The exorbitant interest rates offered by so-called “microlending” companies (who look much more like payday lenders or garden variety loan sharks) to clients of the Russian Post recently gave rise to a wave of indignation on the part of the public, government, mass media and the responsible microfinance industry.
Microlending has existed in Russia for 15 years but it was not until 2011 that special legislation came into force, providing for a clearer legal status of microlending MFIs. These institutions play an important role in the country, serving people who do not have access to bank loans. Thus, last year about 70 percent of microloans were disbursed in small towns and rural areas; 60 percent of microborrowers were women and 10 percent – youth; and about 50 percent of all microloans were used to fund micro and small businesses. The average annual interest rates charged by MFIs are about 28 percent per annum.
Just as the legal framework for MFIs was complete, a number of companies disbursing small short-term loans at very high interest rates (we’ll call them “payday loans” and the lenders “payday lenders” for convenience, although many borrowers are pensioners or self-employed) started registering as MFIs. It should be noted that the appearance of the payday lending companies has not been brought about by the adoption of the new microfinance legislation. Rather, they took advantage of the new legislation to gain a recognized legal status for their activities. Though the share of payday loans is only about 15 percent of all microlending in Russia, their negative image has cast a dark shadow over the responsible microfinance sector.
Since the Russian microfinance legislation has not been designed to account for specifics of payday lenders, the microfinance community led by the Russian Microfinance Center has suggested the following measures to separate this market from responsible microfinance and establish necessary protections for clients of payday lenders:
- Payday lenders licensed as MFIs should be separated from the rest of the MFIs in the state register (lines of demarcation remain to be established – a challenge, of course, in many markets beyond Russia).
- Reporting to credit bureaus should be mandatory for all payday lenders and MFIs.
- The regulators (the Russian Central Bank and Federal Financial Markets Service) should regularly publish average interest rates on retail credit products offered by banks, payday lenders, MFIs and credit cooperatives and establish that interest rates higher than 20 percent of the average are to be considered usurious (and labeled clearly as such, though not prohibited).
- Payday lenders should be restricted in their ability to raise funding from individuals (something other MFIs are permitted to do under Russian law, but within limits).
- All MFIs should be members of self-regulated organizations, to reduce instances of unethical market conduct.
We believe that these measures will help inform and protect Russian borrowers, as well as foster a more responsible and transparent microfinance sector in Russia. Presented to the regulatory authorities shortly after the Russian Post scandal, these measures are likely to be adopted soon.
The situation in Russia is not unique, and the next post in this series we will discuss what lessons can be drawn for other countries.
The legislation just came into effect and the entire market is still being shaped. Yes, paydeylenders can and should be separated from the traditional microfinance institutions (on the common understanding of this term.) However, exceptionally high interest rates charged on such loans is a result of a) cost of funding and b) much higher risks. These loans are being disbursed without any credit enhancement and thefore the lender is automatically facing much higher risks.
I myself represent a so-called paydaylender MFI and certainly such type of institutons can and should be responsible towards their borrowers. Of course I can not speak on behalf of the entire industry, but my company treats the borrowers responsibly and by all means we aviod the exess in the credit load and always base our credit decisions on clients’ credit capacity. For instance, 100,000 RUR loan (approx. 3,000 USD) can not be disbursed at 2% a day. The borrower would never be able to service this debt and our line of products in designed according to the credit ability of each individual borrower.
I would not neglect the fact that there are many lenders outthere who only focus on profit making and completely disregard social impact of microfinance. In fact, many still operate outside of the legal framework and I would focus on the transformation of the “grey area” of the market prior to introducing additional measures to paydaylenders. At any rate, the market is not mature enough and the mentioned measures should be carefully calculated.
The survival of any money lending business hinges on the interest spread. But when it comes under Micro finance platform with the poor clients, it is where shoe pinches. Anyway it is a good sign with the separation of payday lending from traditional MFI
Since conceptually Micro finance is a package of pro poor financial services like micro savings, micro insurance, micro credit , transfer payments, micro pension (of late).Therefore when the institution confines narrowly to money lending service only (micro credit)to the poor segment, it may be called as Micro credit institution(MCI) only.Globally this industry is moving from micro credit to micro finance with diversified services balancing social goal and business sustainability thereby doing full justification for using the brand name “Micro finance” and also for the cause of the vulnerable poor. This approach need to be spread for bringing some commonality in clients served and uniformity in the concept followed globally.