Kyrgyzstan Adopts a Law to Restrict Usurious Activities
Kyrgyzstan, August, 08 2013 -
From now on, the NBKR will regulate the activities of micro-credit companies, pawnshops and individuals engaged in money lending.
The law has been signed and now must be observed. It was possible to argue during the discussion of the draft law, but that time has passed. Deputy Chairman of the National Bank of the Kyrgyz Republic (NBKR), Zair Chokoev, said this about the Law "On restriction of usurious activities in the Kyrgyz Republic" at a press conference in Bishkek last week. On July 26, President Almazbek Atambayev signed the law which was adopted by the Kyrgyz Parliament on June 20. The law takes effect on the expiration of fifteen days from the date of publication.
From now on, the NBKR will regulate the activities of micro-credit companies, pawnshops and individuals engaged in money lending. According to the initiator of the law, MP Omubek Tekebayev, "the idea of the law comes from good intentions to protect the rights of borrowers through the introduction of restrictions on the exorbitant interest rates on loans, currently practiced by some financial and credit institutions." The law introduces the concept of "usury activities" and "usurious interest rates," which are defined as rates on loans in excess of the maximum allowable percentage. The NBKR will calculate the maximum allowable percentage on the basis of the weighted average nominal interest rate of loans provided by financial institutions, with 15 percent added.
According to the President’s information policy department, the credit market of Kyrgyzstan is in the "immature" phase, and there is no sustained and severe price competition among the creditors, especially among microfinance institutions, which could lead to an effective reduction in interest rates. Financial literacy of the population is low, and many potential borrowers are not able to adequately assess the credit terms and calculate the real demand for loans. The law aims to reduce social tension caused by high interest rates on loans, concluded the authors of the law.
However, the Association of Microfinance Institutions (AMFI) intends to apply to the Constitutional Chamber to challenge the law. AMFI Executive Director Nargiza Joldosheva stated that microfinance is one of the most developed sectors of lending in Kyrgyzstan. Start-up businesses with low income are the main users of microfinance institutions’ (MFI) services. With the help of an MFI, a person can easily start a business with no start-up capital and credit history. The State recognizes that the fast and affordable MFI loans are designed to overcome poverty and develop entrepreneurship in the country.
According to Joldosheva, 303 microfinance institutions, including five large microfinance companies, 225 micro-credit companies and 73 micro-credit agencies, are working in Kyrgyzstan today. These three MFI forms have certain rights and obligations, as well as range of services.
The microfinance sector has been developing very well in the country, but if there is strict regulation by the state, this growth will slow down, believes Joldosheva. There are very few problem borrowers in the country: repayment of loans is 97% in the microfinance sector. It means that 97% of borrowers pay their loans on time, and it makes no sense to restrict lending rates.
Among the AMFI members, the average interest rate is now around 33%, and six years ago it reached 44%, so there is a steady downward trend.
"MFIs that operate in Kyrgyzstan attract funds from abroad, so we also get loans,” said Makhmud Saidakhmatov, CEO of FINCA microfinance company. “The cost of foreign loans is high because Kyrgyzstan does not have a sovereign credit rating, which could have a positive impact on the country's prestige in the world market. An improving credit rating gives the country the benefits of being able to reduce rates of funds attracted from abroad, and to expand access to world financial markets.”
Because of the lack of external ratings, Kyrgyzstan receives expensive loans from investors. For example, Kazakhstan can attract loans at much lower interest rates because it has BBB+/A-2 sovereign credit ratings.
Many experts predict that the restrictions on credit rates will pave the way to unregistered, informal lenders. As a result, the law’s limitations can have an opposite impact of that intended.