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Microfinance Comes to Russia
On July, 2 RF President Dmitry Medvedev signed the Federal Law “On Microfinance Activity and Microfinance Organizations”. The law was developed by RF Government with an involvement of professional associations, such as National Association of Microfinance Market’s Stakeholders, Association of Russian Banks and OPORA Rossii.
In order to be considered as an MFO, a legal entity must be included in the register of MFOs by a designated state body. A foreign legal entity is expressly permitted to set up a Russian legal entity that will subsequently be designated as an MFO. The candidate legal entity must provide in its charter that it is authorized to engage in MIA. No license is required by the Microfinance Law.
MFOs are obliged to extend loans in accordance with their internal regulations which must contain the essential terms on which loan is to be made available to all applicants. These regulations must be publicly available to all potential clients of an MFO, including through publication on the Internet.
The Microfinance Law imposes certain limitations on MFO operations, including a provision that an MFO may not act as a professional participant in the securities market, borrow funds from individuals (with certain exceptions), secure obligations of MFO owners, provide loans in foreign currencies, unilaterally change interest rates (or the mechanism for their determination), the amounts of commission or the term of a microfinance agreement, or provide loans in amounts exceeding one million rubles. Importantly, the Microfinance Law expressly prohibits MFOs' imposing penalties or other extra charges on individual borrowers who repay their loans early, provided that such borrowers have notified the MFO of the proposed early repayment at least ten days in advance.
In practice, many MFOs are likely to be not-for-profit organizations, including various federal and municipal funds that support small business. It is also presumed that the Russian government, acting through VEB (Russian Bank for Development), will provide funds and subsidies to MFOs.
The Microfinance Law is a step in the right direction and may be beneficial in stimulating the economy and retail lending. It will create common rules and standards for microfinance activities and will set up a system of government oversight and control over this activity, which is important for the protection of unsophisticated retail borrowers. However, in order to attract significant private investment into this market, we believe that the government should propose additional incentives, such as tax preferences and careful state support for MFOs, as well as providing adequate secondary regulation.
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