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Regmi Research (Private) Ltd. Nepal Miscellaneous Series Vol. 11/2003 Kathmandu: November 14, 2003 Regmi Ville, Lazimpat, Kathmandu Telephone: 4-11927 (For Private Study and Research Only) FINANCIAL INTERMEDIARY SOCIETIES ACT, 1999 History March 31, 1999 ... First Promulgated. Nepal Rajapatra, Vol. 48, No. 79 (a) (E), Chaitra 17, 2055 August 7, 2002 ... First Amendment. Nepal Rajapatra, Vol. 52, No. 37 (E), Shrawan 22, 2059 Consolidated Text Preamble: Whereas it is expedient to provide for Societies working as financial intermediaries in micro-enterprises on an institutional basis to low-income people living in microenterprises and thus improve their economic condition, now therefore, the Parliament has enacted this law in the 27th year of the reign of His Majesty King Birendra Bir Bikram Shah Dev. Chapter 1 Preliminary 1. 2. Short Title and Commencement (1) This law may be called the Financial Intermediary Societies Act, 1999. (2) It shall come into force on such date as may be prescribed by His Majesty's Government by notification in the Nepal Rajapatra. Definitions Unless otherwise meant with reference to the subject or context, in this Act, (a) Financial intermediation means the collection of microsavings and supply of micro-credit under this Act. (b) Society means a Society registered under the 1977 Registration of Associations Act and license to work as a financial intermediary under this Act. (c) License means a license issued under Section 5 to work as a financial intermediary. (d) Bank means the Nepal Rastra Bank established under the 1955 Nepal Rastra Bank Act. (e) Micro-enterprise means an income-oriented enterprise operated with less than 10 persons. (f) Low-income person means a person with an income lower than the income prescribed by the Nepal Rastra Bank from time to time. (g) Group means a group of low-income persons which has been formed by fulfilling the prescribed formalities. (h) Collective guarantee means a guarantee bond issued to a Society by the members of a group collectively pledging to repay micro-credit obtained by any member of the group if he failed to do so. (h1) Micro-savings mean the savings to be collected by the Society in the manner prescribed by the Bank from time to time from low-income persons or groups who are members of the Society. (i) Micro-Credit means the credit to be supplied by the Society within the limit prescribed by the Bank from time to time for the operation of micro-enterprises. (j) Borrower means a group or any member of a group who has obtained micro-credit from a Society. (k) Security means any movable or immovable property pledged as collateral, mortgage, or otherwise according to current law while obtaining micro-credit. (l) Employees mean persons appointed by a Society to work for it with or without remuneration; the term includes office-bearers of the Society. (m) Prescribed or as prescribed means prescribed or in the manner prescribed in the rules or by-rules framed under this Act. Chapter 2 Licensing Arrangements 3 3. Prohibition to Work as Financial Intermediary Without Obtaining License After the commencement of this Act, no one shall work or instigate others to work as a financial intermediary without obtaining a license under this Act. 4. Application to be Filed for License In case any Society which has been registered under the 1977 Registration of Associations Act with the objective of working as a financial intermediary desires to work as a financial intermediary under this act, it must submit an application to the Bank in the prescribed form explicitly mentioning the following particulars: 5. (a) Certificate of registration and Constitution of the Society. (b) Names, addresses, and occupations of office-bearers of the Society. (c) Total number of members of the Society. (d) Movable and immovable assets of the Society. (e) Geographical area where the Society wishes to work as a financial intermediary. (f) Other matters as prescribed. Issuance of License (1) On receipt of an application under Section 4, the Bank shall conduct necessary enquiries into it, and, if it so deems necessary in the course of such enquiries, it may demand additional information or particulars from the applicant-Society. (2) In case the Bank so deems appropriate in the course of conducting enquiries under Sub-Section (1), it shall collect the prescribed fee and issue to the applicant in the prescribed form a license to work as a financial intermediary. (3) Licenses to be issued or while notifying about the rejection (of the application) under Sub-Section (2) shall be issued not more than 75 days from the date of receipt of the application, or of the additional information or particulars demanded under Sub-Section (1). 4 (4) 6. 7. (Deleted on August 7, 2002). Power to Prescribe Conditions (1) While issuing a license under Section 5, the Bank may prescribe the conditions to be fulfilled by the concerned Society while working as a financial intermediary. (2) It shall be the duty of the concerned Society to fulfil the conditions prescribed under Sub-Section (1). Renewal (1) A Society must have its license renewed by the Bank every two years in the prescribed manner. (2) Any license which is not renewed within the time limit mentioned in Sub-Section (1) shall be ipso facto cancelled. (3) Other arrangements concerning renewal of license shall be as prescribed. Chapter 3 Functions, Duties, and Powers of Societies 8. Functions, Duties, and Powers of Societies The functions, duties, and powers of a Society, in addition to those mentioned elsewhere in this Act, shall be as follows: (a) To encourage low-income persons to form groups. (a1) To collect micro-savings from groups or group-members. (b) To supply micro-credit to any group or member thereof for operating micro-enterprises, with or without any movable or immovable property as collateral or guarantee. (c) To obtain loans or grants from the HMG or Bank or any local or foreign organization or association, and use them for the supply of micro-credit or for making the process of supplying such credit effective. Provided that it shall be mandatory for a Society to secure the approval of HMG through the Bank before obtaining loans, grants or any other type of assistance 5 from any foreign organization, association, etc. 9. (d) To evaluate schemes for which micro-credit have been requested, and determine whether or not they are feasible, before supplying micro-credit. (e) To organize publicity and extension programs about micro-enterprises programs of the type which help to improve the economic condition of low-income persons. (f) To organize workshops on micro-enterprises, extend help and provide training in the formulation of schemes, make available technical know-how, and mobilize technical assistance according to need. (g) To provide necessary services to a group in respect to the micro-savings and mobilization of micro-credit. (h) To take necessary actions for the timely realization of micro-credit. (i) To conduct investigations from time to time to determine whether or not micro-credit has been properly utilized, and, if it is not found to have been properly utilized, to issue necessary directives or taking necessary action. (j) To perform all such functions as are prescribed in connection with the supply of collection of microsavings and micro-credit. (k) To work as an agent of commercial banks and financial institutions. Power to Demand Information, Data, or Documents The Bank may demand any information, data, or document relating to micro-credit from any Society, micro-savings and it shall be the duty of the concerned Society to furnish such information, data, or documents. 10. Agreements to be Signed (1) While supplying micro-credit, a Society must execute a written agreement with the borrower by prescribing conditions deemed essential for the protection and proper utilization of the credit. (2) While executing an agreement under Sub-Section (1), the Society may prescribe any time limit for repayment of its micro-credit, or a condition to the effect that it 6 may have the borrower repay the principal and interest if he violates the conditions prescribed by it, or to recover the same from the collateral pledged or collective guarantee furnished by the borrower. Provided that a Society shall not accept the security furnished by any person not connected with the concerned group while obtaining a security from the borrower. 11. Power of Societies in the Event of Breach of Conditions (1) In case any borrower fails to abide by the agreement signed or terms stipulated with a Society, or to repay the micro-credit of a Society within the time limit stipulated in the bond, or in case a Society finds through investigations that the borrower has misused or misappropriated the amount of the micro-credit, the Society may, notwithstanding anything contained in current law, auction any property pledged to it, or any security deposited with it, according to current law, and thus recover the principal and interest. (2) In case any borrower relinquishes in any manner title to the property pledged to a Society as collateral, or the value of such collateral declines due to any reason, the Society may, notwithstanding anything contained in current law, ask him to furnish additional collateral which is sufficient to cover the credit within the period prescribed by it. In case the borrower fails to furnish additional collateral within the time limit prescribed by the Society, the Society may recover its principal and interest by auctioning the collateral pledged to it. (3) In case the principal and interest cannot be fully recovered through the auction sale of the collateral pledged to the Society under Sub-Section (1) or (2), the Society may recover the balance by auctioning the other assets of the concerned member in case any member of a group has obtained the micro-credit on an individual basis, and of all the members of the group in case the micro-credit has been obtained on a collective basis. (4) The amount of principal and interest and expenses incurred in auction shall be deducted from the amount raised through the auction of the assets under this Section, and the balance shall be refunded to the concerned person. 7 (5) 12. In case no one offers a bid in an auction as prescribed held by a Society under this Section, the concerned Society may itself take over the ownership of such assets. Registration or Transfer (1) In case the bid offered by anyone is approved in the course of auctioning the assets pledged as collateral under Section 11, or in case a Society itself takes over the ownership of such assets on the ground that no one offered a bid in an auction, the Society shall write to the appropriate Land Tax Office for registration or transfer in its records according to current law of the concerned assets in the name of the person whose bid has been approved, or in the name of the Society. (2) In case the appropriate Land Tax Office receives a written request from any Society for registration or transfer of assets under Sub-Section (1), it must do so accordingly. 13. (Repealed on August 7, 2002) 14. Power to Determine Interest Rates 15. (1) A Society shall itself determine the interest rates to be paid and charged by it on micro-savings and microcredit subject to the policy directives of the Rastra Bank. It must furnish information about the same to the Bank within seven days. (2) Notwithstanding anything contained in Sub-Section (1), the Bank may, if it so deems necessary, direct the Society to increase or reduce the interest rates fixed by it, and it shall be the duty of the Society to comply with such directives. Power to Collect Service Charges A Society may collect a service charge from any individual or group in consideration of any service, facility, technical know-how, or training provided by it to him/it in connection with micro-savings and micro-credit. 16. Records to be Maintained A Society must maintain records of its work as a financial intermediary on a current basis. 8 Chapter 4 Functions, Duties, and Powers of the Bank 17. 18. Power to Conduct Inspection or Investigation (1) The Bank may inspect or investigate the office or the functions and activities of a Society, or make arrangements for doing so, according to need. (2) It shall be the duty of the concerned Society and employees to supply the documents or particulars demanded by the inspector or investigator in the course of conducting inspection or investigation under SubSection (1). (3) Other arrangements concerning inspection or investigation shall be as prescribed. Power to Issue Directives (1) (2) In case it is found in the course of inspection or investigation under Section 17 that a Society has taken any of the following actions, the Bank may direct the Society to introduce reforms or make any special arrangement in respect to any of its functions and activities by prescribing a time limit for that purpose: (a) In case it has not taken any action which it is required to take under this Act. (b) In case it has taken any action which adversely affects the savers and borrowers. (c) In case it is not found to have properly maintained its ledgers, accounts, or documents. (d) In case it has not complied with any condition prescribed or directive issued by the Bank. (e) In case it has misappropriated its funds, used in activities opposed the objectives of this Act the funds received for the purpose. (f) In case it has not supplied particulars, data, or documents demanded under this Act. The Bank may issue directives from time to time to a Society in respect to functions which it has to perform under this Act or the rules framed hereunder. It shall be the duty of the concerned Society to comply with such directives. 9 19. Power to Cancel License (1) (2) (3) 20. In case any Society violates the directives issued under Section 18, the Bank may issue a warning to it to correct its mistakes, or impose a bank on any of its functions. In case any society violates such directives for three times, or takes any of the following actions, the Bank may suspend or cancel its license. (a) In case the Society stops working as a financial intermediary. (b) In case the Society misappropriates its funds, or does not use such funds for purposes for which they have been received. (c) In case the Society does not comply with the directives issued by the Bank to introduce reforms or make any special arrangement in respect to any of its functions and activities by prescribing a time limit for that purpose. (d) In case the Society fails to renew itself under the 1977 Registration of Association Act and Section 7 of this Act. The Bank may, if it so deems necessary before issuing an order of cancellation of license under Sub-Section (1), have necessary enquiries or investigations conducted in that connection. Before cancelling a license under Sub-Section (1), the Bank shall provide the concerned Society with an opportunity to submit its explanations. Power to Impose a Ban (on a Society) to Work as a Financial Intermediary In case it is not deemed appropriate to allow any Society to continue working as a financial intermediary on the ground that it has taken any of the actions mentioned in Section 18, the Bank may provide it with an opportunity to introduce necessary reforms and impose a ban on it to work as a financial intermediary for a specified period of time. 21. Permission to Relinquish Functions of a Financial Intermediary In case any Society applies to the Bank for permission to relinquish its functions of a financial intermediary, and in case the Society is found to have met in full all its 10 liabilities, the Bank may grant it permission to relinquish its functions of a financial intermediary. Provided that in case any Society has not been able to meet its liabilities in full, the Bank shall impose a ban on it to carry out functions of a financial intermediary and write to HMG to have the liabilities of the Society met from its assets under the 1977 Registration of Associations Act. 21A. To be Realized From Personal Assets of Office-Bearers In case any office-bearer of a Society performs or instigates the performance of the functions of a financial intermediary or misappropriates the funds of the Society with selfish or malafide motives in a manner opposed to the objectives of the Act, the Bank shall realize or make arrangements for realizing the funds so misappropriated from his personal assets or from any movable and immovable property within the Kingdom of Nepal which is under his name and ownership. 22. (Repealed on August 7, 2002) 23. (Repealed on August 7, 2002) Chapter 5 Fund, Accounts, and Audit of Societies 24. Fund of the Society (1) A Society's Micro-Credit Fund, which shall comprise the following amounts: (a) Grants or loans received from the HMG or Bank or local or foreign organizations or associations. (a1) Amounts received through the collection of microsavings. (a2) Amounts received from commercial banks or financial institutions. (b) A prescribed amount from the fees collected from the members of the Society. (c) Service charges collected in consideration of the services provided by the Society. (d) Interest, fees, etc. received from micro-credit transactions. (e) Amounts received from other sources. 11 (2) All expenses to be incurred in the name of the Society shall be borne from the fund mentioned in Sub-Section (1). Provided that amounts collected through micro-savings or received for micro-credit shall not be disbursed for other purposes. 25. 26. (3) Funds of the Society shall be deposited in an account opened in any commercial bank or financial institution, and such (bank) account shall be operated in the prescribed manner. (4) In case the Society is not currently in a position to supply micro-credit, it may, with the approval of the Bank, make investments in term deposits for a period not exceeding six months. Risk-Bearing Fund (1) A Society shall establish a separate risk-bearing fund, in addition to the fund mentioned in Section 24, for the purpose of bearing any possible loss in the course of supplying micro-credit. The prescribed (percentage) of the total outstanding credit invested until the day of the expiry of each financial year must be credited to that fund. (2) The amounts credited to the fund mentioned in SubSection (1) may be invested by the Society in the securities of His Majesty's Government or the Bank. (3) The amounts credited to the fund mentioned in SubSection (1) shall be used only for waiving microcredit. In case it becomes necessary to waive any micro-credit, the Society must obtain the approval of the Bank. Accounts and Audit of Societies (1) A Society must maintain separately the accounts and records of its functions as a financial intermediary. It must prepare a balance sheet of each financial year and have it audited by a recognized auditor appointed by its general meeting within six months after the expiry of the concerned financial year. (2) While appointing an auditor under Sub-Section (1), the same individual or firm shall not be appointed for more than three consecutive terms. 12 27. (3) The remuneration of the auditor shall be as prescribed by the general meeting of the Society. (4) The Bank may, if it so wishes, inspect or make arrangements for inspecting the accounts and records of a Society at any time. (Repealed on August 7, 2002) Chapter 6 Penalties 28. 29. Penalties (1) In case any person works as a financial intermediary without obtaining a license under this act, he shall be punished with a fine not exceeding Rs 20,000, or with imprisonment for a term not exceeding six months, or with both. In case any Society does so, the officebearer discharging the functions of that Society shall be subjected to such punishment. (2) In case any Society does not comply with this Act or the rules framed hereunder, or with any order or directive issued by the Bank, or fails to supply or submit particulars or documents demanded from it under this Act, or submits false information intentionally, and in case any loss or damage results therefrom, the amount involved in the loss or damage shall be recovered from the concerned employee, who shall also be punished with a fine not exceeding Rs 10,000, or with imprisonment for a term not exceeding six months, or with both. (3) In case any employee of a Society misappropriates its cash or supplies, or uses them for his personal purposes, the amount involved shall be realized from him, in addition to punishing him with a fine equal to that amount, or with imprisonment for a term not exceeding five years, or with both. (4) In case any harasses or Bank or the against him employee of a Society cheats or illegally causes any hardship to any borrower, the concerned party may initiate legal action according to current law. Power to Take Action According to Current Law In case any Society takes any action which is punishable under current law, this Act shall not be deemed to have 13 prejudiced the power to take action against it accordingly. Chapter 7 Miscellaneous 30. Exemption From Registration Fee or Revenue Stamp Fee No registration fee or revenue stamp fee shall be charged on the registration of any property in the name of a Society which it has obtained from a borrower as a collateral, or on the sale or purchase of any immovable property by a Society. 31. Income Tax Exemption His Majesty's Government may, by notification in the Nepal Rajapatra, grant full or partial income tax exemption on the income earned by a Society. 32. Annual Reports to be Submitted A Society must submit to the Bank an preliminary annual report of its functions in the capacity of a financial intermediary along with a statement of its profit and loss within three months after the expiry of each financial year. 33. Bank to be Consulted It shall be mandatory to consult the Bank before dissolving a Society under the 1977 Registration of Associations Act. 33A. Right to Amalgamate or be Amalgamated (1) Notwithstanding anything contained in the 1977 Registration of Associations Act, in case two-thirds of the total number of members present at a general meeting of a Society which is performing the functions of a financial intermediary under this Act support a resolution to amalgamate the Society with any other Society or to amalgamate any other Society with the Society, the resolution shall be deemed to have been approved by the general meeting. Provided that no resolution may be adopted for amalgamating or being amalgamated with any Society which is not performing the functions of a financial intermediary under this Act. (2) The resolution approved under Sub-Section (1) shall be submitted to the office which had registered the Society which is to be amalgamated and the Bank, and shall come into force only after receiving separate 14 approval from both the office and the Bank. On receipt of such approval, the legal existence of the concerned society shall be deemed to have been ipso facto terminated. (3) 34. The assets of the Society that is amalgamated under Sub-Section (1) shall devolve on the Society with which it has been amalgamated, and the latter must bear the liabilities of the former. Immunity for Action Taken With Bonafide Motives The members or employees of a Society shall not be held individually or collectively responsible for any function discharged by them with bonafide motives subject to this Act or the rules framed hereunder. 35. Applicability of Current Law Notwithstanding anything contained in current law, action in respect to matters provided for in this Act or the rules framed hereunder shall be taken accordingly, and in respect to other matters, action shall be taken according to current law. 36. Power to Frame Rules The Bank may frame rules in order to implement the objectives of this Act. Such rules shall come into force only after they are approved by His Majesty's Government. 37. Power to Frame By-Rules A Society may frame by-rules according to need in order to manage its functions, subject to this act or the rules framed hereunder. Such by-rules shall come into force only after they are approved by the Bank. *******