Microfinance

Microfinance organisations

Microfinance organisations (MFOs) are commercial or non-profit institutions other than banks that provide loans in compliance with Federal Law No. 151-FZ, dated 2 July 2010, ‘On Microfinance Activities and Microfinance Organisations’. Loans can be issued both to citizens and companies or individual entrepreneurs. Supervision over the activity of MFOs is exercised by the Bank of Russia.

MFOs are normally medium and small companies. MFOs are not bound by many banking ratios as they do not attract funds from citizens, which allows them to use a custom-based approach towards the assessment of borrowers and provide loans quicker and in a less formalised manner than banks in many instances. Besides, MFOs frequently operate in places where bank offices are absent.

From 1 July 2014, Federal Law No. 353-FZ, dated 21 December 2013, ‘On Consumer Loans’, came into force to formalise relations between borrowers and creditors, set the limit for the maximum size of a penalty, which organisations may impose on borrowers, and establish the common principles of recovering overdue debts. Pursuant to this federal law, all professional creditors comprising credit institutions, MFOs, pawnshops, consumer credit co-operatives and agricultural consumer credit co-operatives are required to comply with the common rules of issuing retail loans. This practice brings the protection of the rights of financial services consumers to a new qualitative level.

What you should pay attention to when choosing an MFO:

  • Each MFO is required to register in the State Register of Microfinance Organisations. You can check the registration of an MFO in the state register by visiting the Bank of Russia official website (cbr.ru).

A certificate of registration (a copy) must be available in the office of an MFO.

  • Each MFO is required to disclose the full loan cost, i.e. the amount of principal, interest and fee payment for using the money. By comparing the amount of principal, interest and fee payment charged by various MFOs, you’ll be able to choose a loan that will cost you less.

Beginning from 14 November 2014, the Bank of Russia calculates and publishes the average market value of the full cost of consumer loans by consumer loan category on a quarterly basis. At the time of concluding a loan agreement, the full cost of a consumer loan may not exceed by more than a third the average market value calculated by the Bank of Russia for the full cost of a consumer loan in the relevant category and applied in the current quarter.

  • Each MFO is required to use a single table format of agreements to issue retail loans.
  • Each MFO is required to give you time to think – you can conclude a loan agreement on the terms specified by an MFO within five days after applying to the MFO’s office for a loan.
  • If an MFO is a member of a self-regulatory organisation (SRO), this is an additional guarantee of the company’s honest approach. Information on whether a company is part of an SRO is normally posted on the company’s website.

A microloan is a loan in the amount of no more than one million rubles taken out by an individual, an individual entrepreneur or a legal entity under a loan agreement with an MFO, a credit co-operative (a credit union) or another organisation authorised to issue microloans.

Depending on their purpose and size, microloans can be divided into three categories:

1. Microloans for entrepreneurs

Loans in the amount of up to one million rubles for small business start-up, support and development. These loans can be provided both to legal entities and individual entrepreneurs.

These loans allow entrepreneurs to start their business, replenish working capital, bridge cash gap, purchase new equipment or take additional premises on lease.

Entrepreneurial loans are normally provided for a term of one to three years and generally without pledge and pursuant to a short list of requested documents.

2. Consumer microloans

Loans issued to citizens (individuals) for personal needs for a relatively long term. Consumer loans are most frequently taken out for the purchase of major household appliances, the urgent repairs of cars or housing, medical treatment, travel, education or for other needs.

MFOs normally offer these loans for a term of one to six months but they can also be taken out for a term of up to two years. A consumer loan is normally returned by several (weekly or monthly) installments.

3. Payday microloans

Loans issued to citizens (individuals) for personal needs for a very short term. These loans are normally taken out in the event of urgent or unforeseen expenses or delays in monthly wage payments. Interest on these loans is higher than on consumer loans or credit cards. Their advantage is that loan arrangements are quick and easy but you should pay attention to the high interest rate. It makes sense to take out such a loan if you are confident that you’ll certainly return it and the benefit of its use will outweigh expenses incurred.

This loan has a term of seven to thirty days and its amount equals about a half of the borrower’s monthly income. A payday loan and interest on the use of money are returned by a lump sum payment on the last day of the term specified in the loan agreement.

Taking out the microloan

  • Before taking out a loan from an MFO, try to study possible options and choose the optimal scheme in your situation. If you have time, turn to several MFOs for advice. A properly selected loan will help you solve your tasks and avoid new problems.
  • Normally, the internal passport is the only document that is required to formalise a loan. Sometimes, a company may request you to submit the second document, such as a driver’s licence, a foreign travel passport, a military ID card or some other identification document. If you want to take out an entrepreneurial loan, you may be requested to submit documents confirming the revenues and expenses of your business.
  • Before taking out a microloan, you should draw up a plan for its repayment. If you have a possibility to choose a repayment date that suits you, choose the date after the expected date of wage payment, for example, 3-4 days after that, which will allow you to use convenient methods of loan repayment and transfer money to an MFO’s account on time.
  • If you pay off several credits or loans, plan payments on these debts during different periods of a month to spread the debt burden between the salary advance and the basic salary.
  • Choose the loan amount and the loan term carefully. Don’t take out a microloan, if you are not confident that you’ll be able to return all the borrowed funds on time!
  • It is recommended in many countries that the maximum debt burden for servicing all credits and loans should not exceed 30-40% of your monthly income.

Microloan repayment

  • Debts are considered to be repaid in part or in full as soon as money is entered into an MFO’s account. Use only verified means of payment to repay the debt and always keep cheques or receipts on transferring money to an MFO’s account.
  • Federal Law No. 353-FZ, dated 21 December 2013, ‘On Consumer Loans’, sets a special sequence of debt repayment (overdue interest, overdue principal debt, a penalty), if the sums paid by the borrower (individual) under a loan agreement are not sufficient to fully discharge the borrower’s obligations.
  • If you take out a microloan but are unable for some reasons to repay it within the term specified in the loan agreement or make a regular payment, you should immediately notify an MFO thereof. If you are unable to fulfill your obligations for a valid reason (the loss of a job, disease, a long business trip), an MFO may postpone your payment or offer you debt restructuring.
  • You have the right to an early microloan repayment. In the event of an early repayment, you pay interest only for the actual term of using the borrowed funds.
  • A microfinance organisation may unilaterally reduce loan interest but the law prohibits increasing the cost of a loan in a unilateral manner.
  • You should always get a certificate of debt repayment to an MFO – this document will be useful, if disagreements arise.

Other services provided by MFOs

Some MFOs offer citizens both to take out loans and act as an investor by placing money in an MFO for a certain term at a fixed interest rate. It is important to understand that investment in an MFO is not a deposit as this term is applicable only to bank deposit agreements. Investment in MFOs is not insured by the state deposit insurance system and, therefore, the safety of your funds is not guaranteed by the state.

Investments in MFOs have the following specific features:

  • MFOs attract citizens’ funds as loans in the amount of no less than 1.5 million rubles.
  • MFOs generally offer investors an income of up to 20% p.a. If some organisation offers you to invest at much higher interest, there is a high probability that it is engaged in fraudulent operations.
  • MFOs are not obliged to return an investor’s funds early, if this is not stipulated in an agreement.
  • Many MFOs offer investors to insure their funds with a commercial insurance company. Choose an MFO that has insured its liability in a large insurance company, in such way you will increase the reliability of your investment.

Protection of borrowers’ rights and interests

Supervision over the compliance by MFOs with the requirements of legislation is exercised by the Central Bank of the Russian Federation (the Bank of Russia), which has set up the Service for Protection of Financial Services Consumers and Minority Shareholders as one of its structural divisions. Also, Rospotrebnadzor (the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing) and Roskomnadzor (the Federal Service for Supervision of Communications, Information Technology and Mass Media) watch compliance with the requirements of some federal laws.

An MFO’s integration into a self-regulatory organisation (the register of SROs operating on the microfinance market is available on the Bank of Russia website) and collaboration with the institution of the financial ombudsman can serve as an additional guarantee of the observance of customers’ rights.

Laws regulating microfinance activity:

  • The Civil Code of the Russian Federation
  • Federal Law No. 353-FZ, dated 21 December 2013, ‘On Consumer Loans’;
  • Federal Law No. 151-FZ, dated 2 July 2010, ‘On Microfinance Activity and Microfinance Organisations’.
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