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Micro Millionaires

The Law on Micro financial Institutions and Nonbanking Financial Institutions enables them to transform into a bank or invest up to 25 percent of shares. This law is opposed by over 50 NGO’s, since according to them, this law makes possible for these MFI’s to invest all the donations and the profit generated after the transformation, but they also ring the alarm on the possibility of money laundering. According to the heads of some NGO’s, this money should not be invested because they were awarded to help the poor population, and...

Prishtinë, 22 January 2013

Micro financial institutions (MFI) operating in Kosovo will be able to benefit even more than they are currently doing. These micro financial institutions began their operations through various donations in behalf of aiding the poor Kosovar citizens. But since April 12th of 2012, the Law on Micro Financial Institutions and Nonbanking Financial Institutions enables these MFI’s to transform themselves in a bank or own 25% of shares in a bank.

These micro financial institutions are already seriously considering this opportunity that this law provides for transforming into banks, which will enable them to, apart from granting loans, also accept deposits.

Annual reports of BQK show light fluctuations, but with a tendency of increase of the value of MFI’s. According to the report of BQK, in the first half of 2012, the overall value of MFI’s decreased for 4.1%, falling to 122.6 million euros, while the value of granted loans up to June 2012 was 102.6 million euros.

The value and loans granted by MFI’s

- In the first half of 2012, the overall value was 122.6 million euros,

- Granted loans 102.6 million euros.

- Value of loans in 2011 – 115.2 million euros.

- Value of loans in June 2010 – 113.9 million euros.

- Overall value of MFI’s assets in 2009 – 133.7 million euros,

- Granted loans in 2009 – 108.8 million euros.

- MFI’s assets till September 2008 – 99.0 million euros. The value of granted loans, on the other hand, reached 89.1 million euros.

Report of BQK

In 2011, the portfolio value of granted loans by MFI’s reached 115.2 million euros and reached an annual increase of 1.2 percent.

In June 2010, however, the value of granted loans by MFI’s reached 113.9 million euros.

In 2009, the overall value of the assets of this sector reached 133.7 million euros, which represents an annual increase of 35 percent. Up to September 2009, the value of granted loans reached 108.8 million euros, which represents an annual increase of 22 percent.

Up to September 2008, the assets of MFI’s were 99.0 million euros. Whereas, the value of granted loans reached 89.1 million euros.

The approval of this law has stirred a lot of debates, especially as it regards the ownership of assets, money which was granted as donations and those created as profit throughout the years of operation, for which these MFI’s never paid any taxes.

Tendencies for money laundering

Ibrahim Rexhepi, director of the Center for Strategic and Social Research says that the debate which the law stirred on banks, micro financial institutions and nonbanking financial institutions did not uncover the problem, but further created confusion and disagreements. According to him, the whole thing focused on one point as to who owns the money created through non-profit mechanisms which function within the financial system, and how the distribution can take place, especially when it is clear that according to the law, they cannot keep funds created from profit or pay dividends.

Even the budget may become a money laundering machine, if the money ends up there. And this hazard may be avoided only through respecting the provisions of the law which deal with the termination of NGO’s.

Ibrahim Rexhepi, STRAS

"These mechanisms which have the status of NGO were allowed to be established with the intention that, through small borrowings and investments in various humanitarian projects help the population in overcoming the aftermath of the war. Later on, they also offered the first assistance in starting a business, since this was not made possible by commercial banks, which did not lend money to those without long experience in business”, says Rexhepi, adding that all this money is a “gift” from different donors and no law allows for embezzlement, but that they should circulate mainly for humanitarian purposes. According to him, this criteria is not being respected, since these mechanisms offer various loans with higher interest rates that commercial banks.

Rexhepi says that in the case of voluntary or obligatory liquidation, the remaining capital should be distributed for charity purposes in Kosovo, and in case the founders do not do this, then the distribution of the capital should be done according to the plan approved by the Central Bank of Kosovo, and such a criteria should apply also for NGO’s aiming to transform into banks.

"The capital should either be returned to the donors or distributed according to the plan approved by BQK. In both cases the same problem arises. Why should BQK interfere in the distribution of money when in this case it indirectly stands as owner of this capital? Also, what will happen with the capital which was not obtained as donation but as loans with soft terms, which in Kosovo is sold with interest rates 5-6 times higher”, says Rexhepi.

Rexhepi says that the intention to change the manner of circulation or the ownership over the money donated as assistance to mitigate the economic and social hardship of the country is nothing but money laundering.

"Even the budget may become a money laundering machine, if the money ends up there. And this hazard may be avoided only through respecting the provisions of the law which deal with the termination of NGO’s ", said Rexhepi.

In order to oppose some of the articles of this law, around 50 NGO’s have requested from the Constitutional Court through the Ombudsperson to temporarily suspned this law due to the irreparable damage it could cause to civil society.

These NGO’s consider that articles 90, 95 (1.6), 110, 111 and 116 of the Law on Banks, Micro financial Institutions and Nonbanking Financial Institutions No. 04/L-093, violate article 44 [Freedom of Association], article 46 [Protection of Property], and article 10 [Economy] of the Constitution, international principles of non-profit NGO’s and applicable legislation in Kosovo which regulates the field of freedom of association of NGO’s.

The Law on Freedom of Association in Nongovernmental Organizations article 4 says that the NGO does not distribute net income or profit to any person; Wealth, income and profits of the NGO are used to support non-profit purposes specified for the organization; Wealth, income and profits of the NGO cannot be used to, directly or non-directly, generate benefits for any founder, director, officer, member or donor of the NGO, excluding the reasonable payment or compensation for persons involved in the work of the organization.

Article 21 paragraph 3 of this law provides for “in case of termination or deregistration of the NGO which has benefited from tax or fiscal mitigation, public donations, or government grants, the whole remaining wealth, after having liquidated all liabilities, will be transferred to an NGO with same or similar mission. This NGO will be identified according to the statute of the NGO, or through a proposal of the highest leading body of the NGO. The Ministry establishes the Commission on Distribution of remaining Wealth of the terminated or unregistered NGO, with representatives of NGO’s, based on sublegal act promulgated by the Government ".

Taking into consideration the appeal of NGO’s, The Constitutional Court on December 24 2012 has decided to suspend articles: 90,95 (1.6),110,111 and 116 until January 31 2013.

The law should not allow the privatization of donations

According to the Law on Banks, Micro financial Institutions and Nonbanking Institutions, the Central Bank of Kosovo has exclusive responsibility on licensing/registration, regulation and overseeing of banks and all Micro financial Institutions and Nonbanking Financial Institutions.

The spokesperson of BQK, Besnik Kada, says that the Law enables for alternatives with specific preconditions for the organization of MFI’s as NGO’s, Sh.a and the level of investment in banks. He says that the preconditions for this include the liquidation of liabilities for the awarded capital and surplus, payment of contingency liabilities towards the Tax Administration for accumulated benefits in exercising the right of public benefit status and the distribution of capital for charity purposes, as detailed in the law.

"Up till now there has been no request by any NGO for termination or liquidation and this is done according to laws in force”, said Kada. Whereas as regards donations obtained by NGO’s, BQK did not give any details despite the insistence by Preportr for several months to know what the sum is for each NGO and the source of those donations.

What may happen in the following years is that micro financial institutions, which on behalf of support for agriculture and unemployed population have accumulated financial capital, will apply for banking license. And the actual law leaves such a space for transformation.

Agron Demi, GAP Institute

Agron Dem from GAP Institute says that during the review and approval of this law, this institute opposed the law precisely because it leaves wide areas of interpretation. According to him, the most questionable part had to do with micro financial institutions, which till the beginning of this year functioned as nongovernmental organizations, whereas now they are regulated by the law on banks.

"What we asked for is that the Law on banks should define that each micro financial institution which wants to transform itself into a banking institution should distribute the funds for the civil society sector in Kosovo, as prescribed by the Law on Association of NGO’s” says Ademi.

He says that this law creates another type of NGO’s, so-called micro financial NGO’s, but according to the Law on Association of NGO’s, in Kosovo there are NGO’s established as associations or foundations, but not as micro financial NGO’s and this makes possible for numerous interpretations.

"What may happen in the following years is that micro financial institutions, which on behalf of support for agriculture and unemployed population have accumulated financial capital, will apply for banking license. And the actual law leaves such a space for transformation", said Demi.

Whose money is it?

Another hot issue as regards this law is the ownership of donations, the profit generated through them and the assets in general. In order to convert into banks or shareholders, micro financial institutions have to be terminated, which implies that also their capital obtained as donations and the profit should be distributed, and not invested.

But as to what will happen with this money is not clear even to some members of the Commission on Budget and Finances in the Assembly of Kosovo. Albana Fetoshi, member of this commission says that throughout the entire process of discussions on the issue of ownership and the eventual investment of money, they received no specific answer by the sponsor of this law, which is the Ministry of Finance.

Preportr has contacted with officials of Ministry of Finance to ask for clarifications on these issues, but no meeting was granted.

Preportr has also contacted some micro financial institutions operating in Kosovo, but apart from representatives of “Finca” (which has branches in 21 countries and is based in Washington) no other accepted to meet or answer on these questions regarding ownership and the eventual investment of this money.

Keith Sandbloom, executive director of “Finca” branch in Kosovo says that this issue is not regulated properly through the law in question. Sandbloom says that “Finca” is considering all possibilities that the new law provides for micro financial NGO’s. But he says that the law is not very clear and does not give explanations regarding some cases which have to do with ownership and donations.

"Whatever we decide to do, we will do it in accordance with the regulations of each country, but in some aspects the law on MFI’s does not tell us what we should do. Each micro financial institution has different situations. Some are NGO’s registered locally, and some others are branches of international NGO’s. Some of them have generated profit and some not, so there are different situations and the law does not provide specific guidance for each situation”, says Sandbloom.

He says that he does not have all the answers on our questions as to who will remain the owner of the money obtained as donations and the money generated as profit throughout these years if they decide to convert to banks.

"Each contribution comes with its documentation and some contracts are clear, providing in written what this money should be used for, and after the mission has ended it is defined what should be done with that money”, said Sandbloom.

He said that if an NGO is local and operates only in that country and if that NGO has obtained donations, those donations are only to be used inside Kosovo. “If you have only one branch of an international NGO, such as “Finca”, it depends if the donation was intended for Kosovo or for the mother organization, since in the case of “Finca”, we operate in 21 countries of the world and these legal issues have not been elaborated in the new law ".

As regards the issue of eventual investment in any bank, whether that will be the money given as donation or the profit generated, Sandbloom says that there isn’t only one answer. According to him, there is a difference in funds, since some are intended for some specific in Kosovo, such as implementing specific projects.

He says that the money should stay in Kosovo, since returning them to the donors would not benefit Kosovo in any way. “The way we perceive the law, it depends how the money was obtained. The Law on banks emphasizes that some of the donations should be returned to the donor. What will happen to those donations when returned? Will they be invested in Kosovo as micro financial shares or joint stock companies? Or, will they be returned to the donors and never return back to Kosovo. We are seeking an answer as to how this money will remain in Kosovo, because if this money goes outside, Kosovo does not benefit anything”, said Sandbloom.

The money should not be returned to the donor

Driton Selmanaj from the Democratic Institute of Kosovo says that the donations were intended to help the population of Kosovo, and with the Law on Freedom of Association, they should not be returned to the donor, but should be distributed to NGO’s with same or similar missions.

The activities carried out by these MFI’s until now have mainly been in violation of the Law on Freedom of Association, and on the other hand, they have exploited all the privileges and rights that this law on NGO’s provides, and have consequently damaged the competition in the banking market.

Driton Selmanaj, KDI

Selmanaj says that all NGO’s, regardless whether they are a branch of a mother NGO, should register in Kosovo and operate in accordance with the laws of Kosovo. According to him, it is scandalous that, through the law on Banks, Micro financial Institutions and Nonbanking Financial Institutions, there are intentions to enable these NGO’s to transform the capital and change legal status, when it is clear that the Law on Freedom of Association of NGO’s has clearly provided that an NGO may be terminated and not be transformed into a bank or another institution.

"The activities carried out by these MFI’s until now have mainly been in violation of the Law on Freedom of Association, and on the other hand, they have exploited all the privileges and rights that this law on NGO’s provides, and have consequently damaged the competition in the banking market ", said Selmanaj.

He says that, regardless how these MFI’s have operated until now, all this capital, including the assets, should not be “privatized” or given away to private persons, but they should be subject to legal provisions delineated in the Law on Freedom of Association of NGO’s and universal principles of freedom of association. As such, the purpose of NGO’s is public benefit and not personal gains of an individual or a close circle of people, least of all those who have managed the NGO.

MFI’s operating in Kosovo were very reserved in providing answers regarding the money obtained as donations, or the profit they generated through them.

The Micro financial institution “KEP Trust” has given partial answers regarding this issue. Despite the insistence by Preports to meet the representatives of KEP to talk about these issues, this was not made possible..

Arta Haxha, public relations officer said that KEP is considering the options provided by the new law on banks, micro financial institutions and nonbanking financial institutions, but did not give an answer regarding the donations, their eventual distribution upon termination, ownership, etc.

"We are in the initial phases of exploring the different options based on the provisions of the new law”, said Haxha.

Mustafizur Rahman, executive director of "Kosovo Grameen Missione Arcobaleno Microcredit Fund (KGMAMF)", says that this micro financial institution began operating in Kosovo in June 2000 in order to help people affected by the war in order that they may rebuild their lives through the implementation of a sustainable program of micro loans through access to Grameen Bank.

"In order to help the people of Kosovo affected by the war, Mission “Arcobaleno” awarded 4 million and 83 thousand dollars to “Grameen Trust” in order to establish a program of micro loans in Kosovo”.

Rahman, likewise, did not give an answer regarding the eventual transformation of this micro financial institution into a bank or joint stock company, as well as on the ownership of these donations, if such a decision is to take place.

While the other micro financial institution "Besëlidhja" (BZMF) did not provide any answer at all on this issue.