A Bill Framed to Provide for Financial Intermediary Societies

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A Bill Framed to Provide for Financial Intermediary Societies Powered By Docstoc
					A Bill Framed to Provide for Financial Intermediary Societies


Preamble: Whereas it is expedient to provide for Societies working
as financial intermediaries for the supply of micro-credit on an
institutional basis to low-income people living in different parts
of the country so as to involve them in income and employment
oriented enterprises 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.   Short Title and Commencement
     (1)   This   Act   may    be    called     the   Financial     Intermediary
           Societies Act, 2055 (1998).


     (2)   It   shall   come   into     force    on   such   date    as   may   be
           prescribed by His Majesty's Government by notification in
           the Nepal Rajapatra.


2.   Definitions
     Unless otherwise meant with reference to the subject or
     context, in this Act,


     (a)   Financial intermediation means the supply of micro-credit
           under this Act.


     (b)   Society means a Society which has obtained a 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.

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(d)   Bank means the Nepal Rastra Bank established under the
      1955 Nepal Rastra Bank Act.


(e)   Income      and   employment    oriented   enterprise     means   an
      income-oriented enterprise run with 10 persons or less,
      either family members or wage-workers.


(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.


(i)   Micro-Credit means a credit supplied for the operation of
      an income and employment oriented enterprise subject to
      the limit prescribed by the Bank from time to time.


(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

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           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.   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.


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:


     (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.


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     (f)   Other matters as prescribed.


5.   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 under Sub-Section (2) shall be
           issued within 30 days from the date of receipt of the
           application,    or   of   the   additional   information   or
           particulars demanded under Sub-Section (1).


     (4)   In case the Bank does not consider it appropriate to
           issue a license in the course of conducting enquiries
           under Sub-Section (2), it shall notify the applicant
           accordingly within seven days.


6.   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).

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7.   Renewal
     (1)   A Society must renew its license every year within the
           prescribed   time   limit    on   payment   of   the   prescribed
           renewal fee to the Bank.


     (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.


     (b)   To supply micro-credit to any group or member thereof for
           operating an income and employment oriented enterprise,
           with or without any movable or immovable property as
           collateral or guarantee.


     (c)   To obtain loans or grants from the 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 the Bank before obtaining loans or

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           grants   from    any    local     or   foreign    organization    or
           association.


     (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 income
           and employment oriented programs of the type which help
           to improve the economic condition of low-income persons.
     (f)   To organize workshops on income and employment oriented
           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 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.


     (j)   To perform all such functions as are prescribed in
           connection with the supply of micro-credit.


9.   Power to Demand Information, Data, or Documents
     The   Bank   may   demand    any   information,    data,    or   document
     relating to micro-credit from any Society, and it shall be the
     duty of the concerned Society to furnish such information,

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      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 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

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            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 borrower.


      (5)   In case no one offers a bid in an auction held by a
            Society under this Section, the concerned Society may
            itself take over the ownership of such assets.


12.   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

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            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.   Approval of the Bank to be Obtained
      It shall be mandatory for a Society to secure the approval of
      the Bank in advance in case it is required to purchase any
      movable or immovable property other than goods which are
      needed for working under this act.


14.   Power to Determine Interest Rates
      (1)   A Society shall itself determine the interest rates to be
            charged on its micro-credit subject to the conditions
            prescribed by the 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.


15.   Power to Collect Service Charges
      A Society may collect a service charge as prescribed from any
      individual or group in consideration of any service, facility,

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      technical know-how, or training provided by it to him/it in
      connection with income and employment oriented enterprises or
      mobilization of micro-credit.


16.   Records to be Maintained
      A Society must maintain records of its work as a financial
      intermediary on a current basis.


                                    Chapter 4
              Functions, Duties, and Powers of the Bank
17.   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 employees to supply
            the documents or particulars demanded by the inspector or
            investigator in the course of conducting inspection or
            investigation under Sub-Section (1).


      (3)   Other arrangements concerning inspection or investigation
            shall be as prescribed.


18.   Power to Issue Directives
      (1)   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.

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            (b)   In case it has taken any action which adversely
                  affects the 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, or not
                  used in micro-credit the funds received for the
                  purpose.


            (f)   In case it has not supplied particulars, data, or
                  documents demanded under this Act.


      (2)   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.


19.   Power to Cancel License
      (1)   The Bank may cancel the license of a Society if it
            repeatedly violates the directives issued under Section
            18, or takes any of the following actions:


            (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

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                   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.


      (2)   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.


      (3)   Before cancelling a license under Sub-Section (1), the
            Bank    shall      provide   the    concerned    Society   with    an
            opportunity to submit its explanations.


20.   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.   Restriction on Relinquishment of Functions of a Financial
      Intermediary
      In case any Society applies to the Bank for permission to
      relinquish its functions of a financial intermediary, the Bank
      shall not let the Society do so until the Society fully
      recovers all amounts invested as micro-credit by it.



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      Provided      that   in    case   it    becomes    unavoidable    for   any
      appropriate reason to allow any Society to relinquish its
      functions of a financial intermediary, the Bank may itself
      bear the entire liability relating to financial intermediation
      carried out by the Society and allow the Society to relinquish
      its functions of a financial intermediary.


22.   Power of the Bank to Itself Recover Micro-Credit
      In case the license or registration of a Society is cancelled
      under this act or current law, or in case it is granted
      permission      to   relinquish       its   functions    of   a   financial
      intermediary under Section 21, the Bank may itself recover the
      micro-credit supplied by the Society, or have it recovered by
      any other Society, under this act.


23.   Final Obligation to Vest in the Bank
      In case the license or registration of a Society is cancelled
      under this act or current law, or in case the Society is
      granted permission to relinquish its functions of a financial
      intermediary under Section 21, the final obligation to meet
      such    financial         liability     relating    to    the     financial
      intermediation of the Society as cannot be met from the
      Society's assets shall vest in the Bank.
                                    Chapter 5
                   Fund, Accounts, and Audit of Societies


24.   Micro-Credit Fund
      (1)    A Society shall have a separate Micro-Credit Fund, which
             shall comprise the following amounts:


             (a)    Grants or loans received from the Bank or local or
                    foreign organizations or associations.



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            (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.


      (2)   All expenses to be incurred in the name of the Society
            shall be borne from the fund mentioned in Sub-Section
            (1).


      (3)   The amounts credited to the fund shall be deposited in an
            account opened in a commercial bank. The (bank) account
            shall be operated in the prescribed manner.


25.   Risk-Bearing Fund
      (1)   A Society must 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 Sub-Section
            (1) may be invested by the Society in the securities of
            His Majesty's Government or the Bank.


      (3)   The fund established under Sub-Section (1) shall be used

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            only   for    waiving     micro-credit.   In   case   it   becomes
            necessary to waive any micro-credit, the Society must
            obtain the approval of the Bank.


26.   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 registered 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.


      (3)   The remuneration of the auditor shall be as prescribed by
            the general meeting.


      (4)   The    Bank   may,   if    it   so   wishes,   inspect     or   make
            arrangements for inspecting the accounts and records of a
            Society at any time.


27.   Ceiling on Administrative Expenses
      No Society may spend more than the prescribed amount for such
      administrative purposes as payment of salaries and allowances
      to employees and meeting of office expenses.



                                    Chapter 6
                                    Penalties
28.   Penalties
      (1)   In case any person works as a financial intermediary

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            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 office-bearer
            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 employee of a Society cheats or illegally
            harasses or causes any hardship to any borrower, the Bank
            or the concerned party may initiate legal action against
            him according to current law.


29.   Power to Take Action According to Current Law
      In case any Society takes any action which is punishable under

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      current law, this Act shall not be deemed to have 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
      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 annual report of its
      functions in the capacity of a financial intermediary along
      with a statement of its income and expenditure 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.


34.   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.



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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.


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