Negligent MFI bosses face heavy penalties

Golden Sibanda Senior Business Reporter
DIRECTORS, senior officials and shareholders of micro-finance institutions (MFIs) who cause the collapse of their companies due to negligent or fraudulent conduct will now face civil liability and a requirement to pay depositors and creditors for the loss or damage incurred.

Micro-finance is a category of financial services targeted at individuals and small businesses that lack access to conventional banking and related services; this includes micro-credit and provision of small loans to poor clients.

MFIs are important because they provide financial resources and access to capital to the financially undeserved, such as those who are unable to get checking accounts, lines of credit, or loans from traditional banks.

Proceedings will thus be instituted against a director, principal officer or shareholder of an MFI that would have been wound up, placed under curatorship or judicial management as a result of suspected irregular conduct of the individual liable for the failure of a particular institution.

For a long time in Zimbabwe, creditors and depositors of financial institutions have been left counting the cost of the investment when the institution collapses due to the irregular conduct of their directors or shareholders. This was particularly the case during the 2003-2005 banking sector crisis that claimed scalps of more than 15 banking institutions.

Amendments to the Micro-finance Act, which were gazetted last Friday, empower the Registrar and chief executive of the Deposit Protection Corporation (DPC) to institute proceedings against any director, principal officer or shareholder of an MFI in terms of any liability by that person under Subsection 5 and Section 318 of the Companies Act.

“Every person who was a director of principal officer of the institution when its business was being carried on in that manner and every shareholder who was knowingly a party to the carrying on of the business of the institution in that manner shall jointly and severally be liable for any loss or damage suffered by creditors, including depositors of the institution,” the amended MFIs law says.

The law excuses directors of collapsed MFIs where evidence suggests that a director, principal officer or shareholder were not responsible for the manner the institution was run or complied with their duties in terms of law.

Any amount recovered as a result of the proceedings instituted by the Registrar or the Deposit Protection Corporation as envisaged in subsection 6, of the new law will be for reimbursing the DPC’s expenses, depositors and creditors of the institution concerned.

To guard against corporate malfeasance which may cost depositors and creditors of MFI’s, the new law says each director or principal officer of an MFI owes fiduciary duty of care and skill to the institution, depositors and creditors.

The law requires directors and senior officers of MFIs to have fiduciary duty of skill and care to exercise such care in their duties or functions as may reasonably be expected of a diligent person who holds a key position.

Directors of MFIs are also now compelled, in the performance of their duties, to observe guidelines and requirements to attend at least three quarters of board meetings.

“Any director of a micro-finance institution who fails, without just cause, to attend at least three quarters of the meetings of the board of his or her institution that are convened during any period of a year shall be regarded as not having exercised the degree of diligence required of him or her by subsection (2) (d).”

Directors of MFIs are now required to be people with knowledge and skill that may reasonably be expected of a person undertaking duties and responsibilities related to such position.

In terms of the new law, MFIs are now required to have at least three directors, in the case of a non-deposit taking institution and a minimum of five for a deposit taking MFI.

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