E-Bulletin, November 2006

Microfinance is an integral part of small and microbusiness development in Russia. The Federation Council discussed ways to improve legal regulation of microlending.



Ways to improve legal regulation of microfinance were discussed at a round-table session hosted by the Federation Council Committee on Financial Markets and Monetary Circulation on 26 October 2006. The round table was attended by members of the Russian Parliament, officials of federal ministries and government departments, and the banking community.

The terms microfinance or microloans are used to describe small loans to small and micro-entrepreneurs mainly used as emergency support, rather than sustainable core funding. Microlending organizations include pawn shops, among others. However, microfinance is the only option for small entrepreneurs in need of debt finance when conventional credit institutions do not lend to microborrowers.

In addition to promoting the development of small businesses, especially start-ups, microfinance reduces its dependence on informal lenders. Microfinance has been included in the UN Millennium Goals as a mechanism of fighting poverty and promoting SME.

Russian law lacks a formal definition of microlending, and the history of microfinance in Russia is relatively short, about a decade. The round-table discussion was co-facilitated by Sergey Vassilyev, Chairman of the Federation Council Committee for Financial Markets, Monetary and Credit Circulation, and NAMMS President Mikhail Mamuta. The round table, organized with methodological support from CGAP, featured presentations by Vice President of the Association of Russian Banks Andrei Yemelin, Advisor to the State Duma Committee on Credit Institutions and Financial Markets Oleg Ivanov, CGAP Advisor Monika Arutyunyan, Deputy Director of the Ministry of Finance Department Vladimir Lukov, Vice President of the 'Russia' Association Alexander Lopukhin, and some other presenters.

The participants discussed basic principles of legal regulation and supervision in the sphere of microfinance and the experience of applying such legislation in different countries, and exchanged their opinions concerning the presented concept of the draft law on microfinance. They advocated for a legislative package including amendments to the Federal Laws on credit consumer cooperatives of citizens and on agricultural cooperatives. They believe that the Bank of Russia can facilitate the establishment of microcredit institutions on the basis of major SME support funds by simplifying their requirements concerning establishment and operation of non-bank deposit-credit organizations. Specialists argued for further development of the banking legislation, for removing administrative barriers hindering the operation of microfinance institutions in the regions, and for designing a system of regulation and promotion to support this financial instrument.

Meeting hosted by the Ministry of Finance to discuss concepts of the federal laws regulating non-profit microfinance institutions and amending the Federal Law on Credit Consumer Cooperatives of Citizens.

On 9 November, the Interdepartmental Council responsible for drafting a Law on Microfinance Institutions met in the RF Ministry of Finance. Chairman of the Inter-Departmental Council, Director of Financial Policy Department of the Finance Ministry Alexei Savatuygin facilitated the meeting. Deputy Director of the Ministry of Finance Department for Financial Policies gave a detailed overview of both concepts. He stressed in particular that both proposed laws seek to establish a more transparent and civilized environment for operation, given the current realities and market development.

The meeting was attended by representatives of the Russian Ministry of Economic Development and Trade, the Central Bank, the State Duma, NAMMS, the League of Credit Unions, the National Union of Organizations for Mutual Financial Assistance, ARB, and experts.

The participants considered and expressed their overall approval of both concepts prepared by the Ministry of Finance working group. They noted that the drafts had been substantially improved based on feedback from the Interdepartmental Council and now they largely meet the needs of the market participants. At the same time, a number of proposals were made to improve the concepts even further; in particular, President of the National Union of Organizations for Mutual Financial Assistance Yuri Volokhonsky and General Director of the League of Credit Unions Vadim Kalinichev made a few suggestions regarding the draft law on credit consumer cooperatives of citizens.

Alexander Bondarev, lawyer, the League of Credit Unions, commented on the draft law on microfinance institutions stressing in particular that the draft law must provide equal opportunities to engage in microlending both to the microfinance institutions mentioned in the concept and to other market participants, such as credit cooperatives.

NAMMS President Mikhail Mamuta indicated a few areas where the draft law on non-profit microfinance institutions may benefit from further clarification.

1. Provide more accurate definitions of microfinance activity and services offered by MFIs, with due regard to specifics of such activity and institutions that engage in it;
2. Establish guidelines for monitoring and oversight over MFIs' activity making sure they meet the needs of the sector participants as well as ensure stability of the financial market;
3. Clarify approaches to MFIs' participation in the credit bureaus and self-regulating organizations;
4. Determine measures of state support for microfinance institutions to encourage lending to the riskiest categories of MFI customers, i.e. socially vulnerable populations and start-ups;
5. Establish guidelines for regulation and self-regulation of MFI;
6. Establish guidelines whereby MFI can transform into credit institutions after attaining a certain size and scale of activity.


These and other topics were covered in presentations made by Vladimir Chistyukhin, Deputy Director of the Central Bank Department for Prudential Regulation and Supervision - in particular, he suggested listing all types of non-profit microlenders in the text of the law with cross-references to specialized legislation wherever needed - and Andrei Yemelin, Vice President of the Association of Russian Banks, who emphasized the need for a comprehensive approach to regulation and supervision in the sphere of microfinance.

Based on the results of the discussion, a decision was made to start the drafting of the laws.

Success story of Svetlana Sokolova from remote city of Khabarovskiy Krai who equipped her business and increased production volumes




On the photo: Svetlana Sokolova in the renovated shop that was equipped using small loans of Counterpart Enterprise Fund, Khabarovsk

Svetlana Sokolova took the job at Bikin knitting mill in 1982. Thanks to her responsible attitude to work and enthusiasm, she became the general manager of the mill within few years. In difficult times of "perestroika" the mill was experiencing the same problems as every small production unit in Russia: lack of finance, growing debts of buyers and worn-out equipment. The mill was prepared for a bankruptcy with future sale of assets and firing of the personnel of 25 people. At that hard time Svetlana saved the business. She used her own savings to buy out old equipment and very soon she registered her entrepreneurship officially. She kept all her work team and continued working as private business.

As almost every small business, Svetlana's mill periodically needed money to purchase machine twist, new knitting machines etc. Because of the lack of formal financial sector supply of services, Svetlana had to borrow money from "street lenders" at a very high interest rate (up to 100% per annum). That is why; in 2005 she was quite pleased to get to know that Counterpart Enterprise Fund, sole MFI in Khabarovsk, opened its affiliate in Bikin (approximately 200 km from Khabarovsk).

Svetlana was among the first CEF clients in Bikin. Her first loan of $7,000 was used for renovation of a new place for business. After paying off the first loan, she applied for a larger one of $10,000 and purchased new knitting equipment. This step allowed her to increase production volumes and expand the assortment of goods. Svetlana hired three new people. Her products are sold not only in Bikin, but throughout the Khabarovskiy Krai. Svetlana Sokolova is fully satisfied with fast and reliable microfinance service from Counterpart Enterprise Fund. She sees the prospective of her business and plans to collaborate with CEF in future.

Small Business Support Fund
"Counterpart Enterprise Fund"
113a Sheronova Street, Khabarovsk, Russia, 680000
Tel/Fax: +7 (4212) 42-00-71, 42-00-72
http://microfinance.khv.ru

Catalogue of Microfinance Institutions

The Russian Microfinance Center and the SME Resource Center are thankful to microfinance institutions which made the time and effort to fill in and return the 2006 MFI questionnaire. In addition to numerical growth, Russian MFI have consistently improved their performance indicators. The data collected in 2004-2005 were used to create an electronic Catalogue of Russian MFI allowing to analyze key performance indicators of MFI, as well as providing contact information.

Analytical materials based on the 2004-2005 survey findings and a presentation based on this data are available at http://www.rmcenter.ru/art.php?catId=6&artId=913&lng=1. Please contact Anisa Aisina of RMC at +7-495-258-87-05 with questions about filling the questionnaire.

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