Improving Regulatory

Framework for Microfinance:

Russian Case

Mikhail Mamuta

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Mikhail Mamuta

President

Russian Microfinance Center

President

National Partnership of the MF

Market Stakeholders (NAMMS)

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RMC MissionTo promote and build an all – inclusive financial system through

the development of a strong, sustainable microfinance sector in

Russia that will result in:

• Access to financial services for small

businesses and unbanked population;

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• Creation of employment opportunities;

• Increase in the living standards of low-income

people and entrepreneurs

RMC Strategy for Financial Inclusion and

Microfinance Development (2008-2011):

�RMC Strategy’s become an important component of the overall

Policy & Advocacy and a solid foundation for the continued

policy reform in 2009 – 2011

�While started to develop it in 2007 we based our approach on

research of situation with Financial Inclusion in Russia

Regional disproportions in banking

Color explanation (white – less than 5% to

near to black – 80% of Moscow ). Mostly

financially underserved are rural area and

small settlements.

Who is mostly underserved financially?

Urban poor

Rural population

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Self -entrepreneurs

Micro and small business

Urban poor

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Social priority level

Average microcredit:

• 4,000 USD for non-banks;

• 25,000 USD for banks;

Average interest rate:

• 5 - 8 points higher than interest rates on conventional

Microfinance Market in Russia

• 5 - 8 points higher than interest rates on conventional

credit to SME;

Microloans portfolio of MFI as of 01.07.2011 - 1 billion USD

(including MFOs and Credit Unions), of which:

• business loans - 45%

• consumer loans - 55%

• 70% of microloans were provided in rural area, 60% - to

women; 25% - to youth entrepreneurs

Microfinance: Development Dynamic

in 2003 – 2010

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Microfinance Sector Growth in Russia (2003 - 2010)

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Influence of the crisis and lessons

learned

• A need for smart regulation and supervision that would

set appropriate standards of MFI performance, financial

sustainability, consumer protection, transparency and

insolvency procedures;

• A need to develop Industry Standards, implemented by

majority of MFIs;

• A need for independent institutions that would be able

to estimate healthy of the sector and help to decrease

risks of MFI.

What has been done since 2009?• Legislation

- Credit Union and Microfinance laws (2010 and 2011)

- Special Taxation Privileges for MFI (in process)

- Special Insolvency Procedures for Credit Unions (in process)

• Regulation and Supervision

- Financial rates for MFI set under both special laws

- Any MFI should develop Consumer Policy available to clients- Any MFI should develop Consumer Policy available to clients

- Delegated supervision of credit coops, direct supervision of MFOs

• Industry Standards

- “Russified” SMART Campaign Principles and Ethic Code for MFI

• Institutional development

- Russian Rating Agencies come to MF sector

- MFI are joining credit bureaus – to avoid over indebt nesses

- Loans and Savings Insurance - is a new opportunity to share risks

Measures Implemented

in 2009-2010: Microfinance

Federal law of July 18, 2009 on Credit Cooperatives:

- Defines a credit cooperative, its registration and liquidationprocedures

- Appoints a government regulator (MinFin)

- Defines 8 financial and operational performance standards to limit

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- Defines 8 financial and operational performance standards to limitrisk concentration

- Credit coops are required to join a self – regulated organization (SRO) for delegated supervision

- Legal framework for a multi-tiered system of credit cooperatives

- Protection of shareholders and depositors

Measures Implemented

in 2009-2010: Microfinance

Federal law of July 2, 2010 on Microfinance Activities and Microfinance Institutions:

- Defines microloan (K33 USD), microfinance institution

- Establishes procedures for acquisition and loss of an MFO status

- Defines rights and responsibilities of MFOs

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- Defines rights and responsibilities of MFOs

- Risk management and control preventing financial piramids; limited depositary – taking rights are in place; must maintain capitaladequacy and liquidity vis-a-vis other borrowings

- Disclosure and consumer protection standards for MFOs

- State regulation and supervision

Government’s support to microfinance

sector – legislation’s “follow up”

• Based on new legislation and better visibility, microfinance was recognized by the Government as an effective tool to reduce unemployment through support of new and existing MSE’s

• Anti– crisis support of microfinance included (2010-2011):• Anti– crisis support of microfinance included (2010-2011):

o Involvement of MFI to state program for unemployed people “Start your own business” – more than 7000 start ups from unemployed were supported by MFI between July 2010 – June 2011

What's next? Possible expectations in the end of 2012

• Total number of MFOs may increase from 300 in 2007

to 700-800

• Total number of credit cooperatives and SROs may • Total number of credit cooperatives and SROs may

increase from 800 in 2007 to 1200 - 1300

• Aggregate portfolio of microloans is predicted to grow

to 1,3 – 1,5 bln. USD

Challenges:

• Pay Day Loans (PDL) companies associate themselves with

MFOs. What should we do with a policy risk related with

extra – high interest rates?

• A lot of start-up MFOs can create industry risks if they are • A lot of start-up MFOs can create industry risks if they are

unable to perform in accordance to the microfinance law

standards

• Should Social Performance Indicators become an obligation

for the MF market? Otherwise, extra commercialization

without social goals can make sector too greedy. 11

The Role of Microfinance in SME

Development

During G20 Business Summit in Seoul in November 2010,

Russian President, Mr. Medvedev, spoke on the Role of

Business for Sustainable and Balanced Growth and he

emphasized the following:

• "Microfinance has become an important element of • "Microfinance has become an important element of

Russia's financial system, its volumes have grown,“

• "We will make sure this work continues in our country,“

• "Expansion of microcredit and availability of innovative

financial services will help small business create new

jobs and thus help fight unemployment”. 15

«Russian Microfinance Center»

107031, Moscow, Petrovka str., 15/13, building 5, office 500

Tel./Fax:

+7 (495) 258-87-05, +7 (495) 258-68-31, +7 (495) 258-87-09

Web and E-mail:

www.rmcenter.ruinfo@rmcenter.ru