Recommendations for a Legal and Regulatory
Framework for Microfinance in Serbia
Access to finance a problem for SMEs
• Small and medium enterprises (SMEs) are critical to
increasing employment and economic growth and decreasing
poverty in Serbia
• Two-thirds of SMEs in Serbia report problems getting credit
• Available loan products are poorly suited for SMEs in terms
of loan size, collateral requirements, and physical access
• Microcredit provides an alternative, market-based approach
to providing financing better suited to the needs of SMEs
However, legal and regulatory framework prevents
existence of “real” microfinance industry in Serbia
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Microfinance has real potential in Serbia
High demand/unmet need
Strong investor interest
• Estimated potential portfolio for
microcredit is EUR 267M
• Only 2-7% of current demand
being met
• “Missing” middle between
current microcredit (EUR 9601,600) and bank loans (> EUR
• Investors actively looking for
investment opportunities given
saturation in other markets in
• Numerous investors already
expressed interest in investing
~EUR 40M in existing
With an enabling legal framework,
it is estimated that loan portfolios could expand by 50%
at existing providers alone
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Components of microcredit regulatory framework
Law on Microcredit Companies (MCCs)
Harmonization with Existing
Regulatory Framework
Overindebtedness and Financial Crimes
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Guiding principles for MCC law
Key components of MCC law
• Definition of “microcredit”
• Registration of MCCs
• Ownership and governance
• Permissible activities
• Prudential regulation, loan
loss provisioning, and risk
• Supervision
• Reporting and auditing
• Others…
 Strike appropriate balance
between providing minimum
requirements for key legal
components while not
 Overburdening non-deposittaking institutions with
excessive regulation increases
compliance costs, ultimately
decreasing access to finance
 A risk-based approach is
recommended by the EU
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Definition of “microcredit”
Type of
Client &
Use of
Loan Size
• Helps prevent regulatory
arbitrage by institutions with
different objectives
• However, limits flexibility of
MCCs to serve necessary
range of clients
• Difficult to determine where to
draw the line
• If included, use general
language to convey policy
• Goal of microfinance to
“alleviate poverty, increase
employment, assist in the
development of social
entrepreneurship” in Kyrgyz
• Recommended as more
concrete method to
maintain policy focus
• Two-pronged approach:
1. Higher single loan size
limit, plus
2. Lower average
outstanding loan
• Two-pronged approach
allows MCCs to serve some
clients with larger loans,
while majority of clientele
remain low-income clients
• Look to current microcredit
operations as starting point,
consider how portfolio may
evolve with MCC law
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Registration of MCCs
Case Studies
• Microcredit agencies (MCAs)
and microcredit companies
(MCCs) obtain certificate (not
license) from National Bank of
Kyrgyz Republic
• Documents required:
o Application
o Establishment documents
o State registration certificate
o List of members of
management body
o Confirmation of funds as
charter capital
• Minimum capital for NBFIs in
Romania is EUR 200,000
• Initial minimum capital requirement:
low enough to allow entry of new
MCCs, high enough to bar entry of
unprofessional institutions
• Risk-based approach recommended,
with less extensive registration
requirements than for banks
• “Licensing” vs. “registering”
• May require registrants submit:
– Ownership structure
– Directors and senior management
– Evidence of minimum capital paid
– Initial operating plans
• Link requirements to confirming
compliance with regulatory
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Ownership and governance and permissible
Ownership and governance
Permissible activities
• Ensure requirements don’t
impede foreign equity
holders or foreign investors
• Include “fit and proper”
requirements for directors
and officers, adapted for
• Other corporate
governance rules should be
limited and not overly
• Permission to lend
• Consider: financial leasing,
guarantees, factoring,
insurance intermediaries,
payment and transfer
• Allow secondary, related
activities (i.e. training)
• Ban deposit-taking, though
clarify regarding cash
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Prudential regulation and loan loss provisioning
• In general, prudential regulation not warranted for MCCs
as they do not pose systemic risk or put public savings at risk
• Imposes unnecessarily high compliance costs on supervisors
and MCCs alike
• If standards issued for certain topics such as client
documentation, leverage ratios, or risk management, should
be adapted for microlending  simplified and allow room
for innovation
• MCCs need ability to create loan loss reserves and write-off
such serves for tax purposes
• Any guidelines for loan classification should be adapted for
microcredit (i.e. more aggressive provisioning for delinquent
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The supervision question
Responsibilities • Maintain public register of approved MCCs
could include:
• Serve as repository of periodic reports by MCCs
• Develop and promote sound financial performance and
consumer protection standards
Option 1: Delegated supervision
• Industry association serves as agent
for MoFE or NBS
• Provides formal link to financial
regulator and allows MoFE or NBS
to monitor and control association’s
• Association could collect registration
info, collect data and reports,
recommend sanctions, and provide
consumer protection oversight
Option 2: Self-regulation
• Supervision by industry association
• Has traditionally achieved mixed
results with respect to prudential
• May still be beneficial for consumer
protection purposes, and least
costly option
• Association could take on
responsibilities listed above
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Harmonize with existing regulatory framework
• Critical that financial consumer protection rules apply to MCCs
and microcredit clients
• Typical microfinance clients have low-literacy, low-numeracy, and
less familiarity with formal financial sector
• All providers of similar financial services should be held to same
consumer protection standards, to provide level playing field and
comprehensive protection to consumers
• However, existing consumer protection rules in Serbia limited to
natural persons or banks, resulting in gaps in coverage
 Recommendation: Revise rules to cover microenterprises
and MCCs, and consider what body will be responsible for
• Also harmonize: tax, accounting, payments, bank laws and
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Addressing overindebtedness and financial crimes
Financial crimes
• Microfinance not inherently riskier
than bank lending
• Risk factors: irresponsible provider
behavior, poor borrowing
decisions by consumers,
oversaturation of microcredit
• Tools to address risk:
o Credit bureaus (mandate
participation by MCCs) and
assessment of creditworthiness
o Disclosure and transparency
o Financial literacy and education
o Market monitoring
• Non-depository microcredit
providers not historically part of
pyramid schemes or similar
• Regardless, MCCs should be
subject to existing controls to
prevent AML/CFT, fraud and
financial crimes, and identity
• Financial Action Task Force
(FATF) recommends risk-based
approach, adapting rules for
characteristics of microfinance
(i.e. customer due diligence)
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Complementary policy initiatives and long-term
financial inclusion strategy
• New MCC legal framework should be accompanied by welltargeted, complementary policy initiatives
– Guarantee programs to domestic banks for wholesale funding to
– Targeting of development funds
– Reaching out to and encouraging investments from international
investors, including shifting target of existing internationally-funded
credit lines for SMEs to smaller loans/clients
• Long-term financial inclusion strategy needs to be
developed, addressing issue from multiple angles
– When to transition to deposit-taking microfinance institutions (MFIs)
– Strategic adjustments to prudential framework that encourage banks
to move down market, balancing with need for financial stability and
management of risk
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Next steps to consider
Assess the potential impact of microcredit in Serbia
Assess the potential for investment in microcredit in Serbia
Convene stakeholders and form an official working group
Begin process of drafting MCC law
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