MASERU — Finance Minister Timothy Thahane this week tabled a Bill in Parliament that seeks to regulate operations of financial institutions in the country.
The Financial Institutions Bill 2011 is meant to tighten screws in the sector and avoid a repeat of past incidents that have seen hordes of Basotho being ripped off by unscrupulous financial dealers.
The proposed law seeks to ensure that players in the financial sector are constantly under scrutiny.
The measures proposed in the Bill could have heavily been influenced by cases such as the MKM debacle that saw people losing money in a pyramid scheme.
Victims of the scheme are still battling to recover their money as the case drags in the High Court.
The Financial Institutions Bill 2011 will repeal the existing Financial Institutions Act 1999.
The proposed law will provide for the authorisation, supervision and regulation of banking and non-banking financial institutions and ancillary financial service providers “and for related matters”.
This refers to a person who engages in providing auxiliary services such as electronic funds transfer, foreign exchange dealing, supporting services to financial institutions and other similar “auxiliary financial institutions”.
The Bill primarily seeks to grant the Commissioner of Financial Institutions, in this case the Central Bank of Lesotho (CBL), enhanced investigatory powers against entities suspected to be conducting illegal banking or financial services business without “a valid licence”.
It will also enhance the ability of the commissioner to grant timely protection to depositors and customers against unlawful credit and banking business.
The proposed law will also dictate that all financial establishments hold and maintain “an adequate capital base.
This, the draft law says, is because an adequate capital base forms part of the most critical features of a sound financial system.
“The proposed law will therefore enable the commissioner to fix such ratios and take corrective measures against non-compliance with capital adequacy requirements,” the draft law statement says.
The new law will introduce revised criteria regarding the internal audit function, set new standards for eligibility for directorships of financial institutions and grant directors increased responsibility.
As a prerequisite for an institution to qualify as a banking or credit business, it first has to be incorporated as a public company under the Companies Act 1967, according to the proposed law.
It further states that a company intending to operate as a financial institution shall not be registered without “prior or written approval of the commissioner”.
In consideration of an application, the commissioner shall conduct investigations and inquiries deemed necessary to establish whether the applicant “is fit to be granted a licence”.
The investigations will chiefly focus on the applicant’s prior business history, financial resources and history, its ownership structure as well as the integrity and standing of “direct and indirect shareholders”.
The Bill further suggests that a financial institution shall have the minimum capital and be licensed according to the type of activities.
The minimum capital required for each type of financial institution may be amended by the commissioner from time to time, by legal notice published in the gazette.
“However, a type one bank (large commercial bank) shall not be granted a licence unless it fulfills a minimum cash capital of not less than M24 million or such higher required capital amount while the figure stands at no less than M10 million for type two (smaller) banks.”
Many Basotho are set to welcome the new law, given the history of the country’s unregulated financial services that have been involved in dodgy activities at the expense of the public.
The most prominent is the MKM scheme that is still pending at the High Court.
Established by Mosotho businessman, Simon Thebe-ea-Khale, MKM began as a funeral parlour and grew into a web that resulted in thousands of people being promised hefty returns on their investments.
It was suspended in November 2007 for failing to comply with the CBL financial regulations.
Forensic investigation company PricewaterhouseCoopers, engaged by the CBL, established that MKM’s assets amounted to only M100 million with the company failing to account for M400 million of investors’ money.
The CBL has since been pushing for the company to be liquidated and whatever amount of money recovered is divided among the no less than 360 000 investors, almost a quarter of Lesotho’s 1.8 million population.