Starting from January 1, 2020, previously unregulated participants of the financial market will fall under the regulation of a new supervisory authority. This provision is stipulated in the Law "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Issues of Regulation and Development of the Financial Market and Microfinance Activities and Taxation."
To implement the law, the National Bank of the Republic of Kazakhstan has adopted more than 10 subordinate regulatory legal acts regulating the activities of MFIs.
Director of the ALE "Association of Microfinance Organizations of Kazakhstan" Yerbol Omarkhanov told a correspondent of Kapital.kz Business Information Center about how these innovations will affect market participants.
Starting next year, previously unregulated credit market participants — credit partnerships, pawnshops, and so-called online lenders providing loans via the Internet — will be required to undergo registration with the National Bank, and their activities will fall under the regulation and supervision of the Agency for Regulation and Development of the Financial Market.
Now the entities of the unregulated credit market will be obliged to provide information to the credit bureau, noted Yerbol Omarkhanov. According to him, this will allow for better assessment of borrowers' solvency based on information about their borrowings from other credit organizations.
"Before the adoption of the Law, unregulated credit market entities were not mandatory suppliers of information to the credit bureau, so borrowers could receive several loans from such organizations before applying to MFIs, and we had no way to assess the associated risks," explained the head of AMFOK.
Overall, the inclusion of non-bank credit organizations within the perimeter of regulation by the authorized body, according to him, was positively perceived by the microfinance sector, since the need to bring this credit market into a civilized and transparent form had long been overdue.
It should be noted that MFIs have been under the regulation of the National Bank since 2016, being mandatory suppliers of information to the credit bureau and also subjects of financial monitoring conducted to combat the legalization of illegally obtained incomes.
What changes will affect the activities of non-bank credit organizations?
First
The law increased the maximum amount of a microloan from 8,000 times the Monthly Calculation Index (MCI) to 20,000 times the MCI.
Thus, this increase will allow medium-sized and even large businesses to access the services of MFIs.
Second
Organizations engaged in microfinance activities, in addition to issuing microloans, may additionally invest their own assets in securities and other financial instruments; perform the functions of payment agents and sub-agents, as well as agents of electronic money systems; conduct factoring and forfaiting operations; issue guarantees, sureties, and other obligations providing for monetary execution; issue microloans electronically; assign claims under microloan agreements; operate in the form of a joint-stock company; issue securities and bonds; transfer a microloan to a third party at the request of the borrower; and accept shares or equity participations in the charter capital of legal entities as collateral.
"These changes will allow microfinance organizations to reach a higher level of quality. We hope that the opportunity to issue bonds, assign rights of claim under microloan agreements, and operate as joint-stock companies will partly help solve the problem of funding microfinance organizations and attract investments, including foreign investments, into the microcredit sector," said the Director of the Association of Microfinance Organizations of Kazakhstan.
However, in his opinion, only large or medium-sized MFIs will be able to take advantage of these additional options, as they require significant capital investments.
Third
At the subordinate legislative level, the minimum charter capital requirement for microfinance organizations has been increased.
It is planned to gradually raise it from January 1, 2020, until July 1, 2022, to 100 million tenge.
"Considering that more than 60% of microfinance organizations currently have a charter capital of up to 50 million tenge, an immediate tightening of requirements could have led to a sharp reduction in the number of microfinance organizations. Therefore, the association proposed a gradual increase in the minimum charter capital requirement," said Yerbol Omarkhanov.
According to AMFOK estimates, by July 1, 2022, a slight reduction in the number of microcredit market participants may occur, and in some cases, mergers or acquisitions may be observed in order to meet the new charter capital requirements set by the regulator.
Fourth
To reduce the debt burden of citizens (DBC), the National Bank has established a debt burden coefficient for borrowers of microfinance organizations.
The maximum value of the debt burden coefficient is set at 50%, meaning that the total debt load should not exceed 50% of the borrower's total official income.
"It should be noted that at the initial stage of discussion, the regulator planned to extend the DBC to all loans without exception, including those provided for entrepreneurial purposes. Considering the specific features of microfinance borrowers, such a restriction would have threatened the existence of the entire microcredit sector as well as state programs supporting the development of small and medium businesses, since 85% of the loan portfolio of MFIs consists of business loans.
Through dialogue with the regulator, we managed to defend the interests of the microfinance industry and small and medium-sized businesses receiving financial support in the form of microloans for business development," commented the head of the Association of Microfinance Organizations.
Currently, the DBC applies only to unsecured consumer loans for individuals.
At the same time, the National Bank has imposed a ban on issuing loans to citizens with incomes below the subsistence minimum by dividing the borrower's DBC calculation into two stages: first, the assessment of the borrower's solvency, and second, the calculation of the DBC.
For recipients of targeted social assistance, the DBC calculation will be based exclusively on official income data.
Fifth
The law prohibits microfinance organizations from charging commissions and other payments related to the issuance and servicing of microloans. Only the accrual of remuneration on the microloan and penalties for violation of credit obligations are allowed.
At the subordinate legislative level, a new formula for calculating the annual effective interest rate (AEIR) for microfinance organizations has been introduced.
However, the limit on the maximum AEIR remains at 56%.
"According to our calculations, taking into account the new formula and the maximum value of the AEIR, microfinance organizations will be forced to lower interest rates on microloans to comply with the 56% limit," reported Yerbol Omarkhanov.
According to him, all the above changes are aimed at protecting the rights of financial services consumers, creating a transparent and regulated market for non-bank credit organizations.
At the same time, a favorable legal environment should contribute to increasing public access to quality microfinance services.
Furthermore, the Director of AMFOK assumed that further tightening of regulation in the microfinance sector is unlikely to occur or will be balanced by the simultaneous creation of additional opportunities for sector strengthening and development.
He also noted that according to statistical data, the microfinance organizations' loan portfolio increased by 26% since the beginning of the year, amounting to 277.3 billion tenge by the end of the third quarter.
"We believe that in 2020, the growth dynamics of the microcredit market will be maintained, although with a slight slowdown due to new regulatory requirements," added Yerbol Omarkhanov.
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