Micro-finance plays a critical role in improving financial inclusion by extending credit facilities and other financial services to underserved populations, particularly those without access to traditional banking systems. Historically, the regulation of this sector in Lesotho was governed by the Financial Institutions Act of 2012, which recognised only two forms of micro-finance providers: those permitted to accept deposits, and those limited to lending activities.
However, with the introduction of the Financial Institutions (Credit Only and Deposit Taking Micro-Finance Institutions) (Amendment) Regulations, 2018, the regulatory landscape shifted significantly. A three-tier licensing structure was established, introducing greater flexibility and accessibility for prospective micro-finance operators, particularly smaller or entry-level entities.
Overview of the Three Licensing Tiers
Under the amended regime, micro-finance institutions are categorised into three tiers, each with distinct requirements, operating restrictions, and regulatory expectations:
Tier 3: Entry-Level Credit Providers
This licence is designed for institutions that exclusively provide credit services (i.e., issuing loans) and are prohibited from taking deposits from the public. These entities must be entirely capitalised through shareholder equity and do not require external debt or deposit-based funding.
Key exemptions granted to Tier 3 applicants include:
- No obligation to submit a detailed business plan during licensing;
- No minimum board size requirement (i.e., fewer than five directors permitted);
- No need to establish an audit or credit committee;
- Reduced regulatory oversight on insider lending practices;
- No requirement to appoint an external auditor, as long as qualified accountants compile the institution’s financial statements.
These relaxed conditions signal a deliberate policy decision to promote financial inclusion by facilitating the creation of smaller, locally operated credit providers.
Tier 2: Mid-Sized Credit Institutions
Like Tier 3, these institutions may only issue credit and are not allowed to accept public deposits. However, to qualify for this licence, an applicant must either:
- Hold debt securities listed on a recognised exchange; or
- Maintain assets valued at LSL 10 million or more.
Tier 2 institutions operate with more stringent governance and reporting obligations than Tier 3, but with fewer requirements than full deposit-taking institutions.
Tier 1: Full-Service Micro-Finance Entities
This is the most regulated category and includes institutions authorised to accept deposits from the public in addition to offering credit services. Tier 1 licensees are subject to comprehensive prudential standards, including capital adequacy, governance, risk management, and reporting requirements consistent with their elevated systemic importance.
Legislative Intent and Policy Direction
The creation of the three-tier licensing model demonstrates a policy shift towards more inclusive economic participation. By reducing the barriers to entry for smaller credit-only micro-finance providers under Tier 3, the regulatory framework recognises the need to balance financial oversight with access to financial services in underserved communities.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. For guidance tailored to your specific circumstances, we recommend consulting our office directly.