According to experts, such a step will lead to undesirable and destructive processes in the financial system. There is a high risk that active loan clients (regardless of whether their loan agreement conditions fall under this law or not) will take advantage of this opportunity to refer claims to court authorities and stop making scheduled repayments. Signed agreements may provoke borrowers to fail to execute their agreement obligations, thereby breaking payability conduct and upsetting overall financial environment.
“The draft law will be of retroactive effect. It means that it spreads over earlier received, but still outstanding loans. Any borrower can say that he is not comfortable with interest rate, and court will reconsider it. This rule can provoke borrowers not to execute their obligations. Client credit history will be spoiled, and he will be out of confidence,” explained Erkinbek Jumabaev, Chairman of AMFI.
Experts have repeatedly provided examples from other countries, in which interest rates cap had overwhelmingly negative impacts on local economic systems. According to expert foreign research, in certain countries that introduced fixed maximum interest rates, many MFIs are forced to close, are subject to slow growth rates, and lose transparency in terms of total cost of loans. They are also forced to reduce the scope of transactions in remote rural areas and in other unprofitable markets. These factors directly contribute to the bankruptcy ofMFIs, and fixed maximum interest rate often makes low income clients to apply to services of expensive informal market, where they are not protected at all.
"Practice of introduction of such loan “ceilings” was not of benefit for any country of the world,” said E. Jumabaev. According to Jumabaev, market representatives have repeatedly said that loan limitations force representatives of financing institutions to close. This means that clients will have limited access to financing resources. "Microfinance institutions have their representations in all the regions. The share of loan non-repayment is only 2,6%. It means that in general all the borrowers are normal, and they develop their businesses and are glad to have access to financial resources. But, once a ceiling is introduced, MFIs will start closing in those regions, where it is expensive to maintain branches,” said the representative of the association.
The exclusion of financing institutions, which work with high risk borrowers and which provide services to low income populations, will force borrowers (due to lack of other financing sources) to apply to informal shadow usury markets, where their rights are not protected. Therefore, this draft law should first of all be non-attractive for the government as it increases the potential for uncontrolled lending and lack of borrower rights protection.
Strict and non-logical requirements that are envisaged in the draft law will lead many financing companies to bankruptcy, deterioration of country rating, loss of attractiveness for investors, limitation of rights of finance and credit institutions, all of which work in compliance with legislation. Additionally, the law breaks independence principle when conducting entrepreneurial activity. The country will lose billions of KGS, as investment flow will sharply decrease access of most rural citizens to financial services. Later in May 2013, during the 16th annual conference of Micro-finance center (MFC), the largest global meeting of financing institutions and micro-finance institutions, the issue about the Kyrgyz draft law “about usury” was touched upon. International investors and lenders were extremely concerned with the law.
“The business community is against these measures. It is expected that this draft law will be passed in the third reading. If there is a positive decision taken, we will apply to President,” said Chief Executive Officer of International Business Council Aktilek Tungatarov.