Last week, the Head of State, Kassym-Jomart Tokayev, delivered his Address to the People of Kazakhstan at the opening of the second session of the seventh convocation of Parliament.
The President of the country announced important changes needed in the financial sector.
One of these changes is the strengthening of the positions of microfinance organizations (MFOs). Over time, MFOs are expected to become the main investors in rural business.
Are microfinance organizations ready for this, and how do they see their future? We discuss this here.
"Second-tier banks do not invest in small projects, especially in rural areas. Therefore, it is necessary to utilize the potential of MFOs. They work on the ground, know their clients, their businesses, and their capabilities. The National Bank and the Agency for Regulation and Development of the Financial Market (ARDFM) must prepare a package of decisions on this issue," the Head of State stated in Parliament.
The very next day, the Chairman of the National Bank of Kazakhstan, Yerbolat Dossayev, at a government meeting, promised that the regulators would prepare "a package of necessary decisions to expand the capabilities of MFOs" by the end of the year.
Since 2021, MFO activities have been carried out under a licensing regime with close oversight by the state.
Prudential standards for MFOs have been tightened, including requirements for the minimum amount of charter and equity capital.
Thus, the minimum charter capital for a microfinance organization is now set at 50 million tenge, and for credit partnerships and pawnshops operating in Nur-Sultan, Almaty, Shymkent, or regional centers from July 1, 2021 — at 30 million tenge.
"This should have a positive impact on the financial stability of companies.
MFOs have been included in the composition of financial organizations and are full participants in the financial system, maintain accounting and prepare financial statements in accordance with IFRS, and are obligated to publish their financial statements in the media to ensure the transparency of their activities.
The procedure for providing microloans is strictly regulated by legislation.
Today, this is no longer a spontaneous and unregulated market of financial services, but a well-established and reliable financial institution," shared the Head of the Association of Microfinance Organizations of Kazakhstan (AMFOK), Yerbol Omarkhanov.
As of the end of the first quarter of 2021, the loan portfolio of MFOs amounted to 463.7 billion tenge, having increased by 10.9% since the beginning of the year.
The loan portfolio of AMFOK member organizations accounts for 396.2 billion tenge, or 85% of the total MFO loan portfolio.
"The share of microloans with overdue debt of more than 90 days is 6.1%, having increased by 0.1% since the beginning of the year.
This increase is not due to a deterioration in the quality of the MFO loan portfolio, but rather due to the integration of previously unregulated participants in the lending market with traditional MFOs.
In any case, we believe that this figure for non-performing loans is much better than in other credit organizations and confirms the fact that microloans are issued under a responsible and careful policy without excessive debt burden on borrowers," emphasized the interviewee.
In the President's Address, the role of MFOs in financing small business projects, implemented by small and medium-sized business entities, including those living in rural areas, was identified very precisely and substantively.
This indeed represents the primary category of borrowers of traditional MFOs that have been operating in Kazakhstan for over 20 years.
The MFO sector warmly welcomed this initiative, with hopes for positive and effective changes.
Most importantly, in our view, it signifies the recognition of microfinancing at the high state level as one of the effective tools for supporting small and medium-sized businesses.
For many years, we have sought to explain the essence of microfinance and its benefits for society and the state, often encountering negative perceptions about MFO activities.
The main mission of microfinance worldwide is to achieve socially oriented goals:
to increase citizens' entrepreneurial activity and to assist low-income population groups.
Traditional MFOs in Kazakhstan have consistently and successfully adhered to these principles for over two decades.
At the same time, we acknowledge that accusations against the MFO sector were sometimes not groundless.
Previously, some unscrupulous market participants abused their creditor rights, acted irresponsibly, violated consumer rights, and in some cases unknowingly violated the law due to a lack of experience operating under regulatory supervision.
Nevertheless, overall, sector participants are highly interested in increasing the transparency of the microfinance services market, enhancing its reputation, and ensuring greater responsibility.
In this regard, we would like to highlight the tremendous and well-coordinated work carried out by the Agency for Regulation and Development of the Financial Market of Kazakhstan.
We fully support and share the financial regulator’s approach in this matter.
For many years, we have been trying to solve the fundamental issue of funding sources.
Today, about 90% of all microloans are funded through foreign borrowing.
The cost of servicing such loans averages 17–19%, which is factored into the overall cost of microloans for borrowers.
Thus, the creation of accessible sources of funding for MFOs would allow a reduction in interest rates for our clients.
It is also necessary to expand the participation of MFOs in state programs to support SMEs and improve productive employment, while ensuring compensation for operational expenses related to issuing and servicing microloans, in the range of 15–16%.
High operating expenses for MFOs are due to the need to maintain a wide network of branches, particularly in rural areas where banks are sparsely represented.
These operational costs do not include financial profits — they are purely operational expenses.
Tax benefits and preferences for MFOs providing financial support to SMEs would also be very helpful.
Currently, we feel an acute need, especially in rural areas, to open and maintain accounts and to carry out transfer operations.
Cooperation with banks and payment organizations in this area also affects the cost of microloans.
Often, MFOs become hostages to the tariff policies of partner organizations,
but today MFOs have no choice but to bear these costs themselves since they are not permitted to independently perform such operations.
These are only the main measures that could help MFOs unlock their full potential.
However, the most important thing is not to hinder the further development and establishment of the MFO sector, nor to excessively restrict existing opportunities with frequent and sometimes overly burdensome legislative measures.
Irina LEDOVSKIKH
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