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 ASTANA 00001721 001.2 OF 002 Summary -------------- ¶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 -------------- -------------- ¶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 ASTANA 00001721 002.2 OF 002 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 -------------- ¶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 5