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Financing the poor in Central Asia is good business

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Ineximbank's Ruslan Boronbaev says financing the poor is good business

Traditional breadmakers are among the micro clients backed by EBRD's programme in Khujand, Tajikistan

Eskhata Bank's Khurshed Nasirov

In Central Asia, market traders depend on micro credit to build their businesses

EBRD micro credit booms in Central Asia

Lending to the poor sounds like a recipe for banking disaster but “it’s turning into the most profitable part of our business,” says Khurshed Nasirov, chairman of Eskhata Bank in the Central Asian republic of Tajikistan.

Next door in the Kyrgyz Republic, Ruslan Boronbaev of locally-based Ineximbank concurs: “Poor people can be good clients. That’s why we’re working with them, to provide them with credit. Often they’re more disciplined than other clients.”

The two lenders are among the many local commercial banks in which the EBRD has invested both money and technical advice to encourage lending to micro and small enterprises, many of which are owned by the poor.

Micro credit an appealing niche

Like many banks in the region, Ineximbank and Eskhata Bank were initially sceptical that small loans could be manageable and profitable. But both are now converts to micro lending which in the Kyrgyz Republic, for example, grew by 250 per cent between January-August 2004.

“We expect our micro credit business to double within a year. Our bank’s overall growth is very much dependent on this portfolio,” says Mr. Boronbaev.

“Listen,” says Mr. Nasirov, “we make 30 per cent interest on micro loans compared with 24-25 per cent on other loans” which are mainly to industrial enterprises and agricultural concerns. While 30 per cent interest seems high, it’s needed to cover salaries for the large number of staff required to manage big portfolios of very small loans. And it’s better than the 120 per cent charged by loan sharks.” The interest rates decrease over time as competition in micro credit grows and economies of scale and greater efficiency contribute to profitability.

“We have zero arrears in our micro loan portfolio,” says Mr. Nasirov. “So you can see why we’re interested in micro finance. It makes sense as a niche for us, given the structure of our economy,” he adds.

Kyrgyz Republic and Tajikistan are the two poorest countries in Central Asia: 83 per cent of Tajiks and 41 per cent of Kyrgyz live below the national poverty line. Micro loans are tailored to fit the aspirations and capacities of this market. Roughly 20 per cent of Kyrgyz loans and 38 per cent of Tajik loans in August were for less than $1,000, some as small as $100. The bulk -- almost 50 per cent – was in loans of $1,000-$5,000.

Breaking down negative attitudes

As part of its mandate to promote the transition of former command economies to market economies, the EBRD is working to broaden the availability of credit to micro and small enterprises, seen as the engines of economic growth and job creation. For example $15.5 million loaned to small businesses in the Kyrgyz programme since April 2002 has helped create or sustain 20,000 jobs.

Not all banks have been won over, though. “The problem is that established banks want to lend to the establishment and don’t see that they can make money lending to people who have never borrowed before,” says Maria Teresa Zappia, a member of the EBRD’s Group for Small Business. More than 85 per cent of the Tajik programme’s clients had never before had a bank loan, with almost half the loans going to women who, worldwide, tend to have greater difficulty than men in accessing credit.

“The EBRD has invested in Eskhata Bank, for example, because Eskhata is not interested in a client’s political connections or whether they can curry favour with the government. They’re interested solely in the client’s ability to repay. Because it is built on solid business principles, their lending programme is sustainable.”

Ensuring sustainability

Sustainability is a key issue for micro finance. The EBRD view is that the programme’s longevity can be best guaranteed when it is delivered via local banks such as Ineximbank and Eskhata. The EBRD invests, either through loans and/or equity, in such partner banks which then ‘on-lend’ that money and their own capital to new micro clients.

Often the pump has to be further primed through carefully targeted subsidies. The Group for Small Business obtains grants from donor governments for these purposes. Consultants funded by donors guide the local banks in establishing micro credit departments and train and monitor young loan officers in this non-traditional lending. Loan officers’ salaries are subsidised for a limited period after which the employee must be transferred to the local bank’s own payroll. Donors involved in the joint EBRD-International Finance Corporation programmes in Kyrgyz Republic and Tajikistan are the US Agency for International Development, Swiss State Secretariat for Economic Affairs, the European Union’s Europe Aid Programme (TACIS) and the UK’s Department for International Development.

Sustainability in the programme is on track. Six out of 16 Eskhata micro credit officers are already on the bank’s payroll and the bank has invested $1 million of its own capital in micro finance. At Ineximbank, 21 out of 50 micro credit bankers are paid by the bank which has put $0.7 million of its own into the programme.

“We want to invest more of our own money and develop the micro finance programme further,” says Ineximbank’s Mr Boronbaev. “The EBRD gave us this new system of micro credit that didn’t exist here before. This has been a very good thing.”

As of July 31 Eskhata had an overall portfolio of $3.5 million in outstanding loans; of that, $900,000 was in micro loans under the programme of $10,000 or less. Ineximbank’s outstanding loan portfolio of $20 million at the end of August included $3 million in micro credits.

8 October 2004