HOW THE CIVIL SOCIETY PREVENTED THE TRANSFORMATION OF MICROFINANCIAL NGOS INTO PRIVATE BUSINESSES
On 12 April 2013, the Constitutional Court of the Republic of Kosovo decided to declare as unconstitutional the articles of the Law on Banks, Micro-financial Institutions and Non-Bank Financial Institutions (No.04/L-093) which enabled the transformation of micro-financial institutions into joint stock companies. This decision was reached based on the case raised by the Ombudsperson through the request of Kosovar Civil Society Foundation (KCSF), Fol Movement, Kosovo Democratic Institute (KDI) and 55 other supporting NGOs.
The transformation of NGO Micro-financial Institutions (MFI NGOs) into joint stock companies, namely into private entities, was an issue powerfully pushed forward by a number of MFI NGOs and other stakeholders ever since 2005, and during this period was continuously rejected by the Kosovo civil society. Similar processes to allow such transformation by the law were also made in 2009, 2010 and 2011, mainly through the Law on Freedom Association in NGOs or other secondary legislation, but were prevented on time due to active objections from the civil society. However, the objection of the civil society and of a large number of MPs did not prevent the Assembly of Kosovo to approve the Law on Banks on 12 April 2012, and would have allowed such transformation. Exactly one year after the controversial approval, the Constitutional Court decided in favor of the request of the civil society and annulled all the provisions of this Law that enabled the transformation of NGO capital into private capital.
Micro-financial institutions originated in the countries of the Far East, and their main goal is providing economic assistance to the poorest categories of the population, who otherwise do not have access to the private bank system. These institutions achieve this goal by offering small loans to certain categories exempted from the commercial bank system. In general, the main goal is not to profit but to alleviate poverty. As such, micro-financial activities serve the general good, and can be registered as NGOs. Furthermore, since it is assumed that through their activities they take over an obligation of the state (economic development of the country and aid for the most impoverished) and as NGOs that cannot generate profits, they usually gain the Public Beneficiary Status, which means being exempted from certain taxes, mainly exemption from tax on profit. This is the main reason that the initial capital of these institutions is provided by international donors, within the overall aid for poor countries. The natural goal of micro-financial NGOs should not be to increase capital but rather to increase assistance to the poor. The increase in capital which is generated through loan repayment should be used similarly for the same mission, usually by increasing the number of beneficiaries. Being that micro financing is a characteristic of poor countries, their aim is that by increasing the standards of living in a country, their capital would diminish, until such time where in the end it would be extinguished entirely.
Such institutions do not exist in developed countries, or they are very rare. In Kosovo, since 1999, micro-financial NGOs have increased their capital manifold from the initial capital, and this mostly by offering loans at a high rate of interest. The applicable legal framework in Kosovo, which is based on international principles for this domain, did not allow for such a thing. Despite this, instead of having a goal to fully implement legal obligations, a number of MFI NGOs and public institutions have requested that this illegal activity is legalized and even officially transform MFI NGOs into private companies, and as such to be allowed to profit from their financial activity.
Since the civil society prevented the transformation of MFI NGOs through the Law on Freedom of Association in NGOs in 2011 during the drafting stage of the said Law, the Central Bank of Kosovo and Ministry of Finance endorsed the Law on Banks, which, amongst others, included a special chapter on Micro-financial Institutions. By violating the Rules of Procedure of the Government 09/2011, the draft of this Law was kept closed for the public throughout the drafting at the Government level, and the civil society was only informed on its contents when this Draft Law was forwarded to the Assembly for approval. Immediately after analyzing this Draft Law, the KCSF and some other organizations invited the civil society sector for support and began their attempts to remove the controversial provisions from this Draft Law. The advocacy process was based on a thorough analysis of its contents that included the identification of constitutional and legal violations, as well as the violations of international principles of the Law on Profit.
Furthermore, the concept of micro-financial NGOs was explained together with the damage that may be caused to the civil society and Kosovar society in general, in case of their transformation into private businesses. Since the representatives of the civil society were not allowed to present these arguments in front of the Committee for Budget and Finance, numerous individual meetings with the heads of parliamentary groups and Assembly committees made possible the proper and accurate informing of those that would vote on this law. Also, media appearances helped in creating a kind of public pressure against the controversial provisions of this Law. Despite the support from opposition MPs who boycotted a number of sessions during which this Law should have been discussed, the Assembly of Kosovo finally approved it on 12 April 2012. Furthermore, during the session of 12 April, according to the official transcript of the Assembly, there hadn’t been a quorum, whereas the Draft Law did not even receive the approval of the Parliamentary Committee for Legislation beforehand, as is requested by the Rules of Procedure of the Assembly. The civil society continued with pressure even with the President of Kosovo, by asking her to send the Law on Banks back to the Assembly, but such a request was not even taken under consideration.
Having exhausted all means to oppose this Law, the civil society used the last legal remedy available to it – the Constitutional Court of the Republic of Kosovo. Not having the right to send laws to be reviewed by the Constitutional Court, the civil society organizations used the Ombudsperson Institution, which, on behalf of the involved organizations presented the case to the Constitutional Court. KCSF and other organizations involved aided the Ombudsperson Institution to prepare the case for the Constitutional Court, as well as defend the request during the hearing session that was organized by this Court.
In its request, the civil society identified three articles of the Constitution of Kosovo which violated the Law on Banks, those being:
Article 44 – Freedom of Association
Being that the MFI NGOs were founded based on the Freedom of Association guaranteed by the Constitution, by changing the legal designation of the MFI NGOs and by allowing them to transform into join stock companies, the Law on Banks was removing them from the field of operation of this article and hindering their right to function based on the freedom of association.
Article 46 of the Constitution – Protection of Property
Being that NGOs (including micro-financial ones) are founded and operate based on the Not-For-Profit Law, and as such have no owners, by allowing the transformation of MFI NGOs into joint stock companies, the Law on Banks arbitrarily alienates NGO property, by transferring property from NGOs to other legal or natural shareholding persons.
Article 10 – Economy
By violating the constitutional principle of the market economy with free competition and by allowing the transformation of MFI NGOs into joint stock companies, the Law on Banks allowed capital that was gathered without paying any tax to be injected into the commercial market of the banks and other financial institutions that paid taxes from the time they were established.
The engagement of the civil society for a number of years in objecting the alienation of the assets of micro-financial NGOs and their transformation into joint stock companies was crowned with success on 12 April 2013, when the Constitutional Court decided in favor of bringing down the provisions that allowed such a transformation. This success was proof that through professional and selfless engagement, despite the numerous problems of governance and rule of law in Kosovo, initiatives that are damaging to the country may still be stopped.
Certain factors that had a positive impact in this success were: building arguments and objections based on expertise; consistency in stances and actions; initiative and continuous contribution by a group of civil society organizations which were called upon and had the expertise in the respective field; support for the initiative by a large number of other organizations, which believed and supported the arguments of the initiating organizations; combining advocacy means, and the most important one – care towards procedures and submission of each case in writing, which at the end also helped in building the winning case at the Constitutional Court.
For further details related to this case and the Judgment by the Constitutional Court, visit http://www.gjk-ks.org/repository/docs/KO97_12_AGJ_SHQ.pdf.