Micro-credit expands in Kyrgyzstan

BISHKEK – Kyrgyzstan’s micro-credit system has been growing in recent years, a phenomenon that, according to economists, will help rebuild the country, especially in outlying regions.

Six months ago, Bekpolot Umbetov, 60, a village school teacher in Toktogul District, Dzhalal-Abad Oblast, borrowed 15,000 KGS (US $330) to buy four rams. He is now repaying Finka, the lending company, in monthly instalments of 1,000 KGS (US $22), 12% of his monthly salary.

“Everyone in the village is taking out loans to buy livestock and seeds, for a business or just to throw a family reunion,” he said.

Micro-credit lenders head to the villages

More than 400 micro-credit organisations (MCOs) operate in the country, according to the National Bank. However, the lion’s share of the capital belongs to five or six organisations that foreign donors helped establish. By the end of 2010, Kyrgyz MCOs had increased their loan portfolios by 25% compared to June 2009. In 2010, they lent 15.44 billion KGS (US $340m) to more than 500,000 borrowers.

“MCOs are more flexible and mobile,” financial analyst Bolot Nazarov said. “Although they operate with small sums, they cover more clients. That is why they started significantly spreading into the provinces. ... Micro-loans are precisely what is going to save the villages from ruin.”

“Credit conditions at (MCOs) are much more liberal than (those at) commercial banks,” said Samat Jumushev, director of the National Bank’s Non-Financial Sector Department. “Furthermore, credit organisations are opening branches in the regions, which also facilitates access.”

Micro-lending reaches 5% of the rural population, according to the National Bank. In Central Asia, the usual figure is 1-2%. However, the annual interest rate for most borrowers at private MCOs is 28-30%, twice as high as in Kazakhstan.

Lower rates are available for borrowers who can’t afford such rates. State-backed micro-loan rates from institutions like Aiyl Bank and RSK Bank are at 18% and rural micro-loans are at 9%, Nazarov said.

“Micro-loans have options where you can pay once every three to six months, which is especially beneficial for farmers, depending on their crop,” said Nazarov.

Osh fallout

The June 2010 ethnic riots prevented many southern borrowers from being able to repay, Gulnara Shamshiyeva, director of the MCO Bai Tushum, said.

“Our clients in the south have suffered,” she noted. “We had to come to an agreement and restructure the loans and defer payments. ... Three companies participated in creating the special Vosstanovleniye (Recovery) fund, and we were able to forgive the debts of those who were killed and their bereaved families.”

The higher perceived risk is crimping access to foreign investments, a problem that leads to higher interest rates, she said. “In Kazakhstan, micro-credit companies are receiving tenge from foreign donors at 8-9% (the annual interest rate). For us, taking into account currency exchange transactions, the resources cost 20-21%.”

After the ethnic riots, 50% of all micro-loans go to agriculture, 32.3% to business and catering and 7.5% to consumer needs, according to the Association of MCOs. In 2008, lending to retail businesses accounted for 43.5% and agriculture for 36.8%.

“The increase in lending in the agricultural sector shows that micro-credit companies have re-oriented their activities according to demand,” Ernest Kamchybekov, director of the MCO Elet Kapital, said.

Micro-lenders re-oriented their lending because the border shut down after the turmoil, Shamshiyeva said. “Kara-Suu Market is operating at 10% and Dordoi at 50%. The drop in business has made agriculture the leader.”

Likewise, Nazarov said, “The high cost of imported goods has made people pay more attention to agriculture, which will gradually lead to its blossoming.”

Lowering interest rates

To reduce interest rates on micro-loans, the country needs a stable political and economic environment, Nazarov said. “Forecasts indicate that the situation is stabilising, and this means that in the next year or two we can hope for the possible lowering of rates,” he said.

An additional barrier to reducing interest rates on micro-loans is the lack of domestic resources, Kamchybekov said. MCOs hope a revised law will allow them to accept more deposits than presently permitted, increasing the capital they have to lend.

MCOs had raised the issue before the overthrow of Kurmanbek Bakiyev in April 2010. They are again asking parliament to consider changing the law, which parliament plans to discuss this summer.

The success of the initiative will depend on the country’s overall situation, said. Zarlyk Bekboyev, director of the MCO Bereke Kredit. We need to ensure political and economic stability and develop mechanisms to curb inflation.”

This July, Bishkek will host an international summit for micro-finance donors. MCO directors have great expectations for the summit and are hoping it will lead to a fruitful dialogue since the foreign partners might be able to provide funds at lower rates, Shamshiyeva said.

Villagers are also hoping for a positive outcome. Paying off the loan is not easy, Umbetov said, but he still wants a new loan next year.

“By applying again, it is possible to get more money at a lower rate,” he said. “I am thinking about buying (more) rams so that after I retire, I can ... put food on the table for my family and help my children and grandchildren. In the villages, loans are the best form of assistance.”