FIESS 2011 Relevance and Challenges of Legal Foundations for NPO-Banks in Japan

1. FIESS 2011 Relevance and Challenges of Legal Foundations for NPO-Banks in Japan 17-22 October 2011 Auditor of Japan NPO-BANK Network Yuko Uehara

2. About the Japan NPO-Bank network （as of 05th January 2010） • Founded spontaneously by the civil society • Provides loans to socially-requested needs (without differentiating between social benefit and reciprocity) • Non-profit (although dividend is allowed according to the law) • The fund provided by the civil society is used for loans • Main goal: to give loans to civil society projects (not necessarily by NPOs, but with priority to the solution of social tasks) Currently 12 NPO Banks (strictly defined)(21 banks in a broader sense) Formulated by Japan NPO-BANK Network：全国のNPOバンクの現況【解説】 (Last revision: 05th January 2010)

3. List of NPO Banks in Japan （as of March 2011） （In: thousand of yens） In reference to Japan NPO-BANK Network：全国のNPOバンクの現況　(http://www.NPObank.net/docs/201103_NPObank_Genkyo.pdf）

4. Example: Hokkaido NPO Bank (HNB) NPO Juridical Person HNB / NPO Bank Business Partnership HNB’s mechanism Address Hokkaido NPO Support CentreKuwagata Building, 2nd Floor, South 2 West 10,Chuo-ku Sapporo-shi 060-0062 JAPAN Organisation form NPO Bank Business Partnership＝Voluntary Partnership (Civil Code Art. 667) NPO HNB＝NPO juridical person （registered as money lender no. 02730 at Ishikari, Hokkaido (T3)) People Businesses Public sector NPOs Capital injection NPO Bank Business Partnership Business size Total capital;Appr. JPY 44.71 million Total loans:Appr. JPY 270.27 million Pending loans:Appr. JPY 11.31 million JPY 7.03 million donation on top of capital （as of end of March 2011) Repay Supporters Loans Donations • Supporter requirement– Individuals over 20, corporations and organisations etc. Need to submit the application form, to get the approval at the Board of Directors and to transfer money at the designated bank account. • The minimum fund is JPY 10,000 • The funds are redeemable only during a certain period after the annual closing of booking • No guarantee for principle nor dividend to funds • The whole capital is financed to HNB. • HNB finances this money into NPOS and workers’ collectives. Loans HNB NPOs Repay Elaborated on the basis of Hokkaido NPO Bank：NPOバンクについて（http://NPObank.blogspot.com/）

5. Laws affecting NPO Banks • Capital Subscription Law (CSL) • Financial Instruments and Exchange Act (FIEA) • Money Lending Business Act (MLBA)

6. In relation to the Capital Subscription Law (CSL) About CSL Formal names is “Act on Regulation of Receiving of Capital Subscription, Deposits, and Interest Rates, etc.”, stipulated in 1954. It restricts the acceptance of funds from general public promising to repay more than the paid amount, forbids non-banks to accept deposits unless otherwise stipulated at other laws, forbids illegal loans by financial institution‘s employees, restricts the commission fee on borrowing money and stipulates punishments on usury in order to prevent unforeseen damages to investors and economic chaos. It was revised in 1983 to lower the maximum interest rate and is considered as regulating law of consumer finance together with “Money Lending Business Act” which was formulated at the same time. Challenges and replies • CSL forbids non-banks to guarantee principles and to plan to distribute dividend • - Risks of no-guarantee is clarified at NPO Banks’ pamphlets • - NPO Banks have decided not to distribute any dividend at all because of FIEA

7. In relation to the Financial Instruments and Exchange Act (FIEA) About FIEA The Securities and Exchange Act, stipulated in 1948, was changed into FIEA in 2006. It aims to realise the issue of securities and financial goods in a fair manner, to circulate securities smoothly, to form fair prices of financial products by fully realising the functions of the capital market, to develop the national economy decently and to protect investors. It arranges the disclosure system on corporations and stipulates requirements on Financial Instrument Businesses in order to ensure the appropriate management of financial instruments exchanges. Challenges and replies • The elaboration of prospectus and registration for the 2nd Financial Instruments Business is required, which is a huge burden for NPO Banks which have been supporting the civil society almost entirely by volunteers and the application of this rule would raise the interest rate too much, jeopardizing the raison-d’être of NPO Banks themselves • - Won the exemption on the condition of not allowing the distribution of dividends as “investments without distribution of monetary profit such as interest and dividend are not to be regarded as financial products”

8. In relation to the Money Lending Business Act (MLBA) About MLBA MLBA was stipulated in 1983 changing the money lending business from notification to registration with the aim to change to run this business appropriately and to protect the interest of money borrowers and was revised in 2007. Over its revisions, the Gray Zone for interest rates was abolished, more punishment is given for non-registered money lenders, more restriction on day-time repayment collection on top of nighttime one was strengthened, a measure is taken to avoid excessive lending and borrowing (borrowing more than a third of your annual income is forbidden) and the need to confirm the borrowers’ whole debt amount at Designated Credit Information Institution is stimulated. It is considered as a regulating law on consumer finance. Challenges and replies • Increase of money lender‘s minimum net asset to JPY 50 million • Compulsory enrollment into the Designated Credit Information Institution • Introduction of Total Volume Control • Obligation to have one full-time counselor who has worked for providing loans for at least three years • -A special rule of JPY 5 million is added for net asset requirement • -Other requirements are exempted on the condition of maximum 7.5% annual interest rate for the indigent or for socially beneficial non-profit lending (17 fields at NPO Act)

9. Towards NPO Banks’ future • “No dividend for investors” restricts the potential of civil society activities • NPO Banks are obliged to pay money lending agency registration fee and financial ADR (Alternative Dispute Resolution) yearly contribution because of its character as money lenders • NPO Banks, performing on the non-profit basis, will be affected by regulations aimed at commercial organisations every time a new law revision is done Future challenges • The Democratic Party, taking power in 2009, aims at “promoting a new public sphere,” positioning NPO Banks as a financial scheme for “a new public sphere” • Lobbying for the stipulation of NPO Bank act to enable the setup of non-profit bank juridical person and discussing specific requirements, governance and interest rates • A permanent counselor at JNBN joins “A new public sphere” promotion congress, proposing how NPO Banks will be • Civil Society Policy Investigation started a research project on “legal systems on new non-profit financial projects beneficial to local communities,” trying to propose policies to build such systems Towards the future More expectation on non-profit and socially-beneficial finance, so appropriate law is now needed for such needs

10. Fin