For the past two years or so, the microfinance sector has been calling for industry-friendly laws, arguing that their services help the most needy citizens, besides supporting the government’s efforts to eradicate poverty.
According to Peter Rwema, the director of research and development at the Association of Microfinance Institutions of Rwanda, tax laws are stifling service delivery and sector growth and, therefore, should be amended. He also notes that the leasing law, which was prepared in 2010 should be passed. Rwema had a chat with Business Times’ Peterson Tumwebaze about these and other issues affecting the industry.
Microfinance institutions have called on the government to pass the long-shelved lease law and review other tax laws and make them sector-friendly. This, they argue, would ensure that people not served by commercial banks access financial services, an effort that would enhance people’s income and reduce poverty.
According to the microfinance body, clients are taxed twice. Peter Rwema, the director of research and development at the Association of Microfinance Institutions of Rwanda, revealed that those using collateral to secure capital loans pay a double tax of up to 36 per cent.
“Clients pay 18 per cent value added tax (VAT) on collateral and again pay 18 per cent VAT when repaying the loan. This makes the loans expensive as one will have to fork out 36 per cent interest.
“We, therefore, request that a new law, which will look at lease loan as normal service loan, to be put in place to protect clients from double taxation,” Rwema said.
As per the current lease law, a micro-finance institution pays 30 per cent as withholding tax (income tax) and 18 per cent as VAT on security, 18 per cent on loan remits, security registration fees and also pay patent tax of Rwf20,000 annually on each branch it opens. The law, the micro-finance sector stakeholders say, is suffocating the industry’s growth and loan up-take.
“We have already written to the Minister of Finance and the Prime Minister to intervene. We know the importance of paying taxes, but if you want to encourage people to access funding to develop their business ideas, then these are some of the unfair policies you have to fight,” Rwema noted.
He said the Rwanda Revenue Authority treats lease loans as services that must be taxed.
He also explained that micro-finance institutions buy capital equipment which they lease out to people who do not have collateral, they pay taxes. But the beneficiaries are still charged an 18 per cent VAT on the same equipment.
“This limits youth who want to start up projects in carpentry, metal works and welding from accessing loans to help improve their living standards,” Rwema said. He pointed out that commercial banks had long ceased to offer lease loans because “it was not making business sense for them”.
And microfinance institutions could follow suit, he added.
“Many of our members have stopped approving new lease loan applications, saying they will wait until a new law is in place. What is puzzling is that the leasing law was prepared in 2010… we don’t know what happened after that as no one says anything.
It was supposed to be passed in 2011, but we are still waiting up to now,” Rwema pointed out.
He said transactions were, in the meantime, on hold. This means people who need funding will not be served, which affects the growth of the sector.
Dalphin Ngamije, CEO Duterimbere Microfinance, said the high interest on loans had hiked the cost of production on the side of the client, making it hard for them to repay the loan.
“This affects us because, if people fail to repay the loans, then we are incapacitated financially as an institution,” she noted.
Ngamije called on the government to give the microfinance sector tax incentives to grow the industry and enhance access to funding.
There are 487 microfinance institutions in Rwanda with a capital base of over Rwf77b, according to Rwema. The majority of these are in rural areas, he added.
Richard Tusabe, the Rwanda Revenue Authority commissioner for domestic customs, acknowledged the association’s complaints, noting that they had agreed with the Prime Minster to solve them in two weeks (about a week remaining now). “We are in touch with the association and we believe the issue of double taxation will be settled,” Tushabe, also the deputy Commissioner General, said.
Meanwhile, the Association of Microfinance Institutions of Rwanda has called for decentralisation of registration of securities (collateral), arguing that the process makes loans expensive.
The association wants the exercise to be scrapped or if it must stay, be decentralised to local authorities.
Presently, the exercise is handled by the Rwanda Development Board and one is required to pay Rwf100,000 as guarantee fees and another charge of Rwf20,000, all which increase the interest on loans, the body added.
They also want the Rwf200,000 patent fees paid by firms to operate branches to be waived off, arguing that the parent institutions pay 30 per cent income tax.
“If this is not reviewed, it is going to make the microfinance industry unsustainable, fail the mission to serve the poor and fight poverty.
“We need to harmonise laws or risk killing the financial sector,” Rwema cautioned.
He pointed out that since the main source of capital for micro-finance institutions is loans; if they are taxed heavily few people will access them, which will cripple businesses.
In a related development, the association has called for operationalisation of loan recovery committees at district level. They said this would reduce on the number of bad loans and boost the sector.
“Some people think that microfinance money is for the government and default. If the local leaders sensitise borrowers about the importance paying back the money, this will create a conducive environment for the sector to grow,” Rwema pointed out.
He, however, noted that the association had no figures on the burden of bad loans the sector has.
Damascene Hakuzimana, the Rwanda micro-finance institutions communications officer, said micro-finance groups should be supported because they take financial services to rural people and boost grassroot development.
Bernard Kivava, the Rwanda Microfinance managing director, called on the government to ease the process of settling disputes once clients default on repayments.
“Rwanda is one of the less bureaucratic countries when it comes to settling disputes, but the government should ease the process further so that we do not lose money in long processes,” Kivava said.