kapital.kz: The MFI market weathered the “perfect storm”

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The microcredit sector is dynamically developing, which implies the same dynamic changes in the market. Let's start with the fact that from January 1, 2021, all organizations engaged in microfinance activities (MFOs, credit partnerships and pawnshops) fell under the licensing regime. Accordingly, now all MFIs are under the control and supervision of the Agency for Regulation and Development of the Financial Market (ARRFR), said the director of the Association of Microfinance Organizations of Kazakhstan (AMFOK) Yerbol Omarkhanov. In a conversation with a correspondent from the  Kapital.kz business information center,  he spoke about the significant events that took place on the market in 2021.

The status of a full-fledged participant in the financial market obliges MFIs to be providers of information to the credit bureau and subjects of financial monitoring in order to combat money laundering and the financing of terrorism, Yerbol Omarkhanov draws attention. The same status requires MFIs to maintain accounting records and prepare financial statements in accordance with international standards, he adds.    

To date, 231 MFOs, 218 credit partnerships and 605 pawnshops have received regulator licenses, the source cites statistics.

Based on the data presented by him, the loan portfolio of MFIs (excluding credit partnerships and pawnshops) increased by 42.2% over the first nine months of this year, reaching 594.6 billion tenge, the share of overdue debt over 90 days is 7.1%.

As for remuneration rates, there was no significant growth or decrease in their size in the MFO sector for the current period, since the funding conditions remained unchanged. The rates were within the limits set by the financial regulator, Yerbol Omarkhanov states.

“Many people think that MFIs charge high interest on loans, and all this profit goes to the income of the lender. However, in the context of limiting the maximum interest rate, a ban on charging commissions from borrowers, the net profit of microfinance organizations, taking into account funding costs, varies within 4-5%, of which MFIs pay corporate income tax. Unfortunately, MFOs do not have other sources of funding, except for borrowed resources, and are forced to include the costs of attracted loans in the interest rate for borrowers,” he explains.

The interlocutor notes that in the context of the consolidation of the MFO market and its inclusion in the regulatory perimeter of the authorized body, there is a clear segmentation of the market in the main areas: support for SMEs, car loans and consumer loans.

“Today, the MFI market has established itself in its contours, has a heterogeneous structure and a clearly defined segmentation in terms of the subject composition and a wide range of loan products focused on the demand of consumers of financial services,” Yerbol Omarkhanov clarifies.  

Among the main innovations adopted this year, the head of AMFOK names a block of amendments to the legislation aimed at strengthening the protection of the rights of consumers of financial services. So, from October 1 of this year, a mandatory procedure for settling debts in relation to an insolvent debtor was put into effect, which implies that in the event of a delay, the creditor is obliged to send a notification to the borrower with a proposal to apply to the MFI to resolve the dispute. Only after following this procedure and in case of failure to reach a compromise, the MFI has the right to take measures to collect the debt provided for by law, Yerbol Omarkhanov explains. 

“These amendments establish a ban on the accrual of interest on the capitalized amounts of the principal debt and interest arrears, limiting the amount of the penalty to 0.5% per day until the 90th day of delay and 0.03% after the 90th day of delay, but not more than 10% for each year the validity of the loan agreement, a ban on the accrual of remuneration and penalties in case of delay of more than 180 days on microcredits secured by housing mortgages,” he adds.

The head of AMFOK also spoke about the amendments to the Law "On Microfinance Activity", which are being considered in the Parliament. It is proposed to halve the overpayment on online microloans, to establish an obligation for online lenders to provide a deferral of loan repayment only on conditions that improve the borrower, explains the head of AMFOK. At the same time, the regulator intends to tighten the requirements for calculating the debt burden ratio of the borrower, and reduce the limit value of remuneration for online loans. The law has already established options for issuing bonds on the organized securities market, conducting factoring operations, acting as an agent for an issuer of electronic money, an agent for insurance and payment organizations. The interlocutor emphasizes that, thanks to the possibility of issuing bonds, many MFIs entered the stock exchange,

“The fundamental changes that took place this year ensured the transition of MFOs to a higher level of development, created conditions for market transparency and increased responsibility to consumers of microfinance services,” says Yerbol Omarkhanov.

However, he notes that even with the introduction of the licensing regime, new restrictions are introduced for MFIs almost every quarter, which indicates the instability of the legal regime in this area. Under such conditions, it is difficult for microfinance organizations to build long-term business plans. “On the one hand, we understand the logic and support the regulator's initiatives aimed at protecting consumers, but on the other hand, in our opinion, a balance should be ensured between regulation and the development of the financial market,” says the director of AMFOK. “Let me remind you that at the VI meeting of the National Council of Public Trust, Head of State Kassym-Jomart Tokayev spoke about the need to take balanced measures to support borrowers without harming the financial sector.”

The interlocutor draws attention to the fact that any changes or additions to the legislation should be based on a deep analysis of statistical data and their impact on the financial market. After all, excessive restrictions in the sphere of credit services can lead to the withdrawal of legal players from the market and the development of shadow lending, with more negative consequences for the population. “We can say that financially stable companies with a competent and long-term business strategy, the ability to introduce innovative technologies in the lending procedure, focused on the introduction of advanced international experience in microfinance with a social orientation, have passed through the licensing sieve,” Yerbol Omarkhanov notes.

Nevertheless, for some small and medium-sized companies, the process of adapting to the conditions of regulation and supervision by the authorized body is difficult - they often abuse the rights of the creditor and violate the rights of borrowers. Such actions of individual unscrupulous market participants harm the reputation of the entire sector, so they need to be resolutely dealt with by targeted methods, up to the suspension or revocation of a license, says the head of AMFOK.   

“The MFI market weathered the “perfect storm” that began last year, when restrictive measures due to the spread of COVID-19 coincided with a period of adaptation to the new regulation of microfinance activities, granting deferrals to the population and businesses affected by the lockdown, the transition to the licensing regime, frequent changes in legislation. Against the backdrop of these difficulties, the MFI sector showed a steady growth dynamics, which indicates its high potential, which needs to be maintained and developed,” Yerbol Omarkhanov comments.

The Association of Microfinance Organizations is interested in the fact that the MFI sector retains its specificity, which consists in financial support for small and medium-sized businesses, the development of entrepreneurial initiatives of citizens, especially in rural areas, he said.

"This basic profile of MFIs should continue and prevail in the microfinance industry," summed up the director of AMFOK.   

 

Source: https://kapital.kz/finance/101476/rynok-mfo-vyderzhal-ideal-nyy-shtorm.html

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