At the beginning of 2021, the Agency for Regulation and Development of the Financial Market established rules for licensing microfinance organizations (MFOs) based on specific criteria. How has this innovation affected the MFO sector, where is the market headed, and how does this impact consumer trust? We asked these and other questions to the Director of the Association of Microfinance Organizations of Kazakhstan, Yerbol Omarhanov, and the General Director of Solva MFO, Anna Maksimova.
Law and Order
– How has the industry situation changed this year after the adoption of licensing rules? How much more transparent has the work of credit organizations become, and what has it given to MFOs and clients?
– Thanks to the regulation process initiated by the National Bank in 2019 and later continued by the Agency for Financial Regulation and Development, order and transparency have been established in this segment of financial services.
The Agency carried out tremendous work in clearing the sector of unscrupulous participants who tarnished the reputation of law-abiding MFOs. Since MFOs came under the Agency’s regulation perimeter, a regulatory framework has been created, MFO responsibility strengthened, effective measures to protect consumers’ rights introduced, and a licensing regime for microfinance activities implemented.
Currently, 235 MFOs have received licenses from the regulator, and more than 3,500 non-bank lending entities have been forcibly or voluntarily liquidated.
All these measures positively impacted microfinance service consumers. Through regulation and licensing, borrowers are now protected by the state. For systematic violations of the law, an MFO faces suspension or revocation of its license, as well as other liabilities.
As of the first half of 2021, the MFO loan portfolio amounted to 531.1 billion tenge, an increase of 27% since the beginning of the year. The main borrowers of MFOs remain small and medium-sized business entities, most of whom live in rural areas. The growth of the loan portfolio was driven by the recovery of micro-entrepreneurs' business activities after pandemic restrictions.
In this regard, we believe that despite the negative opinions about the growth of consumer lending in the country, MFO activities bring more positives to the economy than negatives. Consumer lending is only one segment of the MFO market, where certain companies specialize, but it does not define the entire market. The main mission of MFOs remains enhancing citizens’ entrepreneurial activity, financially supporting SMEs, and achieving social-oriented goals.
Law and Practice
– Comparing the main legislative milestones in the sector, how well does the current law reflect MFO activities? What were the flaws in previous versions?
– The current Law of the Republic of Kazakhstan "On Microfinance Activities" imposes more restrictions on MFOs compared to previous editions. Overall, it meets the objectives of protecting consumers' rights and ensuring the transparency of the microcredit market.
At the same time, it introduced additional activities that MFOs are now authorized to conduct — activities that were previously unavailable.
For example, MFOs can now act as agents of electronic money issuers, insurance companies, payment agents, conduct factoring and forfaiting operations, and issue bonds. Thanks to this last option, there has been active MFO participation in the stock exchange, and some large companies have obtained ratings from international rating agencies, increasing their investment attractiveness and improving their access to capital markets.
Thus, the current legislation on microfinance activities is more progressive compared to the previous one.
However, time does not stand still: financial and digital technologies are evolving, and new trends and directions in financial services appear. Legislation must respond timely to these changes and meet the needs of market participants to support further development.
Recently, AMFOK submitted a proposal to the Agency suggesting that MFOs be granted the right to combine the functions of a payment organization and the ability to issue microloans via identified electronic wallets (which would reduce borrower expenses on banking commissions), along with other measures aimed at expanding MFO potential. We hope that these initiatives will be supported by the regulator and implemented into legislation.
Plans of the Financial Regulator
– Are changes expected from the financial regulator? Will separate criteria be introduced for MFOs and other types of financial organizations (pawnshops, credit cooperatives)?
– Recently, at the IX Congress of Financiers of Kazakhstan, the Agency for Regulation and Development of the Financial Market announced plans for the proportional regulation of each sector based on the risk level of each segment of microfinance activity. We support this approach.
At the same time, we believe that since MFOs do not attract public deposits and contribute minimally to the growth of consumer debt due to their small share in the overall loan portfolio (including bank-issued consumer loans), the risks posed by the microcredit sector to the financial system are minimal. Thus, regulation should also be proportionate and not overly strict.
Borrower Safety
– Who qualifies for lending at MFOs? How safe is it, and how to choose a reliable MFO?
– Lending at MFOs is available to anyone who has sufficient income and the ability to service a microloan. MFOs do not issue loans to everyone indiscriminately.
The law mandates calculating the borrower's debt burden so that loan payments do not exceed 50% of their total official income.
Microloans are typically small amounts used primarily by SMEs to replenish working capital and by individuals to meet urgent household needs.
Before applying for a microloan, you must first ensure that the MFO holds a license (this can be verified on the Agency’s website).
You should carefully review the contract terms and calculate the total repayment based on your financial capabilities.
If you believe an MFO abuses its creditor rights or demands more than what is stipulated in the contract, you can file a complaint with the Agency.
Based on the results, the MFO may be held liable, up to and including license revocation. Borrowers are protected by the state.
On the other hand, borrowers should not misuse this protection to evade obligations. If unforeseen circumstances arise and a borrower is unable to repay, the law requires the MFO to offer restructuring measures before initiating enforcement actions.
The Future of the MFO Market
– What trends do you expect in the MFO market?
– In the future, we expect the financial regulator to take measures aimed at reducing consumer lending to individuals and expanding the share of entrepreneurial loans.
There may be regulatory conditions leading to the contraction or even elimination of the short-term online loan segment (payday loans).
Problems in this sector undeniably exist and must be addressed, but without overreactions or radical decisions.
Overall, it is difficult to predict the future of MFOs, but we are confident that the potential of the sector has not yet been fully realized.
Solva: Experience and Results
– How have things changed at Solva after licensing?
– Licensing is an important tool that ensures consumer protection and market order. It enhanced clarity and transparency for those playing by the rules while pushing out non-compliant players.
Two key requirements were introduced during licensing: recapitalization (owners had to provide the necessary level of capital) and stricter requirements for the qualifications of management and shareholders.
There will also be tighter control over other market players (pawnshops, credit cooperatives) to further "whiten" and make the market transparent and understandable.
It’s better to learn to live under control than to attempt bans — otherwise, unofficial organizations would continue providing services in an uncontrolled, unregulated, and consumer-unprotected manner.
Solva’s Development
– How did licensing impact your company?
– Positively. The more open and transparent you are as a company, the more trust you gain from consumers.
The overall trend toward greater consumer loyalty toward MFOs is evident.
– How much of this change was due to licensing, and how much to your company's strategy?
– It’s a combination of factors. Licensing is one of them.
Trust toward MFOs grows with stricter regulation. Clients prefer working with companies that follow the rules.
This is undoubtedly a positive factor for the development of our company and the MFO sector as a whole.
The second reason is the technological advancement of microfinance organizations.
Alternative lending allows for different approaches, more flexibility toward clients, and less bureaucracy compared to banks.
Third is our flexibility toward client needs. We understand our clients’ "pain points" and adapt quickly: product changes take a few days, not weeks like in large banks.
We act like startups: pilot – if successful, scale up; if not, close it down.
This enables us to stay responsive and maintain a harmonious balance within Solva.
Legislation Improvements
– Are there controversial issues in the legislation that need to be addressed?
– There is always room for improvement.
We regularly submit proposals to the ARDFM. For example, the need to create an equal environment for banks and MFOs and proper naming of financial products.
For instance, short-term loans (PDL) — small, expensive payday loans — differ significantly from MFO-issued microloans comparable to bank loans.
There was a proposal: keep the term "microloan" for payday loans and call proper MFO loans simply "loans," like in banks.
Clients should correctly perceive the product they are receiving.
We also requested access to the Kazakhstan Interbank Settlement Center and clearing system to minimize borrower risks by imposing account freezes, a right banks currently have but MFOs do not.
Focus on SMEs
– Why did you focus on SME lending?
– Indeed, since early 2021, we have prioritized SME financing.
Sales increased tenfold by the end of the year, while individual lending grew 2.5 times.
This difference is because individual lending has been active under the Solva brand for four years, while SME lending was launched only late last year.
Individuals have ample access to bank credit, but SMEs are underserved.
Many financial institutions lack proper SME scoring models.
We are trying to innovate and build an online product for SMEs, combining consumer lending experience with financial analysis.
Regional Expansion
– Do you plan to expand regionally?
– Yes.
Solva offers products available anywhere in Kazakhstan.
If a client has internet access, they can get financing through us — even if there is no local bank branch.
Funds can be sent to a KazPost account.
Outlook for 2022
– What changes are expected for the MFO market in 2022?
– Online lending will continue growing.
Digital products will improve, offering additional services like legal, accounting support, and consulting.
Another trend is MFOs entering the banking market.
Some companies, including Solva, are preparing for this transition to provide banking-level services while retaining fintech flexibility.
We also feel a social responsibility: teaching clients not just to borrow but also to save, creating a healthy mix between loans and financial literacy.
Solva’s 2022 Innovations
– In the short term (one year), we plan to balance our portfolio between individuals and SMEs (50/50).
We will expand the SME product line: financing legal entities, developing factoring and factoring transactions.
Regardless, we will stick to our standard: fast, minimal documents, no collateral, and maximum client convenience.
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