Microfinancing allows individuals and small businesses to quickly obtain small loans for short periods of time. It is easier to obtain them than bank loans, but the rates on such loans are usually much higher.
Microfinance institutions represent a small-sized, yet important element of the financial system. They are often present in regions where there are few banks and, therefore, credit is less available to individuals and small businesses. Microfinance institutions address the demand for short-term and small loans urgently needed by individuals.
Microfinance market participants are microfinance organisations, consumer credit cooperatives, agricultural consumer credit cooperatives, housing savings cooperatives and pawnshops.
The Bank of Russia maintains state registers of microfinance market participants, supervises their activity directly and through self-regulatory organisations, and regulates the microfinance market.
To make sure that microloans help people in different circumstances, rather than worsen their financial situation, the following restrictions on MFO loans have been imposed:
- a restriction on the maximum ratio of debt under a consumer loan agreement to the consumer loan principal amount — 1.5 times starting from 1 January 2020
- a restriction on the daily interest rate — no more than 1% per day starting from 1 July 2019
- a restriction on the total cost of a loan to no more than 365% per annum
- ban on microloans secured by residential property
The activities of illegal creditors who misrepresent themselves as microfinance organisations remain a serious problem. Applying to them for loans is dangerous: illegal creditors may fraudulently force a borrower to sign a loan agreement with a criminally high interest rate, against the pledge of property or housing. Litigation proceedings against illegal creditors can take a lot of time and effort. To avoid falling victim of such creditors, borrowers must check whether the organisation from which they plan to borrow funds is listed in the Bank of Russia Register