Bank Supervision Division

Consultative Document
Operational Guidelines for

Deposit-Taking Microfinance Institutions

Issued for comments by 8 July 2016

Comments should be forwarded to The Director – Bank

Supervision on the following e-mail addresses:
[email protected] and [email protected]

June 2016

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 PART A

PREFACE

i. Short Title

Operational Guidelines for Deposit-taking Microfinance Institutions.

ii. Authorisation

The Guideline is issued in terms of section 36 of the Microfinance Act

[Chapter 24:29].

iii. Application

The Guideline shall apply to all Deposit-taking Microfinance Institutions

(DTMFIs) that are licensed and supervised by the Reserve Bank of Zimbabwe
(RBZ).

iv. Interpretations

The following terms used in this Guideline shall be taken to have the meaning
assigned to them hereunder:-
“capital base” means the net capital of a Deposit-taking Microfinance Institution
arrived at by deducting from its gross capital, any investments in or lendings of
a capital nature to subsidiaries engaged in deposit-taking microfinance and
financial activities which are not consolidated; and encumbered assets acquired
by using the DTMFI’s capital funds which have subsequently been pledged as
collateral for borrowings or are encumbered by any caveats rendering them
unavailable to meet losses arising from the institution’s operations.

“Financial Exposure” arises as a result of lending activities, undertaking credit

commitments by issuing financial guarantee or indemnity on behalf of a customer
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or carrying out any other credit transaction for a person or customer.

“Large exposure” means a loan or credit facility granted to a person and his
associates that exceeds 2% of an institution’s net capital base,

“Loans and advances” means the extension of any credit or the provision of any
credit facility, including the advance of funds arising from the fulfilment of
guarantee and indemnity arrangements entered into between and by the DTMFI
on behalf of its client.

“Microfinance loan” means a credit facility not more than 2% of the net capital
base of a DTMFI, advanced for productive purposes in any sector of the economy
regardless of it being extended to an individual or body corporate.

“Non-Performing Loan” means a credit facility with interest and principal

payments past due for 31 days or more.

“Past Due Loan” means a loan whose interest and/or principal has, in terms of
the loan contract, remained outstanding for one day or more.

“Registrar” means the Registrar of Microfinance Institutions.

“Related Interest” in relation to an individual, means any company, cooperative,

private business corporation, syndicate or association of persons which the
individual controls or in which the individual has the largest single interest.

“Restructured or re-negotiated loan” means a loan that has been modified to

either lengthen or post pone the original scheduled instalment payments, or
substantially alter the original terms and conditions of the loan. Restructured loans
shall include loans disbursed to enable repayment or part payment of prior loans
that were past due (refinanced loans).

“Reserve Bank” means the Reserve Bank of Zimbabwe.

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LIST OF ACRONYMS

CEO Chief Executive Officer

CFO Chief Finance Officer

CCPPs Core Client Protection Principles

DTMFI Deposit-Taking Microfinance Institution

MIS Management Information Systems

PaR Portfolio at Risk

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 PART B

INTRODUCTION AND OBJECTIVES

1. INTRODUCTION

1.1. The Reserve Bank of Zimbabwe recognises the importance of the

microfinance sector in fostering access to financial services for low income
households and micro, small and medium enterprises.

1.2. These Guidelines provide the minimum standards and practices for the
licensing and continuous regulation and supervision of Deposit-Taking
Microfinance Institutions (DTMFIs) operating in Zimbabwe. The
Guidelines should be considered in conjunction with the applicable statutes.

2. OBJECTIVES

2.1. The objectives of these Guidelines are to:

a) ensure the safety and soundness of the microfinance sector and

ultimately financial stability in the economy;

b) promote financial inclusion through encouraging and facilitating the

development of the microfinance sector;

c) ensure that DTMFIs maintain adequate capital and liquidity levels

which enable them to meet customers’ obligations at all times and
promote public confidence in the financial sector;

d) raise awareness on the minimum licensing requirements and

supervisory standards applicable to the microfinance sector; and

e) adopt transparency and accountability leveraging on international best

practices in the regulation and supervision of DTMFIs.
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 PART C

LICENSING REQUIREMENTS FOR DEPOSIT-TAKING

MICROFINANCE INSTITUTIONS

3. GENERAL REQUIREMENTS

3.1. No person shall conduct deposit-taking microfinance business without a valid

deposit-taking microfinance licence in terms of section 7 of the Microfinance
Act.

3.2. An application for a deposit-taking microfinance licence in terms of the

Microfinance Act shall be made in writing to the Registrar of Microfinance
Institutions, at the Reserve Bank of Zimbabwe. The following documents and
information shall be submitted together with the application:

a) Proof of payment of a non-refundable application fee of US$2,000 or

as may be prescribed from time to time, payable to the Reserve Bank
of Zimbabwe Account Number: 2 0 5 3 5 0 7 through a cash deposit
in the Reserve Bank banking halls, or via RTGS transfer.

b) Completed application form in the prescribed format and attach the

following documents:

i. Certified copies of Certificate of Incorporation and Memorandum and

Articles of Association of the applicant company registered in terms
of the Companies Act [Chapter 24:03];

ii. Register of members containing names, physical addresses, and

occupations of persons who hold significant interest directly or
indirectly in the proposed institution and the respective levels and

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 values of such shareholdings registered with the Registrar of
Companies;

iii. Shareholders’ affidavit declaring the beneficial shareholders, where

shares are held by unnatural persons. The details should include
names of institutional shareholders, the names of natural persons who
are beneficial owners of shares in the institutional entity and their
respective percentage shareholding.

iv. Proof of authorized and paid-up capital (Form CR2) duly registered
with the Registrar of Companies;

v. Proof of availability of minimum paid-up share capital in the form of

bank statement in the name of the company or the promoters/
shareholders of the company and proof of the sources of the funds;

vi. Proposed directors (Form CR14) registered with the Registrar of

Companies;

vii. Proof of registration with Tax authorities (ZIMRA);

viii. A business plan, whose contents are detailed in section 8.1 of these
guidelines; and

ix. Any other information and documents that the Registrar may
prescribe or require.

3.3. If the Registrar is satisfied that the applicant has complied with the applicable
requirements, a licence will be issued.
3.4. The Registrar may issue a DTMFI licence with such conditions as may be
deemed necessary.
3.5. Where a licence is granted subject to certain conditions, the DTMFI should

7
 comply with those conditions to the satisfaction of the Reserve Bank, within
such period as stipulated by the Reserve Bank. Failure by a DTMFI to comply
with such conditions may result in the cancellation of the issued licence.
3.6. After issuance of licence, the DTMFI shall put in place the required
infrastructure and systems to enable commencement of operations. The
DTMFI shall invite Reserve Bank of Zimbabwe to conduct a pre-opening
inspection before commencing operations.
3.7. If the Registrar is satisfied that an applicant institution has complied with the
minimum licensing requirements, Microfinance Act and any other applicable
laws, the institution may be authorized to commence deposit-taking
microfinance business.
3.8. A registered DTMFI shall not transfer or assign the issued licence.
3.9. In line with the provisions of the Microfinance Act, the Registrar may cancel
the operating licence of a DTMFI which does not commence deposit-taking
microfinance business within six (6) months from the date of registration.

4. MINIMUM PAID-UP SHARE CAPITAL

4.1. Every applicant DTMFI shall have and maintain on an ongoing basis, a
minimum paid-up share capital of US$5,000,000.00 or as may be prescribed.
4.2. Paid-up share capital shall consist of the following components:

a) Issued ordinary share capital;

b) Share premium;

c) Irredeemable Preference Shares;

d) Retained Profits reflected on audited financial statements; and

e) Current year unaudited but verifiable retained earnings.

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4.3. The following should be submitted together with the application:

a) verifiable and acceptable evidence of payment by the proposed

shareholders of the minimum paid-up capital;

b) proof of source of capital in the form of bank statements, investment

redemption statements; and

c) proof of registration of the capital with the Registrar of Companies, in

the form of copies of Forms CR5, CR11or CR2 where applicable.

4.4. Every shareholder shall be required to submit a sworn statement that capital
contribution does not consist of borrowed funds or any activities relating to
money laundering or illicit transactions.

4.5. Every foreign corporate investor shall also be required to submit the
following:

a) proof of capital flow issued by an authorized dealer;

b) proof of requisite Zimbabwe Investment Authority (ZIA) and any

other relevant approvals;

c) Board Resolution authorizing the company to invest in the DTMFI

and the designated persons who will represent the company;

d) Audited accounts for the past two years and profile of the company;
and

e) A letter of authorization from the home supervisory authority (for

regulated entities).

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5. CORPORATE GOVERNANCE

Shareholding Thresholds…

5.1. Only companies registered as a public company are eligible to apply for a
deposit-taking microfinance licence.

5.2. No DTMFI or controlling company shall:

a) allot or issue any of its shares to, or register any of its shares in the name
of, any person other than the intended beneficial shareholder; or

b) transfer any of its shares in the name of a person other than the
beneficial shareholder.

5.3. Paragraph 5.2 shall not affect the allotment or issue, or the registration of the
transfer of shares in a DTMFI or its controlling company in the name of:

a) a manager or trustee of a collective investment scheme registered in

terms of the Collective Investment Schemes Act [Chapter 24:19] (No.
25 of 1997); or

b) an executor of a deceased estate, a trustee of an insolvent estate or the

liquidator of a company in liquidation; or

c) a curator or guardian of a person under a disability; or

d) a holder of a licence issued in terms of Part V of the Securities and

Exchange Act [Chapter 24:25] (No. 17 of 2004); or

e) a central securities depository established in terms of Part IX of the

Securities and Exchange Act [Chapter 24:25] (No.17 of 2004); or

f) such other persons as may be prescribed.

5.4. No individual, related parties or corporate entities and/or their subsidiaries or

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 proxies shall own controlling interest in more than one DTMFI, except as
approved by the Reserve Bank. Shareholding in a DTMFIs shall be subject to
prior approval by the Registrar and the following limits shall apply:

Table 1: Shareholding Thresholds

Type of Shareholder Percentage Limit

Financial Entity 100

Member of Executive management 5

Any other person 25

5.5. Shareholders with five percent (5%) or more equity stake in a DTMFI shall
be vetted in terms of the Prudential Standards No. 07-2014/BSD: Fitness
& Probity Assessment Criteria.

5.6. The acquisition or transfer of five percent (5%) or more equity shareholding
of a DTMFI shall be subject to prior approval of the Registrar

Board of Directors…

5.7. A DTMFI shall have a board of directors of not less than five (5) members
with at least three fifths of the board membership being non-executive
directors, of which independent non-executive directors shall be the majority
and at least one (1) of the non-executive directors has experience of managing
microfinance business or have relevant exposure to microfinance business.

5.8. No individual shall be appointed as a director of a DTMFI if the person is a

director of another DTMFI, banking institution or another financial institution
in competition with the DTMFI, except where the DTMFI is part of the same
group.

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5.9. Every DTMFI is required to ensure that the board of directors has balance in
terms of relevant skills and experience. The appointment of directors shall be
subject to prior approval of the Reserve Bank.

5.10. Every DTMFI is required to comply with the provisions of Guideline No. 01-
2004/BSD: Corporate Governance.

Board Committees…

5.11. The board of the DTMFI shall constitute and maintain board committees to
assist the board perform its oversight function effectively. In particular the
board committees will be responsible for:

a) overseeing the credit origination and sanctioning process;

b) review of loans and assessment of adequacy of loan provisions;

c) ensuring adequacy of internal controls and risk management systems;

d) compliance with laws, regulations and internal policies and procedures;

and

e) ensuring the integrity of the financial records and financial statements

of the institution.

5.12. Each of the board committees shall have comprehensive and clear Terms of
Reference.

5.13. Each board committee shall have a minimum of three (3) members. No board
member shall sit in committees with conflicting mandates in terms of
corporate governance best practice.

5.14. No executive director, officer or employee of a DTMFI shall be appointed to

the board audit committee of the DTMFI.

5.15. Every member of the board shall attend at least three quarters of the meetings
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 of the board and board committees where he/she is a member in any financial
year.

Senior Management…

5.16. In addition to the appointment of the Chief Executive Officer (CEO) and Chief
Finance Officer (CFO) in terms of the requirements of the Microfinance Act
[Chapter 24:29], every DTMFI shall appoint, subject to prior approval by the
Registrar, any other senior officer based on the nature of the institution’s
activities.

5.17. Officers appointed to key management positions in the DTMFI shall have
minimum qualifications and experience as stipulated below:

a) Managing Director/CEO- a recognized university degree in

microfinance or other relevant degree or qualification and/or relevant
professional qualification with at least eight (8) years post qualification
experience in microfinance or banking or related industry out of which,
at least, five (5) must be at a senior management level; and

b) Departmental Head - a recognized university degree in microfinance or

other relevant degree or qualification and/or relevant professional
qualification with at least three (3) years post-qualification experience
in microfinance and banking or related industry.

5.18. A licensed DTMFI shall notify the Reserve Bank of any proposal to effect
changes in the membership of the board or senior management, 21 days in
advance with reasons. If prior notification is not practically possible the
Reserve Bank shall be notified within three (3) days of its occurrence, with
the reasons for such occurrence and the proposed replacement individual.

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 Certification in Microfinance…

5.19. In recognition of the peculiarities of microfinance business and the special

skills required to manage a DTMFI, senior management is required to possess
requisite certification or training in microfinance management from a
recognized institution or professional body.

5.20. Where the CEO and any member of senior management do not possess
relevant qualification in microfinance, at point of recruitment, they shall be
required to submit evidence of the microfinance certification not later than
two (2) years after assumption of office. Failure to comply with the above
condition shall be a ground for the removal of the affected officer.

6. REQUIREMENTS FOR FITNESS AND PROBITY ASSESSMENT

6.1. Every shareholder with a minimum of five percent (5%) equity in the
DTMFI, a board member and member of senior management team shall be
approved by the Registrar.

6.2. The following information and documentation shall be submitted to the

Registrar to facilitate the fitness and probity assessment of individual
shareholders, directors and members of senior management team:

a) Certified copy of identification certificate or valid passport and one

colour passport size photograph;

b) Detailed Curriculum Vitae, with the exception of shareholders;

c) Certified copies of relevant academic and professional certificates for

directors and senior management;

d) An affidavit in the format prescribed by the Registrar, see Appendix A;

e) net worth statements duly certified by auditors registered in terms of

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 the Public Accountants and Auditors Act [Chapter 27:12];

f) tax clearance certificate issued within the last six (6) months;

g) police clearance certificate issued within the last six (6) months; and

h) names of at least (2) two independent referees who have known the
proposed shareholder/director/senior manager for at least five (5) years,
one of which should be in a professional capacity, providing contact
details including postal addresses, e-mail and telephone numbers.

6.3. For corporate shareholders, the following information and documentation

shall be submitted to the Registrar:

a) Certified copies of Memorandum & Articles of Association;

b) Certified copy of Certificate of Incorporation;

c) Names of shareholders and composition of board of directors

accompanied with the appropriate Form CR2 and CR14;

d) Audited financial statements for the past two (2) years;

e) Resolution of the Board of Directors or General Meeting authorizing

the investment;

f) Where the company is a shelf-company, the shareholders should submit

net worth statements duly certified by auditors registered in terms of
the Public Accountants and Auditors Act [Chapter 27:12]; and

g) In the event of documents being submitted from outside Zimbabwe,

(with the exception of a curriculum vitae), these must be certified by a
notary public registered in the country of origin of documents while an
affidavit must be signed before a commissioner of oaths in the country
of origin of the documents.

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7. NON-PERMISSIBLE ACTIVITIES

7.1. In addition to the provisions of section 25 of the Microfinance Act with

respect to non-permissible activities, every DTMFI shall not engage in the
provision of the following financial services:

a) leasing, renting, and sale/purchase of any kind with its directors,

officers, employees or persons who either individually or in concert
with their family members and beneficiaries own 5% or more of the
equity of the DTMFI, without the prior approval in writing of the
Reserve Bank of Zimbabwe;

b) financing of speculative and illegal activities; and

c) any other prohibited activities as may be prescribed from time to time.

8. CONTENTS OF A BUSINESS PLAN

8.1. The business proposal for the establishment of a DTMFI in Zimbabwe shall
contain at a minimum, the following information:-

Background Information

8.2. Name and location of the proposed DTMFI. This should include physical
addresses of all the proposed branches. Copies of form CR6, proof of
ownership of premises and/or lease agreements for the premises being used
by the head office and all branches should be submitted.

8.3. The institution's corporate structure, where applicable, including every

associate of the institution, and organizational structure, with clear reporting
lines, accompanied with detailed functions and responsibilities of the top
management team.

8.4. A brief discussion of the background to the application.

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 Market Analysis

8.5. The domestic economic situation and its expected impact to the operations of
the proposed institution and an analysis of the financial sector operating
environment and the market to be served by the proposed institution.

8.6. Description of the economic characteristics of the identified markets,

including anticipated changes in the market, factors influencing such changes
and possible effects on the institution.

Business Strategy and Objectives

8.7. A business strategy/model and goals of the proposed DTMFI.

8.8. The justification for the establishment of the DTMFI including description of
the developmental value of the proposed institution to the target community
and the economy at large.

8.9. Description of the products and services to be offered by the proposed

DTMFI.

8.10. The branch expansion programme [if any] within the first 5 years of
commencing operations.

8.11. A credible three-year financial inclusion plan.

Capitalization and Additional Capital Sources

8.12. Description of the plans for financing growth, internally or externally, over
the first 3 years of operation.

8.13. Description of what additional capital sources are available should the need
arise.

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 Financial Projections and Underlying Assumptions

8.14. The business plan should include the following financial projections based on
best, normal and worst case scenarios:

a) a projected annual Statement of Financial Position (Balance Sheet) for

at least the first 3 years of operation;

b) a projected annual Statement of Comprehensive Income (Income

Statement) for at least the first 3 years of operation; and

c) a projected cash flow statement for at least the first 3 years of operation.

8.15. Financial projections should be supported by major assumptions on which

they are based, with reference to variables such as market growth, funding
capacity, inflation rates, interest rates and fees, and any other variables of
importance to the DTMFI’s performance such as products to be offered and
markets to be served.

8.16. The projections and assumptions should be reasonable and realistic in light of
prevailing and forecast economic performance, industry performance,
outlined strategies, etc.

8.17. The projected accounts should take into account the regulatory capital,
provisioning requirements, lending limits, and any other requirements to be
complied with.

Social Performance Assessment Framework

8.18. The business plan should also include the DTMFI’s proposed social
performance management framework with respect to its social mission and
objectives guided by the social performance indicators as outlined in Table 2.

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 Table 2: Social Performance Indicators
Indicator Category What the Indicators Measure

1. Mission and social goals The DTMFI's stated commitment to its social
mission, its target market and development
objectives.
2. Governance Programme for training of board of directors in
social performance management and the presence
of a Board committee that will monitor social
performance.
3. Range of products and services Both financial and non-financial products and
services offered by the DTMFI to achieve social
goals and objectives.
4. Social responsibility to clients Policies and Procedures to be followed by
employees to ensure compliance with the
microfinance Core Client Protection Principles
(CCPPs).
5. Human resources and staff The DTMFI's policy regarding social
incentives responsibility to staff. This includes human
resource policies in place, board and staff
composition, staff turnover rate, and staff
incentives linked to social performance goals.
6. Social responsibility to the The DTMFI’s policies and initiatives in place to
environment mitigate the environmental impact of financed
enterprises.
7. Poverty outreach Methodology for measuring impact of the
DTMFI’s activities on poverty alleviation
including assessment of poverty levels of clients at
entry and their movement out of poverty over time.
8. Client outreach by lending The type of lending methodology (-ies) employed
methodology by the DTMFI.
9. Enterprises financed and The number of enterprises financed by the DTMFI
employment creation and employment opportunities created by the
enterprises financed.
10. Client retention rate The client retention rate of the DTMFI.
Adopted from: http://www.themix.org/social-performance/Indicators

9. PRE-OPENING INSPECTION

9.1. No DTMFI shall commence deposit-taking microfinance operations without

the prior authorisation of the Reserve Bank.
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9.2. Every registered DTMFI shall notify the Reserve Bank of its readiness to
commence deposit-taking microfinance activities and shall invite the Reserve
Bank for a pre-opening inspection.

9.3. The Reserve Bank shall conduct a pre-opening inspection of the institution’s
premises and examine compliance with the standards and the operational
readiness of the institution for commencement of operations. The Reserve
Bank shall examine and verify the readiness and suitability of the premises of
the institution and confirm, among other issues, the following matters,

a) the adequacy of the institution’s security system;

b) evidence of cash payment of the total amount (100%) of capital by

shareholders;

c) opening statement of affairs signed by the CEO and CFO;

d) adequacy and readiness of the Management Information System (MIS) and

other business infrastructure;

e) availability and adequacy of human resources;

f) adequacy of policies and procedures covering all major inherent risks;

g) the readiness and adequacy of the administrative and operational processes

and the internal control system; and

h) adequacy of management systems and procedures, including its risk

management systems, its corporate governance framework and its systems
for the detection and prevention of money-laundering and the financing of
terrorism.

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10. CLOSING AND ESTABLISHMENT OF BRANCHES

10.1. No DTMFI shall close a branch in Zimbabwe or establish a new branch in

Zimbabwe unless it has given the Registrar at least fourteen business days'
written notice of its intention to close the branch or establish the new branch,
as the case may be.

11. APPOINTMENT OF AN AGENT

11.1. Where a registered DTMFI seeks to engage in agent banking activities, it shall
be required to comply with the stipulated regulatory requirements and
guidelines on agent banking business.

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 PART D

PRUDENTIAL REQUIREMENTS

12. CAPITAL AND SOLVENCY REQUIREMENTS

12.1. Every registered DTMFI shall maintain an unimpaired minimum paid-up share
capital and reserves in terms of the Microfinance Act and as defined in these
Guidelines, at all times while in operation and holding the licence. Every DTMFI
shall be required to maintain unimpaired capital which is above the minimum
capital requirement, notwithstanding meeting the minimum capital adequacy
ratios.

12.2. Every registered DTMFI shall maintain a core capital ratio of not less than 10%
of the Risk Weighted Assets (RWA), and total capital adequacy ratio of not less
than 15% of the RWA or as may be prescribed by the Reserve Bank from time
to time.

12.3. The Reserve Bank shall determine whether an institution is in compliance with
the capital adequacy requirements as may be prescribed from time to time.

12.4. The Reserve Bank may require a DTMFI to maintain higher capital adequacy
ratios if it considers that the institution:

a) is loss making, which may result in capital deficiency;

b) exposed to significant risk(s);

c) has high levels of NPLs and insider or connected lending;

d) is growing rapidly, without adequate capitalization and/or risk

management systems among other resource needs; or

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 e) is likely to be adversely affected by the activities or conditions of its
holding company, associates or subsidiaries.

12.5. In determining the level of unimpaired capital of the DTMFI, the Reserve
Bank shall deduct from capital all outstanding loans and advances to related
parties and insiders of the institution.

12.6. Where the Reserve Bank determines that a DTMFI is not complying with the
minimum capital requirements and ratios, it may impose any of the corrective
actions prescribed in terms of section 37 of the Microfinance Act and any or
all of the following measures:

a) prohibit the declaration or payment of dividends;

b) prohibit the establishment of new branches and introduction of new

products and activities;

c) direct the institution to suspend lending, investment, and borrowing

activities;

d) prohibit acquisition of fixed assets;

e) prohibit acceptance of further deposits; or

f) prohibit declaration and payment of bonuses, salary incentives,

severance packages, management fees or other discretionary
compensation to directors or officers.

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13. LIQUIDITY AND FUNDS MANAGEMENT

13.1. DTMFIs are required to minimize liquidity risk, which emanates from
mismatches in cash flows as well as from not being able to close open
positions in a timely manner and at a reasonable cost.

13.2. Management of a DTMFI should put in place a comprehensive liquidity

management policy that is approved by the institution’s board of directors.
One of the components of such a policy is a liquidity management plan which
should address management structures and information technology systems,
measurement and monitoring of net funding requirements, contingency
planning and internal controls.

13.3. The liquidity management process required for DTMFIs should include the
following steps:

a) preparation of cash flow projections;

b) maintenance of a stock of readily available high quality liquid assets in

line with the cash-flow projections;

c) measurement and controlling of the institution’s funding requirements;

d) management of access to funds in the market; and

e) contingency planning.

13.4. Every DTMFI shall be required to maintain a minimum liquidity ratio of thirty
percent (30%) of specified liquid assets against deposit liabilities, including
short term liabilities or as may be prescribed from time to time.

13.5. Specified liquid assets shall include notes and coin held by the institution,
cash with other DTMFIs and other banking institutions, treasury bills and

24
 domestic short-term investments with NOT more than 180 days to maturity
and any other assets as may be prescribed from time to time by the Reserve
Bank of Zimbabwe.

13.6. Every DTMFI shall provide, monthly liquidity information to the Reserve
Bank as set out from time to time, provided that the reporting frequency may
be increased where an institution has been determined to be in breach of the
liquidity requirements.

Limit on Investment in Fixed Assets…

13.7. No registered DTMFI shall be permitted to invest in fixed assets, an amount

exceeding 25% of shareholders’ funds or as may be prescribed from time to
time.

13.8. Shareholders’ funds comprise capital and shareholders’ loans to the DTMFI.

13.9. Where the DTMFI has breached the minimum prudential liquidity ratio and
fixed assets ratio requirement, the institution shall be liable to corrective
action in terms of the Microfinance Act.

13.10. No DTMFI shall be allowed to finance any of the following, other than from
the shareholders’ funds unimpaired by losses:

a) Acquisition of fixed assets;

b) Equity investments in permissible activities or long term debentures;

and

c) Branch expansion.

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 Restriction on Payment of Dividends…

13.11. A DTMFI shall not declare or pay dividends on its shares until it has :

a) written off all its preliminary and pre-operational expenses;

b) adequately provided for all loan losses and write-offs;

c) has complied with the minimum regulatory capital adequacy

requirements; and

d) met all matured obligations.

13.12. Where the DTMFI has received an adverse/qualified report from its external
auditors or the DTMFI’s annual accounts have not been signed off by
external auditors, the DTMFI may only declare dividends after obtaining
approval from the Registrar.

14. LENDING LIMITS

14.1. Every DTMFI shall be required to have a credit policy which guides the
lending processes for all credit facilities regardless of them being extended to
related parties, insiders or other general customers. The credit policy should
among other factors indicate that all credit extensions must be made on an
arm’s length basis.

14.2. In addition, the credit policy should provide for control mechanisms to ensure
that directors or senior management with potential conflict of interest are not
involved in the approval of credits to related companies and individuals as
well as to insiders.

14.3. Every member of the board of directors or senior management of the DTMFI
26
 whose social or business standing might directly or indirectly create conflict
of interest with his/her duties as a director or officer of the institution, or who
is directly or indirectly connected, related, linked to or has some interest in an
outstanding credit facility or advance or proposed credit facility or advance or
service contract with the institution he/she is serving, shall be required to
declare the nature and extent of the interest in writing to the board. Such board
member and officer shall recuse themselves from any board deliberations
relating to the outstanding credit facility, loan proposal or application for
provision of services to the institution.

Portfolio Composition…

14.4. Every DTMFI is required to have and maintain a portfolio of microfinance

loans of not less than 75% of the aggregate loan portfolio at all times.

Lending Limit to single Borrower

14.5. A DTMFI shall not assume financial exposure to a single borrower (single
person, partnership or common enterprise other than a common group)
exceeding three percent (3%) of the net capital base: provided that aggregate
financial exposure to a group of related parties shall not exceed five percent
(5%) of the net capital base.

Lending Limit to Insiders…

14.6. No DTMFI shall extend loans and advances to any single insider in excess of
one percent (1%) of its net capital base, provided that the aggregate financial
exposure to all insiders shall not exceed ten percent (10%) of the institution’s
net capital base.

Other Lending Limits…

14.7. All loans and advances extended to related parties and insiders of the
27
 institution should be fully secured and approved by the board and such
security should be perfected prior to disbursement of funds.

14.8. A DTMFI is required to establish appropriate limits for products and activities
in addition to limits for particular industries or economic sectors, as well as
geographical regions to manage concentration risk.

14.9. Credit limits should be periodically reviewed to take into account changes in
economic and other relevant conditions.

28
15. ASSET QUALITY AND PROVISIONING

Loan Reviews…

15.1. Every DTMFI shall review, classify and appropriately make provisions for its
loan portfolio not less frequently than each quarter, with a view to achieving
the following objectives:

a) to ensure the conformity of the loan portfolio and lending function to

sound lending policy documented, approved and adopted by the board;

b) to keep executive officers and the board adequately informed regarding

portfolio risk;

c) to properly identify and classify problem credits and, as necessary,

place them on non-accrual basis in accordance with these Guidelines;
to ensure that adequate provisions for potential losses are made; and

d) to ensure that write-offs of identified losses are made in a timely

manner.

15.2. Every DTMFI shall maintain sufficient records of every loan review,
evaluations of individual loans and advances, and of the entries made to its
provision for loan losses account.

Classification of assets…

15.3. Every DTMFI shall classify its loan portfolio into the following grades:

14.3.1 “pass”, if the asset in question is performing in accordance with contractual

terms and is expected to continue to do so while fully protected by the paying
capacity of the obligor;

29
14.3.2 “special mention” if the asset in question:

a) is past due 1 to 30 days; or

b) although currently protected, exhibits potential weaknesses which

may, if not corrected, weaken the asset or inadequately protect the
institution’s position at some future date, for example, where:

i. the asset in question cannot be properly supervised due to an

inadequate loan agreement; or

ii. the condition or control of the collateral for the asset in question is
deteriorating; or

iii. the repayment capacity of the obligor is jeopardised or adverse

trends in the obligor’s financial position; and

iv. there is an unreasonably long absence of current and satisfactory

financial information or inadequate collateral documentation in
regard to the asset.

14.3.3 “substandard”, if the asset in question:

a) is past due 31 to 60 days; or

b) is a renegotiated loan, unless all past due interest is paid by the

borrower in cash at the time of renegotiation and a sustained record
of timely repayment of principal and interest under a realistic
repayment programme has been demonstrated for a period of not less
than 90 days; or

c) whether or not it is past due, is inadequately protected by the current

paying capacity of the borrower by reason of the fact that:

i. the primary source of repayment is insufficient to service the debt

30
 and the institution must look to secondary sources such as collateral,
sale of fixed assets, refinancing or additional capital injections for
repayment; or

ii. there is an unduly long absence of current and satisfactory financial

information or inadequate collateral documentation in regard to the
asset; or

iii. generally, there is more than a normal degree of risk attaching to the
asset due to the borrower’s unsatisfactory financial condition.

14.3.4 “doubtful”, if the asset in question:

a) is past due 61 to 90 days; or

b) exhibits all the weaknesses of a substandard asset and, in addition, is

not well-secured by reason of the fact that collection in full, on the
basis of currently existing facts, is highly improbable, but the actual
amount of the loss is indeterminable due to pending events that have
a more than reasonable prospect of mitigating the loss, such as a
proposed merger, acquisition or liquidation, a capital injection,
perfecting liens on additional collateral, refinancing plans, new
projects or asset disposal.

14.3.5 “loss”, if the asset in question:

a) is past due for more than 90 days, unless such asset is well secured
and legal action has actually commenced which is expected to result
in the timely realization of the collateral or enforcement of any
guarantee relating to the asset; or

b) had been characterised as doubtful on account of any pending event

31
 referred to in subparagraph 14.3.4b) above, and the event concerned
did not occur within 90 days, whether or not the event is still pending
thereafter; or

c) is otherwise considered uncollectible or of such little value that its

continuance as an asset is not warranted.

Classification of Renegotiated or Restructured Loans…

15.4. Every DTMFI shall classify a renegotiated or restructured loan in the

‘substandard’ category unless:

a) all past due principal and interest is repaid in full at the time of
renegotiation, in which case it may revert to ‘pass’ classification; and

b) all past due interest is repaid in full at the time of renegotiation in which
case it may revert to ‘special mention’ classification.

15.5. A renegotiated or restructured loan classified as doubtful or loss shall

continue to be classified as doubtful or loss unless:

a) all past due principal and interest is repaid in full at the time of
renegotiation, in which case it may revert to ‘special mention’
classification or;

b) all past due interest is repaid in full at the time of renegotiation in which
case it may revert to ‘substandard’ classification; and

c) all past due principal and interest is repaid in full at the time of
renegotiation and there has been consistent repayment of contractual
principal and interest over a period of three months, in which case it
may revert to ‘pass’ classification.

32
 Suspension of Interest…

15.6. Where a loan is classified as non-performing, every deposit-taking

microfinance institution shall suspend any interest on such loans and advances
and shall observe the following:

a) the interest in suspense shall not be treated as income;

b) all interest in suspense shall be taken into account in the computation

of provisions for non-performing loans;

c) reverse any interest on non-performing loans or credit facilities accrued

into income but uncollected;

d) a non-performing loan is returned to accrual basis only when all

outstanding dues and unpaid obligations have been paid; and

e) all interest on nonperforming loan or credit facilities previously accrued

into income but uncollected is reversed and credited into the interest in
suspense account until paid in cash by the borrower.

15.7. If an institution has extended multiple loans or advances to a single borrower

that are outstanding and any one of those loans or advances is classifiable as
a nonaccrual asset, the institution shall forthwith evaluate every other such
loan or advance to ascertain whether they should be reclassified as non-
accrual assets.

Portfolio at Risk (PaR)…

15.8. PaR is the value of all loans outstanding that have one (1) or more installments
of principal past due for one (1) or more days. The amount includes the entire
unpaid principal balance, both the past due and future installments, and
excludes accrued interest. It also includes loans that have been restructured or

33
 rescheduled.

15.9. Every deposit-taking microfinance institution should ensure that the

institution’s credit policy identifies credit risk management tools to be used
for the institution to maintain low levels of PaR and achieve high levels of
timeous repayments and loan recovery rates.

15.10. Every deposit-taking microfinance institution shall endeavor to maintain PaR

of not more than five percent (5%) of total outstanding loans at any given
time in line with international best practice.

Provisions for Classified Assets…

15.11. Every deposit-taking microfinance institution shall establish a provision for

loan losses account consisting of specific and general provisions created
through charges to provision expense in the Statement of Comprehensive
Income and maintained at a level adequate to absorb expected losses in the
loan portfolio and in respect of other assets.

15.12. The provision for loan losses account shall be offset against the gross value
of loans, advances and other assets for financial reporting purposes.

15.13. Every loan loss shall be debited, and every recovery of a loan previously
written off shall be credited, to the provision for loan losses account, and at
no time shall either of these items be charged or credited directly to “retained
earnings” or any other capital account.

15.14. Every deposit-taking microfinance institution shall be required to maintain

general and specific provisions for performing and past due credit facilities
(after deducting any suspended interest accruals), respectively as indicated in
the table 3.

34
 Table 3: General and Specific Provisions Requirements
Required
Classification Days in Arrears Type of Provisions
Provision
Pass 0 1% General Provisions
Special Mention 1 - 30 days 5%
Substandard 31 – 60 days 25%
Specific Provisions
Doubtful 61 – 90 days 75%
Loss Above 90 days 100%

15.15. A loan graded “substandard”, “doubtful” or “loss” shall be exempt from the
provisioning requirement to the extent to which it is secured by cash or cash-
substitutes, a segregated deposit held by the deposit-taking microfinance
institution, the net realisable value of any collateral, or a reliable guarantee.

15.16. A DTMFI shall seek prior approval of the Reserve Bank to write-off insider
and related party loans.

15.17. The Reserve Bank may require a deposit-taking microfinance institution to

make adjusting entries in its provision for loan losses account if it determines
that the provisions made are inadequate.

35
 PART E

RISK MANAGEMENT AND INTERNAL CONTROLS

16. RISK MANAGEMENT FRAMEWORK

16.1. In line with the provisions of the Microfinance Act, every deposit-taking
microfinance institution shall be required to put in place a robust risk
management system that enables the institution to adequately identify,
measure, monitor and control risk. The appropriate risk management system
should include the four key pillars of a sound risk management framework,
namely, adequate board and senior management oversight, sound risk
management policies and operating procedures, adequate MIS, and adequate
internal controls.

16.2. Deposit-taking microfinance institutions should ensure that the risk

management framework is commensurate with the nature, scale and
complexity of their activities.

Board and Senior Management Oversight…

16.3. The board of directors has the ultimate responsibility for ensuring that an
adequate and effective system of internal controls is established and
maintained.

16.4. In this regard, the board’s mandate in relation to internal controls should
include:

a) ensuring that senior management has developed and implemented a

properly structured internal control system;

36
 b) periodic review of the effectiveness of the internal control system;

c) timely reviews of evaluations of internal controls performed by

management, internal auditors, and external auditors;

d) periodic checks to ensure that management has promptly followed up

on recommendations and concerns expressed by auditors and
supervisory authorities on internal control weaknesses; and

e) periodic reviews of the appropriateness of the bank’s strategy and risk

limits.

16.5. Senior management should implement the strategies and policies approved by
the board as well as develop processes that adequately identify, measure,
monitor and control risks faced by the bank.

16.6. Every deposit-taking microfinance institution should maintain an

organisational structure that clearly assigns responsibility, authority and
reporting relationships and ensure adequate segregation of duties and effective
delegation of responsibilities.

Policies and Procedures…

16.7. Every deposit-taking microfinance institution should have comprehensive and

sound policies, approved by the board, for prudent management of significant
risks arising from its business activities. The approved policies incorporating
limits should be consistent with the nature, complexity and scale of the
institution’s activities.

16.8. The institution should establish appropriate procedures and processes to

implement its policies. These should be documented in procedure manuals
which are periodically reviewed to ensure reflection of current practices.
37
 16.9. There should also be adequate systems to monitor compliance with
established policies and procedures.

Management Information Systems…

16.10. Every deposit-taking microfinance institution should have adequate MIS to

facilitate effective risk management and control of all aspects of their
operations. The sophistication of the MIS should be consistent with the
complexity and diversity of the institution’s operations. Institutions should
consider key elements such as timeliness, accuracy, consistency,
completeness and relevance when developing their MIS.

16.11. The MIS should also be sufficiently flexible to cope with various
contingencies and have the capability to monitor compliance with the
institution’s established policies, procedures and limits.

16.12. DTMFIs should minimize manual intervention in the preparation of

management reports. Management and the board should receive reports with
adequate information to facilitate effective oversight of the institutions’
activities.

16.13. A deposit-taking microfinance institution’s MIS should be capable of

profiling the institution’s lending portfolio in respect of performance analysis.

Internal Controls…

16.14. Every DTMFI should put in place an effective internal controls system that is
consistent with the nature, complexity and risk inherent in its on- and off-
balance sheet activities and that is designed to respond to changes in the
institution’s environment and circumstances.

16.15. A DTMFI should develop and maintain an internal controls framework that
enables the recognition and continuous assessment of all material risks,
38
 including strategic, liquidity, operational, market, credit, reputational, legal
and compliance risks which could adversely affect the financial condition and
soundness of the institution.

16.16. Management of a deposit-taking microfinance institution should develop an

appropriate internal controls system with defined control measures at every
business level, including physical controls, access and review levels for
different departments or divisions, approvals and authorization levels,
verification and reconciliation systems, and checking for compliance with
laws, regulations, as well as internal policies and procedures.

16.17. The assurance functions of DTMFIs, which include internal and external
auditors, risk management as well as the Audit Committee, shall be
responsible for providing public confidence in the institution by ensuring that
the institution establishes and maintains reliable and effective internal control
environment which enables accurate recording and accounting for all business
transactions while complying with laws and regulations, as well as policies
and procedures.

16.18. Every deposit-taking microfinance institution shall be required to conduct an

annual review of its internal controls system to ensure that control measures
remain effective as business environment and information technology change.

Compliance function…

16.19. The board of every banking institution shall establish, as part of a risk
management framework, a compliance function to:

a) identify, assess, monitor and advise the board on compliance risk; and

b) advise the board on ways to comply with all applicable laws, codes of
conduct and stands of good practice, and assist the board in complying

39
 with them.

Anti-Money Laundering and KYC Requirements…

16.20. Every registered DTMFI shall be required to comply with the regulatory
framework governing anti-money laundering activities, circulars and
directives relating to anti-money laundering issued by the relevant authorities
from time to time.

Appointment of an Internal Auditor…

16.21. Every DTMFI should appoint an internal auditor who should assess the
adequacy of the institution’s internal control systems to guide the operations
in conformity with applicable laws and regulations as well as its own policies
and procedures.

16.22. Appointment of the internal auditor should be approved by the Registrar.

Every DTMFI should have a documented audit charter and is also required to
prepare an annual audit plan for the next financial year.

16.23. Every DTMFI is required to ensure that the governance aspects of the internal
audit function, the scope and objectives of the audit charter and annual audit
plan are in line with the requirements of Guideline No.:02-2004/BSD:
Minimum Internal Audit Standards in Banking Institutions.

Appointment of External Auditor…

16.24. The appointment of an external auditor of a DTMFI shall be subject to

approval by the Registrar.

16.25. In determining whether to approve the appointment of an external auditor of

a DTMFI, the Registrar shall be guided by the following among other
considerations:

40
 a) that the external auditor does not represent directly or indirectly the
interests of the shareholders or directors of the institution in any
business ventures; and

b) that the external auditor has not been subjected to any disciplinary
action by any professional body.

16.26. A deposit-taking microfinance institution shall not appoint any person as an

external auditor if:

a) the external auditor is indebted to the deposit-taking microfinance

institution; and

b) the external auditor is a firm in which a director of the deposit-taking

microfinance institution is the close relative or director.

16.27. Every external auditor for a deposit-taking microfinance institution shall keep
the Registrar informed of any changes in partnerships, senior management
and disciplinary actions against the firm or its partners, within 30 days of the
event.

16.28. Except with the approval of the Registrar, a DTMFI shall not appoint the same
person or partnership as its auditor in Zimbabwe for a continuous period of
more than five years in any eight-year period.

41
 PART F

REPORTING AND DISCLOSURE REQUIREMENTS

17. RECORD KEEPING

17.1. Every deposit-taking microfinance institution is, in terms of the Microfinance

Act, required to maintain proper books of accounts for all business
transactions conducted at the head office and all the branches and agents. The
financial accounts should give a true and fair view of the financial condition
of the institution.

17.2. The records in the books of accounts shall be maintained in accordance with
International Financial Reporting Standards.

18. REPORTING

18.1. Every DTMFI shall be required to submit to the Registrar all reports, financial
statements, any other documents and information relating to the institution’s
operations and conditions pursuant to the provisions of the Microfinance Act.

19. DISCLOSURE

19.1. DTMFI are required to comply with the provisions of the Microfinance Act
in relation to disclosure requirements as well as Guideline No. 01-2008/BSD:
Minimum Disclosure Requirements for Financial Institutions.

19.2. A deposit-taking microfinance institution shall be required to publish as part

of the annual report, the latest risk assessment matrix determined by the
Reserve Bank through an on-site examination.

42
19.3. Every deposit-taking microfinance institution is required to submit
information in the prescribed format, to the Credit Reference System.

19.4. Every deposit-taking microfinance institution shall ensure the availability of

a certified copy of the most recent audited financial statements at the head
office and all premises where it conducts business, for inspection by members
of the public.

19.5. The CEO and CFO of a deposit-taking microfinance institution shall sign off
and shall be jointly responsible for the accuracy, reliability and correctness of
every report, statement, schedule and return required to be submitted to the
Registrar or published in terms of Microfinance Act and these Guidelines.

43
 PART G

CONSUMER PROTECTION

20. FINANCIAL CONSUMER PROTECTION POLICY

20.1. Every deposit-taking microfinance institution should comply with

internationally accepted standards and practices of consumer protection
(including CCPPs) and the Microfinance Code of Conduct in the First
Schedule of the Microfinance Act.

20.2. Pursuant to the First Schedule of the Microfinance Act, every deposit-taking
microfinance institution should develop a financial consumer protection
policy that will among other issues address the following three pillars of
consumer protection:

a) Adequacy and transparency of information – Deposit-taking

microfinance institutions should give customers clear, simple and
complete information in plain language, (including national languages)
on products, interest rates and other costs, terms and conditions;

b) Fair treatment – Deposit-taking microfinance institutions should treat

customers fairly by being transparent, avoiding predatory advertising
and marketing, and abusive collection and recovery practices, as well
as protecting privacy of client information; and

44
 c) Recourse mechanism – Deposit-taking microfinance institutions
should develop and make available simple but well-articulated
complaints handling procedures which are readily accessible to
customers. DTMFIs should maintain a register of customer complaints
which captures details of the customer, nature of complaint, date of
launch and resolution of complaint.

Avoidance of Over-indebtedness…

20.3. Pursuant to the requirements of the Microfinance Act, every deposit-taking

microfinance institution should develop a comprehensive credit assessment
framework that will facilitate accurate evaluation of the customer’s repayment
capacity.

45
 PART H

DEPOSIT INSURANCE SCHEME AND INDUSTRY

ASSOCIATION MEMBERSHIP

21. COMPLIANCE WITH THE DEPOSIT PROTECTION

CORPORATION ACT [CHAPTER 24:29]
21.1. In terms of the Microfinance Act, every licensed DTMFI shall be required to
insure its deposit liabilities with the Deposit Protection Corporation.

22. MEMBERSHIP OF INDUSTRY ASSOCIATION

22.1. Every DTMFI shall be required to be a member of any recognized Industry
Association in Zimbabwe.

46
 APPENDIX A

AFFIDAVIT OF FITNESS AND PROBITY

I, [insert name, national registration number] of [insert physical address], do hereby

make oath and state that:

1. [insert declarations as to directorships in other companies];

2. [insert declarations as to shareholding in other companies (including

shareholding in a related subsidiary, whether held directly or indirectly through
other interests];

3. [insert declarations as to whether you have the appropriate qualification and

experience to effectively fulfil the role and responsibilities of the position and
enclose curriculum vitae];

4. [insert declarations as to whether you are assuming concurrent responsibilities

and how you will manage conflict of interest and ability to discharge your
duties];

5. [insert declarations as to whether you are or have been the subject of any
proceedings of a disciplinary or criminal nature, or have been notified of any
impending proceedings or of any investigations, which might lead to such
proceedings];

6. [insert declarations as to whether you are or have been the subject of civil or
financial crime within the last five (5) years or enforcement action, in relation
to the management of an entity, or commercial or professional activities, which
were determined adversely against you (including consenting to an order or
direction, or giving an undertaking, not to engage in unlawful or improper
conduct];

7. [insert declarations as to whether you have faced criminal convictions or served

sentences and whether you have been granted free pardons, whether in
Zimbabwe or any other country];

47
8. [insert declarations as to whether you have contravened any provision made by
or under any written law designed to protect members of the public against
financial loss due to dishonesty, incompetence or malpractice];

9. [insert declarations as to whether you have contravened any of the requirements

and standards of a regulatory body, professional body, government or its
agencies];

10. [insert declarations as to whether you or any business in which you have a
controlling interest or exercises significant influence, has been investigated,
disciplined, suspended or reprimanded by a regulatory or professional body, a
court or tribunal, whether publicly or privately];

11. [insert declarations as to whether you have been engaged in any business
practices in a negligent, deceitful, oppressive or otherwise improper (whether
unlawful or not), or otherwise discreditable business or professional practices];

12. [insert declarations as to whether you have been associated, in ownership or

management capacity, with a company, partnership or other business
association that has been refused registration, authorization, membership or a
licence to conduct any trade, business or profession, or has had that registration,
authorisation, membership or licence revoked, withdrawn or terminated];

13. [insert declarations as to whether you have made any arrangements or

composition with your creditors, filed for bankruptcy, been adjudged bankrupt,
had assets sequestrated, or been involved in proceedings relating to any of
these];

14. [insert declarations as to whether you have held a position of responsibility in

the management of a business that has gone into insolvency, or liquidation
while you were connected with that business and whether you contributed to
receivership, insolvency, or liquidation];

48
15. [insert declarations as to whether you have been a director of, or directly
concerned in the management of, any institution which is being or has been
wound up by a court or other authority competent to do so, or of any regulated
entity, the licence of which has been revoked under any written law and whether
you contributed to the winding up];

16. [insert declarations as to whether you have non-performing loans with any
banking institution, building society, microfinance institution or other lending
institution in Zimbabwe or outside Zimbabwe]; and

17. [insert declarations as to whether you are free from any business or other
relationship which could materially pose a conflict of interest in discharging
your duties as an appointed person within the institution].

SWORN TO AT………….......THIS….DAY OF ………………….YEAR………….

…………………………………….………..
SIGNATURE

BEFORE ME: FULL NAME ….…………………………………….………..

…………………………………….……….
COMMISSIONER OF OATHS
(SIGNATURE AND STAMP)

49