taking institution’.

A customer told me he had been saving with DMF for three months.

He also said many people around Seeta find it convenient to open an account in DMF unlike other financial institutions.
To open a savings account with DMF, you need a Local Council letter, National Identity Card, and two coloured passport-size photographs.
According to DMF’s manual, the institution also operates fixed deposit accounts.

Such an account, the manual states, is for customers who commit their funds to a fixed term of not less than three months or as agreed with DMF to earn interest.

This is contrary to the law since a non-deposit taking institution is not supposed to take deposits.
On October 1, a whistleblower petitioned UMRA over DMF’s illegal operations and sought urgent intervention. The petition was received by UMRA the same day.

“The said institutions are mostly rural-based positioned to defraud customers who cannot understand what a non-deposit taking microfinance institution is. They have displayed everywhere urging customers to do savings despite what the license stipulates,” the whistleblower alleged.
The whistleblower also wondered why such illegal financial transactions would take place yet UMRA is mandated to monitor operations of non-deposit taking microfinance institutions.

Ms Edith Tusubira, the UMRA executive director, confirmed they licensed DMF as a non-deposit taking microfinance institution.
Ms Tusubira also confirmed receipt of the whistleblower’s petition, saying they were investigating the matter. She declined to reveal the details.

UMRA speaks out
“We are working to put them to order but that one we can only disclose to you when we are done with our investigations and we have to find out more things but not just deposits because there could be worse things going on. By January, we should have concluded everything. We are also going to encourage people who have been putting their deposits to remove their money if we confirm that it is true,” Ms Tusubira said.
Although she was told that DMF’s licence expires this month, Ms Tusubira said they needed to thoroughly look at all transactions which required more time.

“If DMF took a non-deposit taking microfinance licence and ended up doing other activities, this means they are in breach and we have to find out why they did so,” she said.

Asked about Mr Mawanda’s claims that DMF is currently in transition, Ms Tusubira said the law took effect as soon as it was gazetted and must not be breached under the offender’s pretext of undergoing a transition.

Ministry unaware
The State Minister of Microfinance, Mr Haruna Kyeyune Kasolo, yesterday said DMF was acting illegally by taking deposits.

“I thank you for investigating that matter and alerting us. On Tuesday I will interest myself in investigating what is taking place and UMRA might be following up that case if they are already in the know. The law will take its course because the licence issued was to do with non-deposit taking and if that institution is taking people’s deposits, that is fraud,” Mr Kasolo said.

He advised Ugandans to always check before they deposit their money with financial institutions to know whether they are authorised to do such business.

IGG probe

Daily Monitor has also established that this matter is being investigated by the Inspector General of Government (IGG). The IGG spokesperson, Ms Ali Munira, confirmed the probe in an email to this newspaper last week. “The IGG received this complaint and preliminary investigations are being conducted.

This means getting additional information for the investigations. It includes getting in touch with the person or agency being complained against,” Ms Munira wrote. However, Mr Michael Mawanda said the institution does not fall under the authority of IGG, but UMRA.

Mr Patrick Onyango, the Kampala Metropolitan Police spokesperson, said they were not aware of the DMF’s operations but added that their crime intelligence team would investigate them.