The microloan market is undergoing a massive evolution

Keeping distance

The microloan market is undergoing a massive evolution. The process of tightening the requirements for MFO continues in the country. COVID also negatively affects business. Here's how classic MFO and FinTechs are going through hard times.

Let me remind you that the classic MFO are organizations that issue small loans for a short term in offices. Since last year, pawnshops, credit partnerships and fintech companies have joined this market. The Agency of the Republic of Kazakhstan for the Regulation and Development of the Financial Market has put forward many requirements to them: from the growth of equity capital to restrictions on the rate of remuneration.

Base

“During this period, MFIs were literally in a fever from frequent changes in legislation, large-scale inspections by law enforcement agencies due to a high-profile case at the beginning of last year, when cases of the creation and operation of a financial pyramid were revealed. Moreover, these financial pyramids had nothing to do with the MFO sector, even by name. They were just legal entities committing offenses in the financial sphere, - says the head of the Association of Microfinance Organizations Erbol Omarkhanov. “The requirements of the regulator to the market are now as close as possible to banking legislation.”

Before July 1 of last year, all online lenders were required to obtain an account registration with the ARRFR. FinTechs say that preparing the documents was extremely difficult, as government agencies worked under strict quarantine conditions. Later, the regulator announced new amendments to the legislation, and now all MFOs began to prepare for licensing.

“Over the past two years, there have been at least five conceptual changes in legislation that have affected the financial model and business planning,” says Erbol Omarkhanov. “In such conditions, many companies left the market, and the rest faced the problem of attracting investments to Kazakhstan due to the instability of the legal field. Nevertheless, it should be noted that a number of legislative initiatives were necessary. Their adoption provided more complete protection of the rights of consumers of online lenders' services, the settlement of over-indebtedness issues through tools for calculating the debt burden ratio and limiting the maximum overpayment on microcredit. "

Summarizing all the innovations, we can say that they are aimed at protecting the rights of consumers of financial services. The financial market should become more open, understandable, accessible, and the relations of its participants should be predictable and protected by law.

“Some companies decided to wind up their business. This mainly affected foreign organizations. If a company cannot adapt and realign its business and cost structure, then it cannot continue the business. The strongest survives in the market and the one who can adapt faster. Gone are the weak, ineffective and those who thought that the tightening of regulation and mass inspections will continue, ”emphasizes the founder of the“ Credit24 ”service Alexey Sidorov.

As a result, according to the National Bank, the loan portfolio of MFOs, at the end of 2020, amounted to 418 billion tenge, an increase of 42.6%, in terms of their number, there was also an increase of 15%. In quantitative terms, these are 47 organizations included in the register of the authorized body.

“The net profit of MFOs at the end of 2020 amounted to 32 billion tenge. Their equity capital also increased from 108.6 billion tenge to 163.9 billion tenge. This was influenced by the factors of online lenders joining the traditional MFO sector and including their financial indicators in general accounting and statistics, ”says Yerbol Omarkhanov.

But the main changes in the legislation affected fintech companies, and here the situation is different. “The loan portfolio has significantly decreased, since during the state of emergency, the volume of monthly lending decreased five times,” says Anatoly Glukhov, director of the Kazakhstan Association of FinTech ALE. - However, some recovery in extraditions occurred as the country left the strict quarantine regime and the resumption of full-fledged activities of many enterprises. According to official data, as of January 1, 2021, the aggregate loan portfolio of MFOs - members of the association is 25 billion tenge, while as of January 1, 2020 it was estimated at 100 billion tenge. "

 

Funding

Despite the difficulties, MFOs have firmly consolidated their positions in the market, having proved their financial solvency and self-sufficiency, having determined the correct business strategy in times of crisis, with a high professional level of management and a great practice of microcredit. This is no longer a spontaneous and unprofessional market, but for the most part a fairly successful, stable financial institution, with trained and trained personnel, material resources and technological financial products.

“Moreover, several MFIs entered the stock market last year through a bond issue. The largest company on the market received a loan from the EBRD in the amount of $ 40 million. Our association's companies also work with the Damu Fund, - emphasizes the head of the MFO Association.

 

Portfolio

Despite the small, compared to banks, the size of the business, MFOs and FinTechs during the emergency period provided deferrals for loans to the population and entrepreneurs. Sometimes loans were “frozen” for six months, that is, MFIs acted as a business helping another business.

“When the quarantine began, we stretched the maturity dates and made various concessions. Of course, this affected the quality of the loan portfolio, but from the second half of last year the situation began to level out. However, at the end of the year, we did not see any growth in the loan portfolio. The pace of issuing loans began to recover, but we are still affected by legal restrictions and the epidemiological situation, ”says Aleksey Sidorov.

Classic MFO operate with different numbers. For example, the KMF press service claims that the pandemic has shown the limited number of offline points, remote services look more flexible and client-oriented against this background: “In general, the market has grown over the past year by 42% in the volume of loans issued. At the same time, classical MFOs had growth in the range of 1-5%, while companies focused on online had more significant growth. Within 15-30%. Car lending companies are also growing quite actively ”.

The increase in the portfolio occurred not only due to the growth of business with traditional MFOs, but also due to the application of a different approach to accounting statistics. However, KMF believes that in the MFO market, the winners are companies whose business model provides for issuance primarily through online channels.

“They grew faster than the market and faster than classic MFO. Among MFOs and STBs, there is an increase in competition for borrowers among individual entrepreneurs and farmers, there is also an increase in the number of borrowers who simultaneously take loans from STBs and MFOs, ”the press service of KMF says.

Some experts say that microloans may grow by 15-20% in 2021. The revival will be facilitated by the accelerated transition of issuances to online, as well as the flow of bank clients due to toughened scoring. However, the rapid growth of portfolios can lead to a deterioration in their quality, and the continuing economic instability will intensify the struggle for clients and increase the cost of attracting them, experts warn.

“Experience shows that during a crisis, the population has a growing demand for“ quick and short money ”. Consumers put high-value purchases in a distant box, preferring to cover the needs of today. But there will be no explosive market growth in the country anymore, as companies have changed their credit policies and improved the quality of customer assessment, ”concluded Alexey Sidorov.

FinTech Lenders Market. Summary

“Companies that managed to build long-term strategies back in 2019, taking into account the need to balance profitability and a reasonable responsible attitude towards consumers, were able to stay on the market. It is necessary to understand that, despite the seemingly high profitability in the sector, operating costs are simply enormous, ”says Anatoly Glukhov, director of the Kazakhstan Association of FinTech ALE. - The prime cost of an average microloan in the amount of 50,000 tenge reaches 28% of the amount! This is primarily due to the high cost of attracting customers through online advertising, as well as the need to use various paid credit scoring models and customer identification procedures. Taking these factors into account, companies remained on the market that managed to retain consumer loyalty. With all the variety of loan products on the market, nevertheless, hundreds of thousands of borrowers still use the services of online lenders and fulfill their obligations on time.

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The strongest impact on the activities of online MFOs and the need to improve lending procedures was not quarantined, but the more active fraudsters. Using the confidence of consumers, illegally obtained personal data, "left" bank accounts and payment cards, anonymous mobile phone numbers, they began to try in all possible ways to arrange online loans for unsuspecting citizens.

The IT solutions and compliance tools used by lenders to counter fraud, although they contributed to its reduction, were still not ready, faced with sophisticated new methods of data falsification. Of course, there can be no talk of any collusion between MFIs and fraudsters, as pseudo-experts began to present it. Since in all cases identified, the creditors themselves become the injured party and write off these microloans at a loss, and are also subject to negative PR and sanctions from the authorized body.

In order to resolve such cases, the members of the association adopted an appropriate standard that provides for a set of rapid response measures and includes a series of necessary actions by the MFO to restore the primary situation for the affected person. If you or your friends find themselves in a similar situation, then feel free to contact the association, and we will assist in solving the problem.

A new effective tool against fraudsters was the recent adoption by the microfinance market of the recommendations of the financial regulator on the need to conduct appropriate biometric identification of primary borrowers when issuing online microcredits. In addition, MFO are improving their anti-fraud software.

In conclusion, let me remind you that in March 2021, the licensing process for previously created MFOs was completed. New legislative requirements for microfinance will come into force, and the market, leaving scandalous stories behind, will receive a new impetus for further responsible development. "

The market for classic MFO. Summary

Head of the MFO Association Yerbol Omarkhanov: “Quarantine, the action of the state of emergency left an imprint on the business strategies and models of MFOs. Now companies are more cautious about providing microloans, taking into account the requirements of the financial regulator for calculating the borrower's debt burden ratio and other regulatory restrictions aimed at not providing microloans to those who cannot repay them.

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Basically, traditional MFOs are focused on the development of new loan products aimed at supporting small and medium-sized businesses and helping to recover from the coronavirus pandemic and emergency situations.

In the consumer lending segment, where online lenders are mainly represented, taking into account the development of digitalization and the understanding of the need to increase, as well as to improve the quality of service for their clients, MFOs are actively introducing various models, including the improvement of remote services for borrowers via the Internet.

Along with this, measures to counter fraudsters are being strengthened. For example, our association, together with the ARRFR, takes part in the development of amendments to the rules for the provision of microcredits by electronic means in terms of the mandatory biometric identification procedure before their provision.

In 2021, a licensing regime is introduced for MFOs. This is a new and higher stage in the development of the microfinance sector, which should have a qualitative impact on the strategy and approaches to the work of each MFO. "

More details: https://www.dknews.kz/inner-news.php?id_cat=27&&id=174029

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