The Legal and Regulatory Environment for Micro and Small Enterprises in Russia: Survey Evidence from Samara

The paper describes the operating conditions for a select number of MFIs in Russia, with direct or indirect linkages to U.S. funding sources, and underscores the difficulties of operating a microfinance institution in the Russian Federation. MFIs have been individually struggling against common policy obstacles such as:

• A harsh legal and regulatory environment in Russia;
• Taxation is often repressive;
• Transaction costs of operation are high.

There is slow growth in a thin and fragmented sector. They all agree that gains could emerge from more transparent and cohesive sectoral initiatives

The paper provides:

• An overview of the historical evolution of the MFI sector in Russia;
• A description of the current state of microfinance activities in this country;
• A profile of constraints facing donor-funded MFIs, including registration, licensing, taxation, and legal and political obstacles;
• MFI strategies undertaken to circumvent regulatory obstacles;
• A review of Best Practice forms of MFI registration and setting up for lending.

The paper recommends:

• A thorough and continuing legal review of the various forms of registration and licensing;
• A comparative study of legal and regulatory environments between the Russian Federation and selected environments in the "near abroad" and Eastern Europe;
• Continued support for advocacy strategies through the Federal Duma with the maintenance of informal contact with regional representatives of the Central Bank and a continuing dialogue among MFI practitioners to strengthen advocacy efforts;
• The establishment of a co-ordinating office to facilitate information flows with regularly programmed strategy discussions and internet discussion groups;
• A survey of a newer generation of MFI borrowers to determine if the legal and regulatory environment in Samara has improved or deteriorated.

The paper concludes that:

• There is continuing uncertainty surrounding the legal status of microfinance institutions in Russia due to ambiguities in legal frameworks and contradictions between the Russian Civil Code and Federal statutes governing banking activities;
• Non-commercial partnerships and private funds are ranked (unweighted) as the most desirable modes of registration, followed by consumer co-operatives, state funds, and mutual credit societies;
• MFIs that reach large scale in lending will likely have to face the challenge of formalizing their activities through the Central Bank, as grant monies dry up and the need for savings and deposit mobilisation increases;
• An ideal new financial law would allow for non-bank financial intermediaries - offering a more restricted range of financial services - to acquire less expensive charters than those associated with commercial banks, provided that these institutions;
• The institutional learning curve will rise in the financial services industry in Russia to allow this broadening of the country's financial markets.

[Based on the authors' abstract]