Good Practices: Banking Sector

List of Reviewed Laws and Regulations

12.The main laws, regulations and guidelines relevant for the assessment of MFOs are as follows:

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  Law on the National Bank of Tajikistan, Law No. 383 of December 1996, as amended by Law No. 548 of August 2009
  
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  Law on Microfinance Organizations, May 2004
  
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  Law on Credit Histories, Law No. 492 of March 2009
  
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  Law on Banking Activities, Law No. 524 of May 2009
  
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  Law on Insurance of Deposits of Individuals, Law No. 758 of August 2011
  
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  Law on Liquidation of Credit Organisations
  
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  Law on Advertising, July 2003, as amended in 2007 and 2008
  
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  Law on Consumer Protection, December 2004
  
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  Law on Competition and Restriction of Monopolistic Activity on Goods Markets, Law No. 198, July 2006, as amended in 2008
  
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  Law on State Registration of Legal Entities and Individual Entrepreneurs, July 2009
  
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  Civil Code of the Republic of Tajikistan
  
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  Instruction No. 135 on the Order of Regulation of Microcredit Deposit Organizations, January 2011
  
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  Instruction No. 136 on the Order of Regulation of the Activities of Microlending Organizations, April 2011
  
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  Instruction No. 137 on the Order of Regulation of the Activities of Microlending Funds, April 2011
  
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  Instruction No. 186 on Procedures on Issuance of Credit and Accrual of Interest at Credit Organizations, April 2011
  
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  Rules of calculation and collection of interest on loans by banks, non-bank financial institutions and microfinance institutions, Resolution No. 388 of October 2008
  

Good Practices: Non-Bank Credit (/Microfinance) Institutions

SECTION A	CONSUMER PROTECTION INSTITUTIONS
Good Practice A.1	Consumer Protection Regime The law should provide clear consumer protection rules in the area of non-bank credit institutions, and there should be adequate institutional arrangements to ensure the thorough, objective, timely and fair implementation and enforcement of all such rules, as well as of sanctions that effectively deter violations of these rules. There should be specific statutory provisions, which create an effective regime for the protection of consumers of non-bank credit institutions. There should be a government authority responsible for implementing, overseeing and enforcing consumer protection in the area of non-bank credit institutions. The supervisory authority for non-bank credit institutions should have a register which lists the names of non-bank credit institutions. There should be coordination and cooperation among the various institutions mandated to implement, oversee and enforce consumer protection and financial sector regulation and supervision. The law should provide for, or at least not prohibit, a role for the private sector, including voluntary consumer associations and self-regulatory organizations, in respect of consumer protection in the area of non-bank credit institutions.
Description	a. The Law on Microfinance Organizations includes some general provisions that touch upon consumer protection issues. According to the Law on Microfinance Organizations, the National Bank of Tajikistan (NBT) is the government authority responsible for the authorization, regulation and supervision of all types of MFOs in Tajikistan (including prudential supervision of microdeposit organizations). This Law includes several general provisions that deal with consumer protection issues, such as disputes (Art. 40), confidentiality (Arts. 27 and 39) and consumer disclosure (Arts. 15 and 16). Some regulations issued by the NBT also include provisions that deal with consumer protection issues, such as disclosure of information and business practices. Some general laws include provisions that could be applicable to the microfinance sector. Although the Law on Consumer Protection does not include any explicit article dealing with financial services, the overall scope of the law refers to all types of goods and services (which by default include financial services). The Law on Advertising does have a specific article on financial services, including banking, insurance and securities (Art. 18), in addition to more general provisions on unethical, unfair, misleading, false and hidden advertising that could be applicable to microfinancial services. Regarding micro-credit deposit organizations (MDOs), the Law on Insurance of Deposits of Individuals approved in 2011 restructured the Individuals' Deposit Guarantee Fund, to provide depositors with insurance compensation in cases of bankruptcy or withdrawal of license of credit institutions, including MDOs. The Law requires credit institutions to prominently display in the premises information on the extent of the insurance and membership in the Fund. The maximum coverage of the Fund is 7,000 Somoni (about US$1,470) per depositor in a credit institution. However, Article 24 of the Law also indicates several exclusions of coverage under criteria that are not clearly defined or verifiable by the Fund (e.g. deposits which in the opinion of the NBT aggravated the financial situation of a credit institution, or deposits from third parties who entered into a deposit agreement with a credit institution on behalf of members of its Supervisory Council or family members). At least one MDO underreported the amount of covered deposits based on their interpretation of excludable deposits, and ended up significantly underpaying its contribution. It is also worth noting that, according to the microfinance legislation, the Law on Liquidation of Credit Organizations shall apply in the event of the liquidation of an MDO. This Law indicates that all deposits not covered by the deposit guarantee fund have lesser priority than the repayments to the Government or the NBT. This would put depositors at a disadvantage and drastically reduce their chances to recover more than the amount paid by the fund. b. The overall legal framework does not provide the NBT with a clear and specific consumer protection mandate in the financial sector, let alone in the microfinance segment. The Law on the NBT mentions that the “main goal of regulating and supervising activity of credit institutions shall be to maintain stability of the banking system and to protect the interests of depositors and creditors” (Art. 42), which could be interpreted as assigning consumer protection responsibilities to the NBT. However, this could also be interpreted as the typical mandate of a prudential supervisor. A review of other pieces of financial legislation does not give a clear indication regarding NBT’s mandate for consumer protection either. On the one hand, the Banking Law includes a section on “Protecting interests of customers” that covers some consumer protection issues. On the other hand, NBT’s Instruction 186 on disclosure of information to consumers (not applicable to MFOs) was issued in the context of a prudential provision in the Banking Law -- specifically Article 29 “Prudential Regulations”, item 5 “The National Bank of Tajikistan may set requirements regarding the interest rate, maturities and other conditions applicable to loans and attracting funds (including deposits) or off-balance-sheet liabilities”. The Antimonopoly Agency (AMA) is the only government body with a clear mandate to oversee consumer protection, competition and advertising issues in the entire economy. The AMA is in charge of enforcing the Law on Consumer Protection and the Law on Advertising mentioned above, as well as the Law on Competition and Restriction of Monopolistic Activity on Goods Markets (although Art. 2 of this law indicates that it does not apply to financial services unless activities in the financial sector affect competition in goods markets). The AMA also has the power to represent consumers in courts when detecting infringements of consumer rights, and present collective consumer action in court. However, the AMA does not yet have basic rules in place governing procedures for investigations and decisions on individual cases. In addition, the AMA has very limited resources to enforce those three laws in all types of goods and services markets, let alone specialized staff dealing with financial sector issues. Also, the AMA has neither received any complaint against microfinance institutions, nor started any investigation against microfinance institutions. c The NBT’s website includes a list of all the MFOs, including contact information and names of Directors and Chief Accountants. d. In general, there are no cooperation mechanisms (e.g., memorandum of understanding) between the AMA and the NBT. These mechanisms have not yet been necessary given that the AMA has not dealt with any consumer protection issues in the microfinance sector. e. The Law on Microfinance Organizations provides for a role for industry associations to “protect and represent common interests of their members, coordinate activities and satisfy informational and professional interests” (Art. 10). At the same time, the Law clearly prohibits MFOs from using these associations to set interest rates or commissions. The Law on Public Associations provides consumers with the right to form associations, which includes the right “to establish voluntary public associations for the purpose of protection of their common interests and attainment of common goals, to join existing public associations or refrain from joining them, and to withdraw from such organizations without any hindrance” (Art. 4). Consumers are entitled to form such voluntary, self-governed and non-profit associations without the need of prior authorization from any government authority (Arts. 4 and 5).
Recommendation	The NBT should have a clear, explicit mandate to regulate and supervise consumer protection issues in the microfinance sector. For this matter, either the Law on the NBT or the Microfinance Law should be amended to incorporate consumer protection as a mandate or function of the NBT. Consequently, the Law on Consumer Protection should also be amended to recognize the NBT’s consumer protection regulatory and supervisory authority in the microfinance sector. The AMA would still bear responsibility to monitor compliance with the law in the case of any financial product or service that could be offered by entities that are outside the remit of the NBT (such as private moneylenders or retail stores). The NBT should set up a unit to deal with consumer protection issues in the financial (banking and microfinance) sector. The unit should be responsible to propose regulations in areas such as disclosure of information to consumers, business-to-consumer practices, complaints handling and disputes resolution, customer account handling, debt collection, and data protection. The unit should also elaborate manuals for offsite and onsite supervision of consumer protection; participate in offsite and onsite supervision (eventually developing a risk-based conduct-of-business supervision methodology); propose corrective measures, sanctions or fines; require and analyze reports from supervised institutions on consumer protection issues, including reports on complaints. In order to prevent or minimize conflicts of interests, the consumer protection unit should be located outside the prudential supervision department and report to a different Board member. The consumer protection unit should at a minimum elaborate a report discussing and analyzing key consumer protection issues, to be included in the NBT’s Annual Report. Although currently the AMA is responsible for enforcing the Law on Advertising in the financial sector, it would be useful to reassign the responsibility for enforcing such rules applicable to the microfinance sector (and the banking sector) to the NBT. Given that the NBT regulations on consumer disclosure and business-to-consumer practices would have to include provisions on advertising, the NBT could be better positioned to centralize all responsibilities to supervise and regulate advertising practices in microfinance (and banking). In this case, either the Law on Advertising should be amended to recognize the NBT’s authority, or the relevant provisions should be removed from the Law on Advertising and included in a new piece of legislation applicable to the banking and microfinance sectors. If responsibility for investigation of individual disputes from microfinance customers remains with the AMA, substantial additional resources and support will need to be provided. Also, at a minimum, the AMA should include in its statutes and procedural rules the requirements to assign responsibility in cases concerning microfinance and other financial sector issues to a specific unit or official, and to consult with the NBT when issuing a decision regarding microfinance products or services (further recommendations on dispute resolution are presented in Good Practice E.2). In addition, the AMA should collaborate and consult with the NBT in relation to competition issues in the microfinance sector. The NBT and the AMA should jointly prepare and sign a memorandum of understanding (MoU), and communicate to the public their responsibilities on consumer protection, competition, advertising and/or dispute resolution matters. The MoU would provide an official framework for collaboration and cooperation among the authorities and clarify each authority’s role in the aforementioned matters. Regarding MDOs, the exceptions of coverage by the deposit guarantee fund should be reviewed in order to follow international good practices and eliminate uncertainties and unfairness regarding the definition of insured deposits. There should also be clearer disclosure of the fund’s coverage of deposits offered by MDOs, in all advertising materials, in the premises of the MDOs and in the deposit contracts given to depositors. The Law on Liquidation of Credit Organizations should be revised in order to give deposits from individuals a higher priority than payments to the Government or NBT in the event of bankruptcy.
Good Practice A.2	Code of Conduct for Non-Bank Credit Institutions There should be a principles-based code of conduct for non-bank credit institutions that is devised in consultation with the non-bank credit industry and with relevant consumer associations, and that is monitored by a statutory agency or an effective self-regulatory agency. If a principles-based code of conduct exists, it should be publicized and disseminated to the general public. The principles-based code should be augmented by voluntary codes on matters specific to the industry (credit unions, credit cooperatives, other non-bank credit institutions). Every such voluntary code should likewise be publicized and disseminated.
Description	a. The microfinance industry has started to undertake initiatives to promote rules of business conduct. The Association of Microfinance Organizations of Tajikistan (AMFOT) developed a general Code of Business Ethics that is mandatory for all members to sign and comply with. However, there is no mechanism yet in place for AMFOT (or the NBT) to monitor compliance with the Code. The Code includes a set of ethical values that should guide staff behavior towards clients and the community, but does not cover principles related to consumer protection issues. In order to address these more specific issues, AMFOT has also endorsed the Smart Campaign’s Client Protection Principles,^11 and four staff members have been trained to become accredited social performance evaluators and in turn become trainers for the microfinance industry. There is no mechanism in place yet to monitor compliance with these principles either by AMFOT or the NBT. AMFOT is evaluating the implementation of a social rating mechanism to oversee compliance with the client protection principles and other social performance practices. b. Some microfinance representatives interviewed by the mission did not know of the Smart Campaign. While some MFOs display internal codes of conduct or ethics in their premises, many of them do not display any code on the walls of their premises, or their website, let alone give a copy of the code to their customers. c, d. There are no other voluntary codes of conduct on matters specific to MDOs, MLOs or MLFs, at a sector level. Some MFOs have developed internal codes of conduct on specific topics, such as communications with clients, telephone calls, or debt collection practices.
Recommendation	AMFOT should actively promote the endorsement and concrete application of the Smart Campaign’s Client Protection Principles by its members. AMFOT should continue engaging in programs of training of trainers on social performance and promote that member associations conduct self-assessments on the way they are applying the client protection principles. AMFOT should also consider the incorporation of these principles in a new consumer protection code of conduct or the expansion of the existing code of ethics to include the consumer protection principles. In either case, its members would have to be required not only to comply with the code but also to adequately disseminate the code to staff and customers (e.g., by displaying the code in a prominent place at its premises and attaching a copy of the code to each contract). AMFOT should also implement a mechanism to monitor and enforce compliance with client protection principles (e.g. hotline to receive consumer complaints, mystery shopping exercises to verify application of principles when dealing with consumers, client protection external evaluations). It would also be important for the NBT to monitor compliance with the code.
Good Practice A.3	Other Institutional Arrangements Whether non-bank credit institutions are supervised by a financial supervisory agency, the allocation of resources between financial supervision and consumer protection should be adequate to enable their effective implementation. The judicial system should ensure that the ultimate resolution of any dispute regarding a consumer protection matter with a non-bank credit institution is affordable, timely and professionally delivered. The supervisory authority for non-bank credit institutions should encourage media and consumer associations to play an active role in promoting consumer protection regarding non-bank credit institutions.
Description	a. Regarding financial supervision, the NBT just recently set up a specialized microfinance unit with 9 staff in charge of overseeing more than 120 MFOs. The unit plans to undertake at least one onsite inspection every two years for each MDO. The unit focuses on prudential and financial supervision. There is no separate unit for consumer protection in the NBT. In theory, the microfinance unit would currently also be responsible to cover some consumer protection issues, for example regarding compliance with regulatory provisions on disclosure of information to consumers. However, there is no manual or guideline for the unit to undertake this type of tasks, and the unit faces significant constraints to diverge resources from their primary prudential/financial supervisory focus to also deal with consumer protection. b. In the judicial system, the economic courts handle disputes between MFOs and their clients. The vast majority of cases relate to debt collection, seizure of collateral and other disputes raised by MFOs rather than consumers. In some cases the NBT has been invited by the court to clarify legal provisions. In general, neither consumers nor financial organizations trust the courts, especially because the court processes are slow, unpredictable and handled by low-paid judges. Regarding non-financial disputes, some consumers have asked the AMA or Consumers Union (consumer organization) for help, and they have contacted firms to correct wrongdoing. Both institutions may represent consumers in courts when detecting infringements of consumer rights, and present collective consumer action in court, although this procedure has not been used yet. Despite their potential to play a role in financial sector disputes, neither institution has undertaken any action yet in that sector. There is also a human rights ombudsman office, responsible for ensuring the protection of rights and freedoms of citizens and the observance and respect of those rights by all types of public authorities and officials (Article 1 of its institutional law). One of its main tasks is to ensure that a person’s violated rights are restored. In this context, the ombudsman may intervene when a consumer presents a complaint against how his/her case was dealt with by the courts, provided that there is a violation of his/her rights and the complaint is submitted within one year of occurrence of such violation. c. The NBT has not interacted with the media or Consumers Union regarding financial consumer protection or financial education issues.
Recommendation	As mentioned in Good Practice A.1, the NBT should set up a unit to deal with consumer protection issues in the financial (banking and microfinance) sector. In order to prevent or minimize conflicts of interests, and to ensure an adequate allocation of resources within the NBT, the consumer protection unit should be located outside the prudential supervision department and report to a different Board member. The unit should elaborate manuals for offsite and onsite supervision of consumer protection; participate in offsite and onsite supervision; propose corrective measures, sanctions or fines; and require and analyze reports from supervised institutions on consumer protection issues, including reports on complaints. Consideration should be given to developing a risk-based supervisory approach for consumer protection in the microfinance sector, which may include delegating monitoring functions to other institutions (e.g. supervision of MFOs’ compliance with microfinance code of conduct by AMFOT, regular reporting of results of mystery shopping exercises conducted by Consumers Union). Once the legal framework for financial consumer protection is strengthened, NBT and AMFOT should consider organizing regular seminars for prosecutors and judges in the economic courts, as well as seminars for representatives of the media and civil society, to improve their knowledge on retail finance and financial consumer protection issues. NBT should also involve consumer associations in consultative processes for new pieces of legislation, and preparation of financial sector strategies or programs. NBT should interact with the media more often and provide them with consumer-friendly information on overall financial sector and more specific retail finance and microfinance issues.
Good Practice A.4	Registration of Non-Bank Credit Institutions All financial institutions that extend any type of credit to households should be registered with a financial supervisory authority.
Description	All MFOs shall be registered by a tax authority or state registration body, according to the Law on State Registration of Legal Entities. The state registration body is in charge of recording all the organization’s information required by the law in the Single State Register. According to the Microfinance Law, all MDOs and MLOs shall operate on the basis of a license issued by the NBT, following the procedures established in the general Law on licensing of individual types of activities. In addition, the Law allows the NBT to deny a license on the basis of: noncompliance of documents attached to the application with requirements set up by the NBT, failure of candidates to senior executive or other key positions to satisfy ‘fit and proper’ requirements, or inadequate financial situation of the founder of an MDO or MLO. The Law indicates that the ‘fit and proper’ requirements shall be established by the NBT and relate only to education, working experience and absence of previous convictions for committing an acquisitive intended crime. Instruction 135 on the Order of Regulation of Microcredit Deposit Organizations specifies that senior executives of MDOs shall have higher economic education, not have been convicted of intentional self-serving crime, and have professional experience in the microfinance or banking sector. Regarding MLFs, in order to start operations they must obtain a registration certificate from the NBT, following the procedures established in the Microfinance Law. The Law also indicates that the NBT may refuse to issue or may revoke a certificate on the basis of: noncompliance of documents attached to the application with requirements set up by the Law, provision of false information in the documents attached to the application, or failure to meet requirements set forth in the Law. The Microfinance Law indicates that the NBT shall maintain a register of licensed MDOs and MLOs (which shall be accessible to the public) and a register for MLFs. The registers shall be published once a year in an official publication of the NBT, and any changes and additions in the registers shall be published within one month of occurrence. The NBT does not include such lists in its Annual Report, but maintains a section on its website with a list of all non-bank credit institutions, including MDOs, MLOs and MLFs, with the name of the institution, its contact information and the names of Directors and Chief Accountants.