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IBC voiced the business position on reducing interest rates on loans at parliamentary hearings

IBC
December 13, 2024

On December 13, 2024, parliamentary hearings were held to discuss the draft Law of the Kyrgyz Republic “On Amendments to Certain Legislative Acts of the Kyrgyz Republic on the Protection of the Rights of Consumers of Financial Services.”

According to the initiators, Parliaments members, the bill is aimed at reducing the financial burden on borrowers by reducing the maximum permissible interest rates. Among other things, the draft law proposes reducing interest rates on loans issued by banks and microfinance organizations to the average weighted nominal rate of the National Bank with the addition of 3 and 7 percent, respectively.

In his speech, Askar Sydykov, Executive Director of the International Business Council, outlined the business position on the bill under discussion.

The IBC head informed about the possible negative consequences of the bill’s adoption, including a decrease in the availability of loans for the population and businesses, a decrease in the volume of lending, a deterioration in the financial stability of the banking system and investment climate, an increase in shadow lending and a decrease in competition in the financial sector.

Considering the negative impact of non-market methods of regulating interest rates on business and the economy of Kyrgyzstan, IBC proposed to revise the bill.

Overdue debts

According to the draft law, one of the expected results is a reduction in the level of overdue debts.

However, according to the NBKR, the volume of overdue loans in the Kyrgyz Republic as of September 2024 amounted to 7.2 billion soms, or only 2.4 percent of the loan portfolio of the banking system. In comparison with neighboring countries, this figure is one of the lowest.

Interest rate level

The explanatory note says that the key problem addressed by the draft law is the high level of interest rates, reaching up to 32.83% in some cases. However, the average weighted interest rate in the Kyrgyz Republic is also almost the lowest in comparison with neighboring countries.

As an example, the IBC head cited the experience of other countries, in particular Kenya and Zambia. As a result of setting the maximum lending rate no more than 4% higher than the base rate of the Central Bank of Kenya, the growth of lending to the private sector in this country decreased from 25% to 2.4%.

Restricting the profitability of banks may negatively affect the stability of the financial sector.

Risks for borrowers, reduced investment

Limiting profitability for banks and microfinance organizations may force small and specialized financial companies out of the market, because will not be able to operate with low rates.

When interest rates are limited, the popularity of illegal lenders that are not regulated by the state and offer loans on stricter terms may increase, which creates additional risks for borrowers.

According to the business community, the adoption of such restrictive measures could lead to a decrease in investor confidence in the country's financial system, which would make it difficult to attract foreign investment and lead to capital outflow.

Impact on MFIs

The adoption of the proposed bill may also have a negative impact on microfinance organizations, which in 2023 attracted 83% of their resources in foreign currency from foreign investors, with an investment volume of 20 billion soms and the cost of funds raised from 18% to 20% in national currency.

Microloans are an important source of funding for self-employed citizens, especially in those regions of the country whose residents do not have sufficient access to bank loans. Reducing support for MFIs will make it difficult for them to obtain loans, which will have a negative impact on small businesses and the self-employed.

IBC proposals

In order to reduce interest rates using market methods, IBC proposes such measures as improving macroeconomic stability, diversifying the economy, increasing the transparency of the banking system and attracting foreign investors.

This includes reducing public debt, eliminating inflation risks, introducing reporting standards consistent with international practices, such as IFRS, and simplifying the conditions for the entry of foreign banks.

IBC proposes to stimulate competition in the banking sector by reducing administrative barriers for new players, accelerate the digitalization of banking services to reduce costs, and create conditions for attracting long-term investment through tax incentives and the issue of government bonds.

These measures will reduce the cost of borrowing and create conditions for healthy competition in the financial market.

IBC calls for an open dialogue between the state and business to ensure balanced development of the financial sector, which will promote economic growth and protect the interests of all market participants.

IBC continues to work on this draft law.

Attached is the IBC presentation “The Impact of Non-Market Methods of Interest Rate Regulation on Business and the Economy of Kyrgyzstan,” presented at the parliamentary hearings on December 13, 2024.

Скачать файл «презентация МДС_парламентские слушания 13.12.24.pdf»

The presentation is also available at the following link:

https://drive.google.com/file/d/15BhAa_LVC6EkTDIM_LojDhNG3qOudIfH/view?usp=sharing