Meeting Minutes Between GOT & SME Legal Environment 15 July, 2005

This was the second meeting between representatives of the government, headed by Mr Norov from the Ministry of Economy, and the SME Legal Environment working group.

The meeting took place in IFC PEP office, and was chaired by Florentin Blanc.

List of participants:

1. Mr A. Norov, Head of Macroeconomy Department, Ministry of Economy
2. Bill Kennedy, Chief of Party, USAID-ARD/Checchi LIME Project
3. Michael Schneider, Project Manager, GTZ Micro Finance Project
4. Hassan Aliev, Consultant, FIAS/MIGA Investment Climate Project
5. Dilshod Kholmatov, Legal Advisor, IFC Mortgage Project
6. Djasurbek Teshaev, Local Consultant, KfW
7. Bahriddin Shermatov, Economic Affairs Assistant, OSCE
8. Mavsuda Vaisova, Chair, AMFOT / Executive Director, Fund Humo
9. Florentin Blanc, Project Manager, IFC Tajikistan SME Survey and Policy Project (hosting)

The participants regreted the absence of representatives from the National Bank, the Ministry of Justice and the President?s Executive Office, which were planned to attend, and hoped that they would be able to attend in the future.

Florentin Blanc presented the agenda and asked participants if they had any objections or additions. None were raised.

Agenda

-          Brief update of activities of participating organizations

-          Discussion of micro-finance related issues.

1.                   Brief update of activites.

Law on administrative procedures

Bill Kennedy, USAID-ARD/Checchi, told the participants that the draft law on administrative procedures has been translated into English and Tajik languages. Also, he informed participants that they were holding a round table with business community to present the  draft law and receive feedback. These days the draft law is getting ready for submission to the Government of Tajikistan (GoT). The overall reaction of government members towards the draft law was positive, during the presentation that took place recently. Moreover the GoT is going to communicate to the public why the new law is needed, what it will affect and how.

At the end of his update he mentioned that according to the draft law there needs to be an administrative commission to review the public appeals against normative administrative acts. Florentin Blanc, IFC, commented that this might conflict with IMF memorandum with the GoT, which forbids creation of any new structures, except if its members are not permanent and only meet on an ad hoc basis. Bill Kennedy, USAID-ARD/Checchi, registered the comment and said that this has to be looked into.

            Law on inspections

Florentin Blanc, IFC, updated participants about the situation with the draft law on business inspections. The draft law is ready and has been sent to all involved ministries for consideration and comments. It should then be officially submitted to the government and then, possibly in September, it can be submitted to Parliament.

New Mortgage project

Florentin Blanc, IFC, mentioned that as it was announced earlier, the main issue for today?s joint discussion is Microfinance. Before proceeding he made a short announcement that last Friday there was the official launch of the IFC Central Asia Mortgage project in Tajikistan. Two members of the project team will be based in Tajikistan, precisely in IFC PEP office: Dilshod Kholmatov - Legal Advisor and Zarina Odinaeva ? Economic Advisor. Management of the project will be based in Almaty. He mentioned here that this phase of the project will focus on analysis of the current situation and work out recommendations for further work. The power-point presentation made in the project launch will be sent to SME legal environment group (the presentation is available in Russian only).

Bill Kennedy, USAID-ARD/Checchi, asked if the mortgages will be registered by the Ministry of Justice. Dilshod Kholmatov, IFC, replied that as it was mentioned earlier, the project has just started and there is no clear vision yet. So far several problems regarding the registration were revealed, in particular an argument between the MoJ and State Land Committee. The concrete answers will be provided only after deep study of the situation. Meanwhile it is clear that it would be preferable to have only one body dealing with the registration.

Bill Kennedy, USAID-ARD/Checchi, mentioned about technical support provided to the MoJ in the registration of pledges of moveable property. The system could also be used for registration of mortgage. Experience sharing and cooperation were offered, which were welcomed by the IFC project.

2.                   Joint discussions. Microfinance issue.

Michael Schneider, GTZ, was given the floor to present results of their analysis of the microfinance situation.

He started with general issues and the micro-finance market: there are many small institutions, several small and several medium ones, but all of them are treated in the same way in the law and by the National Bank, which creates problems.

The new law and regulations present problems in particular regarding:

1. Reporting ? reporting requirements are too high, too frequent, not focused on quality but on static indicators ? and similar information is requested by several state bodies.
2. Registration of MFIs ? the registration can be done only in Dushanbe, requirements can be high, and there are issues with the minimum capital requirements.

In addition, regulations for licensed types of MFIs are still not adopted, due to delays with the general regulation on licensing.

Florentin Blanc, IFC, suggested the participants that the problems identified at this meeting and results of the discussions could further on be presented to the MoJ and the National Bank. He also suggested giving the floor to Mavsuda Vaisova, chair of the Association of Micro Finance Organizations in Tajikistan, to present the problems its memebers face.

She mentioned that indeed, MFIs face a lot of problems:

-          Reporting. The deadline for submitting the reports was 2^nd day of each month. This created a lot of difficulties. They asked the Head of NBT to change the date. On this agreement the date was moved to 10^th of each month. But now we are told that since January 2006 it will be switched back. Again, this makes a lot of difficulties. Large organizations can cope, but most of the others can not because of the lack of adequate software etc.

-          Statistical information. MFIs have to submit their balance sheet by 5^th of each month. If delayed the fine goes up to 120 somoni.

Florentin Blanc, IFC, remarked that internationally, even large banks and corporations are not requested to submit balance sheets and reports that early in the next month, nor to submit reports so often. These requirements are clearly excessive.

-          Lack of knowledge. There are lots of new MFIs and there should be an official notice about types of reporting and deadlines.

-          Re-registration is always difficult in terms of time and the payments ? but the NBT requires to re-register even if only the physical address of the MFI changes.

-          Transformation of non-commercial MFI into commercial MFI should be possible ? but the regulations state that the capital of a Micro Lending Foundation can only be transferred to another MLF, or to the state ? what to do?

-          Charter capital. According to the existing legislation the charter capital is $10.000 but the NBT appears to claim that all the funds owned by an MFI should be deposited in the NBT upon registration, which would mean getting all loans reimbursed at the same time, and appears clearly excessive and detrimental.

-          Pledge registration. The registration is made by the MoJ, which has offices only in oblast centres ? since a lot of lending occurs in distant raions, this is difficult. Also the registration of pledges of immovable properties has to go through 2 bodies.

-          There should be some tax privileges for non-commercial organizations ? at least this was, when the law was prepared, the justification for requiring them to register with the NBT (this registration was supposed to be voluntary, not compulsory).

All these issues were recently discussed at a joint meeting of MFIs and donors. Working groups are preparing proposals that will be ready by end of July.

Florentin Blanc, IFC, drew participants? attention to the fact that it is a very visible example of how the legislation and its implementation do not correspond to each other. He gave the floor to Dilshod Kholmatov who, having participated to the drafting of the Law on Micro Finance, is the best person to answer these questions.

Dilshod Kholmatov, IFC, emphasized that in all these problems the MFIs bear a part of responsibility. They do not know the law that regulates their activities and their rights. The use of a good lawyer, while of course having a cost, would be a very adequate solution to most of these problems.

In particular he replied that:

-          according to the law the non-deposit MFIs should submit reports only once a year. The law gives the framework and describes key procedures. The details are described in the normative acts. As for the NBT requesting reports every month, this is illegal until approved by the MoJ, which will never do it since the law clearly says one a year.

-          re-registration is absolutely needed in case of changing the address thought the procedure should be very light.

-          transfer of capital from a Foundation should indeed be strictly regulated to avoid misappropriation, but the law allows MLFs to become shareholders (even sole shareholders) of a commercial entity, and to transfer their portfolio to this entity, which is a suitable solution to the transformation issue.

Florentin Blanc, IFC, thanked Dilshod Kholmatov for these very useful replies, but mentioned that, if the law is violated by state structures, they should be held as being at fault, not the private organizations that suffer under this. In addition, MFIs have already asked the assistance of lawyers, to no avail.

Conclusion

Mr. Norov, MoE, thanked participants for inviting him to the meeting. This was a very interesting meeting and it was useful to know the problems of MFIs. Any further comment would require an in-depth study of the matter. At the next meeting he would be able to present the official position of the MoE regarding these issues.