KAZAKHSTAN - IMPACT OF THE GLOBAL CREDIT CRUNCH ON THE

UNCLAS SECTION 01 OF 02 ASTANA 001721

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAID KZ
SUBJECT: KAZAKHSTAN - IMPACT OF THE GLOBAL CREDIT CRUNCH ON THE
MICROCREDIT INDUSTRY

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Summary
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1. Even in resource-rich Kazakhstan, the global credit crunch is
having a major impact. This impact is being felt throughout the
financial system; however, the microcredit industry has been
surprisingly resilient. Long a partner in fostering microcredit
industry growth, USAID support has spanned the spectrum from legal
reform, to capital investments, training and advocacy, and technical
assistance to state-established development institutions, including
the $300 million Enterprise Development Fund (DAMU). Support has
helped to lay strong foundations which have enabled micro
entrepreneurs to contribute to economic diversification. On
September 18, the USAID Mission Director will speak at a conference
in Astana highlighting these gains and future challenges. End
Summary.

Creation and Expansion of the Microcredit Industry
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2. USAID has always seen microfinance as a means of providing
economic opportunities to the poor through sustainable financial
services. Since the mid-1990s in Kazakhstan, it has played a
pivotal role in the establishment and expansion of the microcredit
industry. Initial support included providing capital and technical
assistance for the establishment of microcredit institutions,
including KazMicroFinance, the Asia Credit Fund, and the Farmer's
Fund. All of these organizations have since matured into profitable
institutions, with KazMicroFinance alone garnering more than 26,000
clients and holding an outstanding loan portfolio of $40 million.
KazMicroFinance was even listed as the 37th best microfinance
institution in the world by Forbes magazine and is in the process of
converting to a commercial bank by late 2009.


3. Initially unrecognized by the Kazakhstani government, the
industry received a boost when the government passed the
USAID-supported "Law on Microcredit Organizations" in 2003. The law
outlined the basic legal framework of the industry by defining two
types of microfinance institutions: (1) limited liability,
for-profit partnerships and (2) non-profit, public funds. The
microfinance law allows a maximum loan amount of 8 million
Kazakhstani Tenge (approximately $67,000 USD),though actual loan
sizes average approximately $2,500.


4. The industry received a second boost when it was successfully
argued that the industry contributed to the Kazakhstani government's
policy of economic diversification. The government has long
recognized the need to diversify its economy and as early as 1997
established an $83 million Small Enterprise Fund (SMEF),which was
tasked with expanding financing to micro, small and medium
enterprises. In 2005, SMEF began lending to microcredit
organizations directly and until 2008 its annual financing was
approximately $15.5 million per annum.


5. In 2004, USAID established the Association of Microfinance
Organizations of Kazakhstan (AMFOK) which has since garnered
significant recognition from the government. AMFOK has played a key
role in the development and expansion of a number of microcredit
organizations through training and technical assistance and in
initiating and passing amendments to the original micro-lending law.
AMFOK has since grown to comprise more than 70 members with 51,267
clients and active portfolios totaling $161 million. It is well on
its way to complete operational and financial sustainability.


6. In 2003, USAID also set up a regional wholesale lending
institution, Frontiers, that lends to microfinance organizations to
increase their liquidity and loan capital. Frontiers has since
become fully sustainable (ROE 13%) and maintains an outstanding loan
portfolio of over $10 million.

The Global Credit Crunch
--------------


7. The onset of the global credit crunch has had a major impact on
the economy of Kazakhstan. From 2001 to 2007, real GDP growth
averaged 10 percent annually. Based on oil sector development that
was matched by generally prudent macroeconomic policies, structural
reforms, and increased access to global financial markets, real per
capita income had doubled since 2000 and social indicators improved.
The banking sector played a key role in this rapid growth. Most
banks, which account for 80 percent of total financial system
assets, are still locally and privately owned, although foreign
participation has increased. The sector is highly concentrated, with
the five largest banks accounting for 78 percent of market share.
Banks have been very reliant on external financing, with external
liabilities making up about 45 percent of their aggregate balance
sheets.


8. From January 2005 until August 2007, easy access to external
funding had fueled very rapid domestic credit growth -- an annual
average growth rate of 70 percent had brought credit to around 75

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percent of GDP. Lending was mainly to the household, trade, and
construction sectors, while the energy sector does not rely on
domestic Kazakhstan banks for financing. Speculative behavior in
the real estate market was fueled by relatively cheap credit, which
also fostered the introduction of new financial products. As in
other over-inflated property markets, the credit crunch has led to a
significant decline in construction and property market activity
which has not only left banks and individuals with overpriced assets
and dried-up credit lines, but stifled growth, cut employment and
reduced purchasing power.


9. The credit crunch also negatively impacted the growth of the
microcredit industry, with individual micro credit organizations
facing liquidity crises and with microcredit clients facing the loss
of profitable opportunities. Particularly hard hit were the
numerous small and young microfinance organizations which had
limited capacity. Some of these smaller organizations had been
supported by the Kazakhstani government's credit program, which was
accused of mismanagement and corruption. Towards the end of 2007
there we roughly 1,086 registered microcredit organizations in
Kazakhstan but approximately half were not active.

Surprisingly Resilient Sector
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10. Despite the recent challenges faced by the microcredit industry,
the loan portfolios of AMFOK's members in the first quarter of 2008
increased by 5.4% compared to a year earlier.


11. Amidst accusations of management and corruption, at the end of
2006 a new chairman, Amrin Gosman was appointed to head SMEF, which
was renamed the Enterprise Development Fund (DAMU). In 2007, DAMU
was recapitalized at $366 million. After Gosman participated in a
USAID tour to study public and private SME support networks in
Poland (he would also later visit Hungary and the U.S. for this
purpose),he requested additional technical assistance in assessing
DAMU's capacity and operations as a government owned, non-banking
financial institution. The silver lining of the crisis and
mismanagement has been the government's recognition that it can not
pick winners and that it needed to improve operations. USAID's
study tours and technical recommendations focused on outsourcing
direct SME lending to commercial banks and micro-credit
organizations and on risk management.


12. The openness of DAMU to donor and industry advice, and another
major plus-up to DAMU capital will result in the outsourcing of $2.2
billion in SME credit lines via seven intermediary banks for a
period of between five to seven years. With respect to microcredit,
Damu intends to lend between $16-20 million per annum to
micro-credit organizations during the same period. In mid 2008 DAMU
received 45 applications from micro-credit organizations and
approved half of them. USAID technical support to DAMU in both the
areas of financial and business development services will continue
through a number of USAID activities.

Challenges and Future Direction
--------------


13. The Microcredit industry still has a long way to go in
Kazakhstan. Further consolidation, financial products for rural
areas, and legislation which enables balanced regulation for limited
savings mobilization are but some of the challenges the industry
faces. Despite these challenges the future looks bright. As USAID
winds up its support to the sector in 2009, it is leaving behind a
strong advocacy group (AMFOK),a more professional and market-based
government counterpart (DAMU),and a second-tier lending institution
(Frontiers) which will be used to establish a $100 million regional
agricultural development fund, enabling it to continue to provide
liquidity far into the future.


14. Through 2009, USAID will provide support to build the capacity
of AMFOK to ensure its operational and fiscal sustainability. AMFOK
will provide ongoing advice and support in maintaining high industry
standards and in improving the policy, legal, and regulatory
environment for the microfinance sector. A joint AMFOK and DAMU
microfinance conference on September 18 is an indicator of the
stature that AMFOK has achieved. Such workshops which bring
together leading microfinance practitioners, association executives,
and government regulators and policymakers to analyze the state of
the industry and share information and best practices are
invaluable.

ORDWAY



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