On the introduction of a risk-based supervision system for microfinance market entities by the Agency of the Republic of Kazakhstan for Regulation and Development

The Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (hereinafter – the ARRFR) has begun a phased implementation of measures to introduce risk-based supervision of microfinance market entities in 2024.

In order to prevent infringement of the rights and interests of consumers of microcredit services in 2020, all subjects of microcredit, including pawnshops, credit partnerships, as well as online lending companies were included in the perimeter of the Agency's regulation and, starting from 2021, licensing of microfinance activities was introduced.

After the introduction of licensing, there was a significant strengthening of the regulatory system in the microfinance market, which made it possible to streamline the activities of its participants and increase the protection of the rights of consumers of services. Thus, prudential standards were established, standards for the activities of microfinance organizations when issuing micro-loans, qualification requirements for the impeccable reputation of executives and founders, requirements for the formation of financial and regulatory reporting and provision of information on loans issued to credit bureaus, compliance with AML/CFT procedures.

At the same time, the growth in the number of microcredit entities throughout the country and their ability to quickly adapt to changing external conditions with associated risks leads to the need to modify the regulatory regime of the ARRFR.

First of all, it is necessary to establish requirements for risk management systems (hereinafter – RMS) in microfinance organizations. The RMS will provide for high requirements for corporate governance and business processes of microfinance organizations, including an adequate credit, operational and compliance risk management system. The responsibility of organizations for their actions will increase, and non-compliance with the requirements will serve as a basis for revoking the license.

Secondly, a supervisory methodology will be introduced to determine the risk profile of microfinance organizations, similar to the SREP (Supervisory Review and Evaluation Process) model used in bank supervision. Within the framework of this model, a consistent assessment of the risk profiles faced by microfinance organizations, as well as their ability to properly manage these risks, will be carried out. The results of the supervisory assessment will be used by the ARRFR to determine the intensity and depth of supervisory measures against the subject of supervision.

The issue of introducing the institution of self-regulation is also being considered, which will effectively allocate the limited supervisory resources of the regulator. As international practice shows, SROs can be empowered to control regulatory reporting, consider complaints from citizens, conduct inspections and initiate revocation of licenses in relation to entities with a small amount of assets. At the same time, the ARRFR will continue direct regulation and supervision of large microfinance organizations, as well as the activities of the SRO themselves.

A full-fledged transition to risk-based supervision based on the best international practice will increase the effectiveness of the regulator in identifying negative changes in the financial condition of microfinance organizations at the early stages of their occurrence, as well as the ability of the ARRFR to respond promptly to the situation.