The microcredit sector is developing dynamically, which implies equally dynamic changes in the market.
To begin with, as of January 1, 2021, all organizations engaged in microfinance activities (MFOs, credit cooperatives, and pawnshops) have come under a licensing regime.
Accordingly, all MFOs are now under the control and supervision of the Agency for Regulation and Development of the Financial Market (ARDFM), notes Yerbol Omarhanov, Director of the Association of Microfinance Organizations of Kazakhstan (AMFOK).
In a conversation with a correspondent from the Kapital.kz Business Information Center, he spoke about significant events that occurred in the market in 2021.
The status of a full-fledged participant in the financial market obliges MFOs to act as providers of information to the credit bureau and as subjects of financial monitoring for the purposes of combating money laundering and terrorism financing, Yerbol Omarhanov emphasizes.
This status also requires MFOs to maintain accounting records and prepare financial statements in accordance with international standards, he adds.
To date, 231 MFOs, 218 credit cooperatives, and 605 pawnshops have received licenses from the regulator, the interlocutor states.
Based on the data he presented, the loan portfolio of MFOs (excluding credit cooperatives and pawnshops) grew by 42.2% in the first nine months of this year, reaching 594.6 billion tenge, with the share of overdue loans over 90 days amounting to 7.1%.
As for interest rates, Yerbol Omarhanov notes that no significant dynamics of increase or decrease were recorded in the MFO sector during the reporting period, as the conditions of funding remained unchanged.
The rates remained within the limits set by the financial regulator.
"Many people believe that MFOs charge high interest rates on loans and that all the profit goes to the lender. However, under conditions where the maximum interest rate is capped and commissions from borrowers are prohibited, the net profit of microfinance organizations, taking into account funding costs, varies within 4–5%, from which MFOs also pay corporate income tax. Unfortunately, MFOs have no other sources of funding except borrowed resources and are therefore forced to include funding costs in the interest rate for borrowers," he explains.
The interlocutor notes that with the consolidation of the MFO market and its inclusion within the perimeter of the authorized regulator, a clear segmentation of the market has been observed along the main directions: SME support, auto lending, and consumer loans.
"Today, the MFO market has established its boundaries, has a heterogeneous structure, and shows a clear segmentation by the subject composition and a wide range of credit products aimed at meeting the demand for financial services," Yerbol Omarhanov clarifies.
Among the main innovations adopted this year, the AMFOK head mentions a package of legislative amendments aimed at strengthening the protection of financial service consumers’ rights.
Thus, from October 1 of this year, a mandatory procedure for settling debts regarding insolvent borrowers was introduced.
It stipulates that when a delay occurs, the creditor must send the borrower a notice offering to contact the MFO to resolve the dispute.
Only after following this procedure, and in the event of failure to reach a compromise, can the MFO initiate measures to recover the debt as provided by law, Yerbol Omarhanov explains.
"These amendments establish a prohibition on accruing interest on capitalized amounts of the principal debt and overdue interest, limit the amount of penalties to 0.5% per day for the first 90 days of delay and 0.03% after 90 days, but no more than 10% per year of the loan agreement term.
They also prohibit the accrual of interest and penalties for delays over 180 days on microloans secured by residential real estate," he adds.
The AMFOK head also spoke about amendments to the Law "On Microfinance Activities" currently under consideration in Parliament.
He explains that it is proposed to halve the overpayment on online microloans and to oblige online lenders to provide deferment of repayment only on terms favorable to the borrower.
At the same time, the regulator intends to tighten the requirements for calculating the borrower's debt burden ratio and to lower the maximum allowable interest rate on online loans.
The law already provides for the issuance of bonds on the organized securities market, factoring operations, activities as an agent of electronic money issuers, and as an agent for insurance and payment organizations.
The interlocutor emphasizes that thanks to the opportunity to issue bonds, many MFOs have entered the stock market, and several large microfinance organizations — KMF, Toyota Financial Services, and OnlineKazFinance — have received ratings from international rating agencies.
"The fundamental changes that occurred this year have ensured that MFOs transitioned to a higher quality level of development, creating conditions for market transparency and increased responsibility toward consumers of microfinance services," asserts Yerbol Omarhanov.
However, he notes that even after the introduction of the licensing regime, practically every quarter new restrictions are imposed on MFOs, indicating the instability of the regulatory environment in this sector.
Under such conditions, it is difficult for microfinance organizations to build long-term business plans.
"On the one hand, we understand and support the regulator’s initiatives aimed at protecting consumers.
On the other hand, we believe there must be a balance between regulation and the development of the financial market," says the AMFOK Director.
"I would like to remind that at the VI meeting of the National Council of Public Trust, the Head of State, Kassym-Jomart Tokayev, stressed the need for balanced measures to support borrowers without harming the financial sector," he adds.
The interlocutor draws attention to the fact that any changes or additions to legislation must be based on a deep analysis of statistical data and their impact on the financial market.
After all, excessive restrictions in the area of credit services can lead to the exit of legal players from the market and the development of shadow lending with more negative consequences for the population.
"It can be said that financially stable companies with competent and long-term business strategies, with the ability to introduce innovative technologies into the lending process, and focused on implementing best international microfinance practices with a social orientation, have passed through the licensing sieve," Yerbol Omarhanov notes.
Nevertheless, for some small and medium-sized companies, the process of adapting to regulation and supervision by the authorized body is challenging — often, they abuse their creditor rights and violate borrowers’ rights.
Such behavior by individual unscrupulous market participants harms the reputation of the entire sector, and thus decisive measures must be taken against them, including license suspension or revocation, the AMFOK head emphasizes.
"The MFO market withstood the 'perfect storm,' which began last year when COVID-19 restriction measures coincided with the adaptation period to new microfinance regulation, the provision of deferrals to affected populations and businesses, the transition to a licensing regime, and frequent changes in legislation.
Despite these difficulties, the MFO sector demonstrated a stable growth dynamic, confirming its high potential, which must be preserved and developed," comments Yerbol Omarhanov.
The Association of Microfinance Organizations of Kazakhstan is interested in preserving the sector’s specialization, which consists of providing financial support to small and medium-sized businesses and developing citizens’ entrepreneurial initiatives, especially in rural areas, he emphasized.
"This basic profile of MFOs must be preserved and should prevail in the microfinance sector," summarized the AMFOK Director.
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