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Microfinance Comes to Russia


 06.07.2010 

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.

 
The financial crisis of 2008-9 led to a near-paralysis of the credit market for small businesses in Russia. In the "Program Of Anti-Crisis Measures For The Year 2009" of July 3, 2009 the Russian government responded by calling for the development of legislation regulating (and it hopes encouraging) "microfinance." The program proposed that microfinance organizations should operate in the banking sector and financial services market where traditional banks are not currently active, and should provide pretty short-term loans (mostly with a maturity of less than one year) to small businesses and individuals who do not have the necessary means to access the regular commercial and retail credit markets.

 
The Draft Federal Law "On Microfinance Activity and Microfinance Organizations" was submitted by the Russian government for the consideration of the State Duma on April 15, 2010 and was adopted (with amendments) by the State Duma in its first reading on May 14, second reading on June, 16 and third reading on June, 18 2010.

 
Microfinance activity ("MFA") is defined as providing small loans of not more than one million Rubles. A "microfinance organization" ("MFO") may be established in the form of a fund, an autonomous non-commercial organization, an agency (excluding budgetary agencies), a non-commercial partnership, or a corporation.

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.

 
An MFO may extend loans for general and specific purposes; where a loan is for a specific purpose, the MFO may exercise control over how the debtor spends the credited funds in which case the specifics of such control must be negotiated between the parties in a microfinance contract on an individual basis.

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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