On the 6th of March, the President of Kazakhstan signed a new "Law on Microcrediting Organizations", which constituted the final step in the process of enacting the first microfinance-specific legislation in Kazakhstan. The new law is the result of an almost 2-year cooperation between the National Bank of the Republic of Kazakhstan and USAID advisors.

The new law defines Microcrediting Organizations (MCOs) ¹ as legal entities engaged in microcrediting activity. Two forms of MCOs, commercial (established as a economical partnership) and noncommercial (established as a public fund), are permissible. The law stipulates that a noncommercial MCO can be established only to provide legal persons and individuals engaged in micro and small business with the financial support for their entrepreneurial activities.

The size of each microcredit is subject to two limitations: first, MCOs can not extend credits to any one borrower in excess of 25% of the MCO's capital; second, no microcredit can exceed 1000 "monthly calculation units", which are set by the Law on the Republican Budget for the calendar year in question.

In addition to microcrediting, MCOs can carry out the following activities:

• Taking loans (except for mobilizing savings from the public as an entrepreneurial activity) and grants from residents and non-residents;
• Investing assets in government securities, corporate securities, deposits with the 2nd tier banks and other investments which are legal under Kazakhstan law;
• Performing transactions with pledged property obtained as a security for a microcredit;
• Participating in authorized capital of other legal entities;
• Disposing of its own property;
• Providing advisory services related to microcrediting;
• Leasing its own property;
• Engaging in leasing;
• Delivering training free of charge.

The law on MCOs does not empower the NBRK to license, regulate or supervise MCOs, which is in line with the NBRK's objective to minimize its interference with MCOs. This means MCOs are not subject to such prudential requirements as minimum capital, minimum liquidity, limitations on open foreign currency positions or large exposure limits.

Nevertheless, MCOs will have to comply with the general rules on accounting, reporting, document retention etc. However, there is no requirement in the law for MCOs to register with or obtain a permit from any centralized authority in order to act as an MCO, nor to file periodic reports with any centralized authority.

Although the lack of a licensing or permitting process for MCOs will facilitate establishing such organizations, it brings also some new challenges. Indeed, one side effect of not receiving a license from the NBRK is likely to be the application of VAT to credits granted by MCOs. For the same reason, MCOs might not be able to deduct loan loss provisioning expenses from taxable income. These taxation issues have already been identified by USAID advisors, who have encouraged the NBRK to try remedy this situation with the relevant tax authorities.

Another practical issue raised by the law relates to the stringent conditions imposed on credit documentation. Each microcredit requires a separate credit file, and the MCO must obtain from each borrower its registration documents (in the case of legal entities) and employment information (in the case of individual borrowers), or governmental proof of unemployment. For microcredits that are guaranteed, the microcredit file must contain both a signed agreement by the guarantor and proof of the guarantor's legal authority to provide the guarantee. Such requirements, if scrupulously observed by MCOs, will render lending to informal sector borrowers and group-guaranteed lending extremely difficult, if not impossible.

The author received contributions to this article from Gauhar Serikbayeva, Bryan Stirewalt and Timothy R. Lyman.