microfinance in kazakhstan: an inclusive financial sector for all

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This report from UNDP Kazakhstan—the first in the country to focus on microfinance—presents international and national microfinance practices, and provides recommendations for the development of an efficient and effective microfinance industry in Kazakhstan.

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Page 1: Microfinance in Kazakhstan: An Inclusive Financial Sector for All

an inclusive financial sector for all

Page 2: Microfinance in Kazakhstan: An Inclusive Financial Sector for All

Àlmaty 2005

MICROFINANCE IN KAZAKHSTAN:AN INCLUSIVE FINANCIAL SECTOR FOR ALL

Page 3: Microfinance in Kazakhstan: An Inclusive Financial Sector for All

Report materials could be reproduced in otherpublications, without prior permission of UNDP, provided

proper reference is made to this publication.

The views expressed in this report are those of the authorsand do not necessarily represent the views of UNDP.

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Yuriko Shoji

The UN General Assembly has declared thisyear, 2005, as the International Year of Microcre-dit and called for governments, UN agencies,non-governmental organisations, private sector andmass media to make their contributions in buildingcapacity in the microfinance sector. At the sametime, all parties involved in poverty reductionhave been called to take additional steps to streng-then existing and start-up microfinance institutions,so that they can effectively provide services forself-employment and income generation to thepoor. In this framework UNDP Kazakhstan hasdecided to contribute by reviewing the develop-ment of microfinance in Kazakhstan and the chal-lenges it faces.

Until 1976 there was a latent perception that poorpeople were not able to receive and manageloans. It was believed that providing credit to thepoor was too costly, laborious and unreliable. In1976, however, professor Mohammed Yunus and hiscounterparts from Bangladesh began handing outsmall loans to poor people, and in few years theycreated one of the icons of microfinance, theGrameen Bank. With this experience and the onesof equally successful microfinance institutions aroundthe globe, microfinance has been shown to be anessential tool for poverty reduction.

In 1997 the Microcredit Summit launched acampaign targeting the year 2005 for achievingmicrocredit coverage of 100 million poor. Thisfirst objective is almost achieved, considering aMicrocredit Summit Campaign report claimingthat over 80 million poor households receivedmicrocredit in 2003. However, microfinance is yetto be implemented in full, with an estimated 1billion poor people without basic access to finan-cial services. Based on the past success, at therecent Microcredit Summit in Santiago it wasannounced that the campaign would be extendedto 2015. The new goal of the campaign is to

ensure that 175 million of the world's poorestfamilies are receiving credit and related servicesfor self-employment by the end of 2015.

In Kazakhstan the first microcredit project emergedas early as the mid-1990s. Since then, microcreditagencies have significantly expanded the scopeof services and now provide a broad range offinancial products to the poor. Their operations arespread throughout the whole country, but they arenot able to meet the increasing demand for basicfinancial services. Moreover the microfinance sectordemands continued attention from the Govern-ment and support from international organizations.

The Government of Kazakhstan already considersmicrofinance as an effective tool for povertyreduction. Reference to microcredit is included inthe national development strategy "Kazakhstan2030" and the Poverty Reduction Programme for2003-2005 - elaborated with assistance of the UNDevelopment Programme and the Asian Develop-ment bank - identifies the "number of microcreditgiven to poor households" as a poverty reductionindicator.

This report presents an updated outline of interna-tional and national microfinance practices, and iden-tifies challenges and provides recommendations forthe development of an efficient and effective micro-finance industry in Kazakhstan. The report analyzesthe major strengths and weaknesses of existingmicro-lending models in the context of the currentpolicy and legal environment in Kazakhstan andprovides recommendations for policy-makers.

It is my hope that the report will promote betterunderstanding of microfinance as an economictool for improving the lives of the people ofKazakhstan. UNDP is looking forward to workwith the Government and other partners to makethis possible.

FOREWORD BY YURIKO SHOJIUN RESIDENT COORDINATOR/UNDP RESIDENT REPRESENTATIVEIN KAZAKHSTAN

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Microfinance in Kazakhstan: an inclusive financial sector for all

FOREWORD BY SAUAT MYNBAEVMINISTER OF INDUSTRY AND TRADEOF THE REPUBLIC OF KAZAKHSTAN

Today, the reforms being conducted in Kazakhstangive their first significant results. The financialsector is developing rapidly, living standards ofpopulation are getting better, and several mea-sures aimed at development of stable economyare being undertaken in Kazakhstan.

The financial sector of Kazakhstan includes com-mercial banks, credit partnerships, microcreditorganizations and other financial institutions. Thelegislative foundation of Kazakhstan's financialmarket was established, the Concept on FinanceSector Development was adopted. Adoption of thenew laws considerably increased the effectivenessof the financial system of Kazakhstan.

Support to small and medium enterprises is con-sidered to be a priority of the Government'seconomic development strategy. High emphasis isplaced on introduction of innovative informationtechnologies and establishment of legal frame-work favourable for entrepreneurs.

However, despite the rapid economic growth andcontinuous government support to SMEs, unem-ployment is still an acute problem in Kazakhstan.In this situation, microcredit becomes an effectivetool to support the economically active popula-tion and to stimulate the entrepreneurship incen-tives and, as a result, to attract the private capitalinto the financial sector.

Microcredit organizations provide access to loanfunds for SMEs, contribute to the establishment ofthe credit culture of population and, thus, to theirexclusion from the informal financial sector, which

is still considered to be the main source offunding for microenterprises.

A set of measures aimed at development ofmicrofinance in Kazakhstan has been undertaken.Its major objective is creation of the enablingenvironment for independent and effective micro-credit organizations, which will ensure continuousfunding for entrepreneurs, promote competitive-ness on the finance market as well as increasethe entrepreneurship potential of the population.All of these will help to overcome social chal-lenges by creating new jobs, increased self-em-ployment and incomes of the population.

The report "Microfinance in Kazakhstan: an inclu-sive financial sector for all" is one of the firstattempts to analyze the microfinance sector inKazakhstan. The report gives an overview of theexisting microfinance sector in the country, ana-lyzes the demand for microfinance as well asassesses the potential for further development andimprovement of the sector. International best prac-tices and recommendations, presented in the re-port, are of the special interest.

I believe that the report would be a valuablesource for government officials, international orga-nizations and other microfinance players in Kaza-khstan.

I would like to take this opportunity and toextend my gratitude to the United Nations Devel-opment Programme in Kazakhstan. I hope for ourfuture fruitful cooperation on microfinance issuesin Kazakhstan.

Sauat Mynbaev

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Foreword by Yuriko Shoji, UN Resident Coordinator/UNDP Resident Representative in Kazakhstan .............................................. 3

Foreword by Sauat Mynbaev Minister of Industry and Tradeof the Republic of Kazakhstan ....................................................................... 4

Executive summary .......................................................................................... 7

Acknowledgements ........................................................................................ 11

Acronyms ....................................................................................................... 12

CHAPTER 1 Conceptual framework ............................................................ 13

1.1 An inclusive financial sector for all ...................................................... 13

1.2 Microfinance services and institutions ................................................... 16

1.3 Financing microcredit and sustainability ............................................... 19

1.4 Microfinance social and economic impact .......................................... 21

1.5 Challenges, findings and conclusions ..................................................... 23

CHAPTER 2 Microfinance global development .......................................... 24

2.1 International initiatives in support of microfinance ............................. 24

2.2 Microfinance best practices .................................................................... 26

2.3 Microfinance in transitional economies andin Central Asia .......................................................................................... 27

2.4 Major findings and conclusions .............................................................. 31

CHAPTER 3 Microfinance in Kazakhstan ................................................... 32

3.1 Background ................................................................................................ 32

3.2 Microfinance sector outlook ................................................................... 32

3.3 Microfinance in Kazakhstan: institutional outline ................................ 34

3.4 Assessing microcredit demand and supply ........................................... 36

3.5 Microfinance strategies and methodologies .......................................... 43

3.6 Barriers for developing microfinance .................................................... 46

3.7 Institutional actors: the state, internationalorganizations and donors ........................................................................ 47

3.8 Principal findings and conclusions ......................................................... 51

Contents

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Microfinance in Kazakhstan: an inclusive financial sector for all

CHAPTER 4 Opportunities and challenges ................................................. 52

4.1 Legal and policy improvements to enhance microfinance ............... 52

4.2 Alternatives to foster microfinance development ................................. 53

4.3 Enhancing the impact of microfinance on social and economicdevelopment .............................................................................................. 57

4.4 Major findings and conclusions .............................................................. 60

Conclusions and recommendations ............................................................. 62

Bibliography ................................................................................................... 65

ANNEX 1 Glossary of terms and indicators ............................................... 68

ANNEX 2 General review of microfinance literature ................................. 72

FIGURES

1.1 The poor use financial services to�? ................................................... 13

1.2 Main components of microfinance services ......................................... 14

1.3 Microfinance environment ....................................................................... 15

1.4 Microfinance service providers .............................................................. 18

3.7 Number of microcredit organizations in Kazakhstan ......................... 41

TABLES

2.1 Microfinance in Central Eastern Europe andin the Newly Independent States .......................................................... 28

2.2 Top 10 MFIs in CEE and NIS (number of clients) ............................. 28

2.3 MFIs in Central Asia ................................................................................ 29

2.4 Outreach indicators for Central Asia ..................................................... 30

3.1 Microfinance institutions in Kazakhstan ................................................ 33

3.2 Microfinance law framework ................................................................. 36

3.3 Poverty in Kazakhstan ............................................................................. 37

3.4 Microcredit demand - standard of living approach ........................... 38

3.5 Microcredit demand - private sector approach .................................. 39

3.6 Commercial banks' microcredit portfolio .............................................. 41

3.8 Geographical distribution of microcredit organizationsin Kazakhstan ........................................................................................... 42

3.9 UNDP/AMFOK survey results: largest MFIs in Kazakhstan ............... 42

3.10 ACCION CAMEL quantitative and qualitative indicators .................... 47

4.1 International microfinance investor funds in Kazakhstan ................... 54

4.2 Comparison of SME contributions to the nationaleconomy in selected states ..................................................................... 58

4.3 Moldir Women's Association activities ................................................... 60

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EXECUTIVE SUMMARYThe International Year of Microcredit is a remark-able opportunity to highlight microfinance as animportant instrument for economic and social de-velopment. As well it provides a perfect chanceto evaluate the remarkable results of twenty yearsof microfinance development. International con-sensus now considers microfinance to be one ofthe main tools to achieve poverty reduction goalsand to improve the daily lives and well being ofpeople.

This report provides an overview on why and howmicrofinance has emerged and evolved in thepast twenty years. It describes microfinance ser-vices and microfinance institutions and reviewschallenges facing the microfinance sector. Thissectoral information is intended to offer the essen-tial tools for understanding the latest develop-ments in microfinance in the world and specifi-cally in Kazakhstan. The report analyzes the stateof the microfinance sector in Kazakhstan, itschallenges and opportunities, and explains itsimpact on society and the economy. The reportthen reviews several options for the developmentof the sector and suggests a number of specificrecommendations for the main stakeholders.

The main conclusions and recommendations ofthis report are based on a number of importantstudies that were recently conducted on the mi-crofinance sector in Kazakhstan. Most significantamong these was a survey sponsored by theUnited Nations Development Programme (UNDP)and conducted by the Institute for Social Surveyin February and March 2004. UNDP and theAssociation of Microfinance Organizations in Ka-zakhstan organized another survey in August andSeptember 2005 to assess the supply of microfi-nance in Kazakhstan.

The definition and breadth of microfinance haveevolved over time. The term now refers to finan-cial services that are targeted at low-incomeclients including credit, savings, insurance andmoney transfer services. Microfinance has cata-lyzed opportunities for millions of poor people.While many have already had the chance tobecome economically productive members of so-ciety as cash income earners and entrepreneurs,the number that have not had this opportunity iseven larger. It is in fact for many of these mostvulnerable individuals that the impact of microfi-nance is most significant and convincing. Thechallenge is to create a financial sector thatserves these groups -- an inclusive financial sectorfor all.

Microfinance has already proven to be an effec-tive tool to fight poverty and a useful means toachieve the MDGs in a sustainable way. Yet theimpact of microfinance is not limited to thecreation of new and diversified incomes -- thepositive personal and social outcomes are ofteneven more striking. The enhancement of self-esteem, the expansion of people's choices and theempowerment of women are among the bestassets produced by micro loans.

Over the years microfinance evolved as a viableindustry with great client outreach and social andeconomic impact in many countries. Today themicrofinance sector has expanded to include glo-bally between 10,000 and 15,000 institutions thatconsistently reach more than 80 million poorpeople.

Microfinance arrived in Central Asia only in theearly to mid-1990s, leaving countries in the re-gion far behind the world's average for develop-ment in the sector. Despite this late start, one ofthe highest growth rates in the world has quicklybegun to reduce this gap. Indeed, the financialand operational efficiency levels of Central Asianmicrofinance institutions (MFIs) show good results,but access to microfinance services remains lim-ited. Microfinance has shown positive impact onpoverty alleviation among the countries of Centraland Eastern Europe and the Newly IndependentStates, with successful examples in Russia, Polandand other parts of Eastern Europe. Of all the bestpractices gathered through research into the widevariety of existing microcredit methodologies andpractices, it is acknowledged that one remainsparamount: any scheme should be tailored to thespecific needs of poor clients, taking into accountlocal traditions, customs, legislation and econom-ic structures.

Microfinance in Kazakhstan is still a relativelyyoung concept that was only introduced in themid-nineties. Despite the diversity and number ofexisting microfinance institutions, there is still ahigh demand for financial services that remainsunfulfilled.

Moreover, most of the necessary legal reformshave already been undertaken. Three main lawsregulate Kazakhstan's financial sector. An overallframework is provided by the "Law on Banks andBanking Activity," while two other laws on micro-credit organizations and credit partnerships -- en-acted in 2003 -- provide specific regulations forMFIs. The "Concept of Finance Sector Develop-

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Microfinance in Kazakhstan: an inclusive financial sector for all

ment in Kazakhstan" was adopted by the Govern-ment in mid-2003 to further streamline the devel-opment of Kazakhstan's financial sector. This con-cept presented a three-tier model:

• Level 1: commercial banks• Level 2: non-banking financial institutions,

credit partnerships, pawnshops• Level 3: microcredit organizations

Prudent financial supervision in Kazakhstan onlyallows banks to collect savings. However, therequirements for becoming a bank are restrictiveand therefore prevent MFIs from accessing thepublic savings that they need. Consequently, un-regulated microcredit organizations will not beable to attract the investors needed to diversifyand expand their services. Many larger MFIs areusing licenses as non-banking financial institutionsto operate, while others are planning to becomecommercial banks.

The main stakeholders in the microfinance sectorin Kazakhstan are:

• the state;• international organizations;• commercial banks;• NGOs and credit partnerships; and• the Association of Microfinance Organi-

zations in Kazakhstan.

The Government of Kazakhstan has established allthe basic preconditions necessary to develop themicrofinance sector: a stable macroeconomic en-vironment, an enabling legal framework for MFIs,and an explicit recognition of microfinance as atool to fight poverty. However, state interventionin the microfinance sector will not be effective ifthere are no reliable mechanisms to ensure effec-tive implementation. The Government made acommitment to provide funds to MFIs. However,rather than being a direct provider of financialservices it is recommended that the Governmentcreate a conducive environment for microfinanceinstitutions. Increased transparency and account-ability could make a difference in the results ofGovernment sponsored projects/strategies.

The role played by donors in Kazakhstan indeveloping the microfinance sector was signifi-cant in the recent past. They contributed byintroducing international best practices and stateof the art technologies as well as providing start-up capital. Several projects can be consideredsuccessful and some can even be viewed asworld best practices. Most of the MFIs that wereoriginally founded with the help of internationalorganizations are now self-sustainable non-profitorganizations. Remarkable results were also achievedthrough downscaling programmes funded by inter-national development banks and implemented by

commercial banks. However, the volumes of do-nor funding are now shrinking in Kazakhstan. It istherefore necessary to carry out an in-depth anal-ysis on how to maintain established relations withKazakhstani MFIs, and to transfer their uniqueexperience to young organizations in the years tocome.

Although more than seven banks have activemicrocredit downscaling programs, non-bankingfinancial institutions, credit partnerships, pawn-shops, and microcredit organizations constitutethe vast majority of entities serving microfinanceclients. NGOs and public funds have in fact beenthe main providers of microfinance services onthe ground. Indeed, in their work with socially-vulnerable groups, NGOs were among the firstorganizations in Kazakhstan to develop and im-plement effective methods for delivering financialservices to the poor.

Microfinance institutions themselves are the maindriver in fostering development in this field. Themain challenge for them is to expand their out-reach, while maintaining outstanding financialrecords in order to build confidence in the sectorand become established as credible institutions.Although MFIs in Kazakhstan are young relativeto other similar institutions around the world, theyhave already achieved good self-sustainability andefficiency records. However, many MFIs in Kaza-khstan are still dependent on donor support tofinance their expansion strategies and there areonly few MFIs that are able to attract externalcommercial funding. A part of the reason is that,since MFIs are not allowed to collect publicdeposits, donor and government support will re-main their major source of funding.

The transition to a market economy caused un-easy transformations in the labor market anddisruptions to the social benefit system in Kazakh-stan. This process increased social vulnerabilityfor a significant part of the population. Only inrecent years has this trend reversed. In 2003 and2004, the economy continued to grow at a fastpace: the growth of real GDP equaled 9.5 percentand 9.2 percent respectively. By 2004, only 16.1percent of the population lived below the subsis-tence minimum of KZT 5,427 per month (or aboutUSD 3.5 per day at purchasing power parity),compared to 39 percent in 1998.

In light of the poverty situation outlined above,many people turned to microcredit during thetransition period as a way to overcome the eco-nomic challenges they faced and the demandkeeps on increasing. In 2004, according to theAgency of Statistics, 50,600 people received mi-crocredit loans, a 57 percent increase over the

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32,300 people who received microcredit in 2003.Preliminary estimates for 2005 indicate that thereare 60,000-70,000 active microfinance clients inKazakhstan. Formal and informal sector enterpris-es (both in urban and rural areas), the unem-ployed, and households are the actual and poten-tial MFI clients.

The potential demand for microfinance can bestudied by understanding the characteristics ofmicro enterprises that look for financial resourcesto grow, and by understanding poor householdsthat seek loans for a wider set of needs. Based onthese considerations, two different models havebeen formulated: the standard of living approachand the private sector approach. Based on thesetwo approaches, the demand for microfinanceservices has been estimated to include between140,000 and 220,000 clients, and the total valueof the microfinance market could exceed USD800 million. However the real demand couldeasily expand beyond these numbers as more thantwo million vulnerable people could benefit fromincreased access to microfinance as well.

Putting considerations of microfinance supply anddemand together, it becomes obvious that thedemand far outstrips the supply in Kazakhstan.According to the latest official figures, there areover 400 registered microfinance institutions in allthree levels of the financial system. However,these figures should be taken with some cautionsince not all of the listed organizations are inoperation, and many have only a small number ofclients and/or limited turnover. There are very fewMFIs with a significant number of clients, result-ing in a major population segment without accessto modern financial services. Rapid growth in thesector during the past few years indicates aprompt market response to the demand for micro-finance services. However, even if the supplygrows at a high rate, the supply of microfinancewill not be adequate.

Surveys have indicated that with few exceptionsMFIs are small in Kazakhstan. Only one microfi-nance organization has more than 10,000 clientsand only eight MFIs have an active portfolio thatexceeds USD 500,000. While NGO-MFIs have alower average loan size, the highest loan sizeswere found among credit partnerships. Two kindsof borrowers emerge: small traders, farmers andentrepreneurs on one side, and SMEs on the other.The average size of loans varies greatly fromUSD 300 to more than USD 200,000. The MFIsthat widely employ group loans have the lowestaverage loan size. Kazakhstan MFIs offer onlymicrocredit services but have developed different

products, such us solidarity group loans, individualloans, agriculture loans, and housing loans. Al-most all of the MFIs that responded to the surveyare nearly or fully self-sustainable. This validatesthe fact that MFIs in Kazakhstan have relativelygood financial records. It is difficult to draw amap of funding sources. However it seems thatvery few MFIs received money from the govern-ment. Otherwise there are good indicators ofprivate sector involvement. MFIs that receiveddonor grants tend to have better performanceoverall.

There are several environmental obstacles thatrestrain the development of the microfinance sec-tor as a whole:

• legal barriers;• low population density;� high transportation and security costs;� underdeveloped collaboration between MFIs,

state administrations and national devel-opment institutions and funds;

� poor interaction with commercial banks;� lack of service providers for MFIs.

Moreover the challenges faced by MFIs in theireveryday activities include the following:

� high cost of funding;� shrinking of grant commitments;� shortage of qualified personnel;� lack of methodology and training pro-

grams for MFIs' staff;� poor methodological and accounting know

how and low level of computer skills;� unequal competition terms with commer-

cial banks.

On the basis of the surveys' findings, variousdevelopment options were analyzed to identifypossible drivers to speed up the expansion of themicrofinance sector in Kazakhstan:

� Attracting financial resources from variousactors such as the private sector, commer-cial banks, international private funds,and pension funds;

� Designing an effective state funding strat-egy with the establishment of an indepen-dent institution and a transparent and ef-fective disbursing mechanism;

� Expanding beyond microcredit to micro-savings, microinsurance and leasing.

In order to overcome the bottlenecks that preventthe expansion of microfinance services and topromote sustainable development, the government,donor community, and microfinance institutionsthemselves are encouraged to consider the follow-ing recommendations.

Executive summary

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Microfinance in Kazakhstan: an inclusive financial sector for all

On the basis of these considerations the govern-ment is advised to:

� Facilitate an open and inclusive dialogueon microfinance in Kazakhstan and cre-ate a conducive environment for microfi-nance institutions.

� Promote amendments to laws that are inline with international best practices tofoster microfinance growth in Kazakhstanas discussed in this report. Under thecurrent law MCOs have several disadvan-tages relative to commercial banks interms of savings mobilization, product di-versification, and expansion opportunities.The loan size limits could be redefined,as could the narrow definition of micro-credit borr owers.

� Create a state coordinating body for mi-crofinance, such as a National Commit-tee, to coordinate the activities and initi-atives that address the challenges that thepoor face in accessing financial services.Members should not be limited to govern-ment bodies but should also include rep-resentatives from multilateral organizations,donors, MFIs, sector associations, academia,and civil society.

� Prevent interventions that could distortthe microfinance sector. Subsidized lend-ing programs should be avoided as self-sustainable microfinance institutions maybe excluded from unfair competition fromsubsidized state institutions.

� Promote the development of transparentand effective mechanisms to transfer statefunds to MFIs. The independence of thedisbursing institutions would be the majorfactor in achieving good results. Interna-tional experience in implementing apexfunds should be looked at with specialattention. The involvement of internation-al organizations and experts in the pro-cess can help to assure credibility andtransparency.

� Strengthen microfinance expertise amongthe staff in key ministries that work withmicrofinance projects.

� Sponsor an independent evaluation of on-going state microfinance projects.

� Encourage Government funds and pro-grammes to follow international practicesand encourage transparency in decision-making processes.

The donor community should continue to supportMFIs to grow in recognition of the important role

played by microfinance, especially for the ruralpoor and small-scale borrowers. Donors shouldcontinue to:

� Provide inputs to the government to im-prove the design of pro-poor policies andthe microfinance strategy;

� Participate in government microfinanceprojects to assure transparency and effec-tiveness;

� Support MFI associations and networks;� Sponsor the creation of a market for MFI

services, such as training, internationaland local audits, and rating services;

� Finance MFI capacity building and ex-pansion;

� Disseminate information about best prac-tices and sector standards;

� Conduct new surveys to better assess theimpact of microfinance in Kazakhstan andto study the introduction of innovativemicrofinance products;

� Develop suitable donor exit strategies forexisting projects;

� Support the introduction of microfinanceservices other than microcredit;

� Strengthen donor coordination.

MFIs are thus encouraged to:

� Expand their outreach, especially in ruralareas, where the poor are concentrated;

� Gain ownership of the microfinance strat-egy in Kazakhstan by researching andproposing specific solutions to current chal-lenges;

� Multiply networking and enhance nation-al associations;

� Promote investment in human resourcesand adopt modern international microfi-nance management techniques;

� Comply with international standards inaccounting and reporting;

� Seek international ratings;� Facilitate knowledge sharing of best prac-

tices among MFIs in Kazakhstan and withinthe region;

� Become proactive in their strategies bydeveloping creative and innovative meth-odologies for reaching clients and attract-ing resources;

� Approach national and international com-mercial banks, as well as internationalprivate investors, to increase financial re-sources;

� Exploit available opportunities offered bythe government budget.

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ACKNOWLEDGEMENTS

The report would not have been possible without support and contributions of many organisations andindividuals. The authors and UNDP Kazakhstan extend their thanks to the following organisations fortheir contributions to the preparation of the report: the Association of Microfinance Organizations ofKazakhstan (AMFOK), the Institute for Social Research, the Small Entrepreneurship Development Fundand the Microfinance Centre for CEE and the NIS.

Special acknowledgements should be extended to the Ministry of Economy and Budget Planning of theRepublic of Kazakhstan, the Committee for Small Enterprise Development under the Ministry of Industryand Trade of Kazakhstan, the Kazakhstan Agency for Management and Supervision of Financial Marketand Financial Organizations, the National Insurance Corporation for Export Credit and InvestmentInsurance, the TuranAlem Bank, the Temir Bank, the World Bank, the European Bank for Reconstructionand Development, the Asian Development Bank, the Embassy of Germany, the Embassy of Hungary,the Embassy of the Czech Republic, the Embassy of Poland and the Embassy of the Republic ofLithuania.

In the course of the report writing the following professionals offered their constructive remarks andcomments: Olga Tamilova and Rakhat Uraimova, Microfinance Centre for CIS and the NIS experts,Shalkar Zhussupov, AMFOK President and Ainur Arenova, AMFOK Director, Maurizio Guadagni, WorldBank Senior Rural Development Specialist, Sophia Nazmetdinova, CAMFA Project Coordinator andKishori Kedlaya, Online UN Volunteer.

Special thanks go to the Institute of Social Research and personally to Gulnar Ismukhanova, Director,for their initial research on microfinance in Kazakhstan.

Finally, the authors would like to extend their sincere thanks to all members of the Advisory Board andpersonal thanks to Yuriko Shoji, the UN Resident Coordinator/UNDP Resident Representative inKazakhstan and Gordon Johnson, Deputy Resident Representative, UNDP Kazakhstan. Special thanksgoes to Malin Herwig, Chief of Poverty Reduction Team, UNDP Kazakhstan; Irina Buchinskaya,Programme Assistant, Poverty Reduction Team, UNDP Kazakhstan; Alma Buirakulova, Research Assis-tant, UNDP Kazakhstan; Aliya Ilyassova and Maral Sheshembekova, Project Experts, UNDP Kazakhstan.Special thanks go to Christopher Herwig, who kindly provided photos for the report.

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Microfinance in Kazakhstan: an inclusive financial sector for all

ACRONYMSACC - Agrarian Credit CorporationACF - Asian Credit FundADB - Asian Development BankAFI - Alternative Finance InstitutionAMFOK - Association of Microfinance Organizations in KazakhstanCA - Central AsiaCAMFA - Central Asia Micro Finance AllianceCAMFC - Central Asian Microfinance CenterCEE - Central and Eastern EuropeCGAP - Consultative Group to Assist the PoorCIS - Commonwealth of Independent StatesDCD - Disbursement and Cash DepartmentsEBRD - European Bank for Reconstruction and DevelopmentEU - European UnionFAO - Food and Agriculture OrganizationFFSA - Foundation for Financial Support to AgricultureGDP - Gross Domestic ProductGTZ - Gesellschaft fur Technische ZusammenarbeitIFAD - International Fund for Agricultural DevelopmentIE - Individual EntrepreneursILO - International Labour OrganizationIMF - International Monetary FundISS - Institute for Social SurveyIYM - International Year of MicrocreditKFW - Kreditanstalt fur WiederaufbauKLF - Kazakhstan Loan FundKZT - Kazakhstan TengeMCO - Microcredit OrganizationMDG - Millennium Development GoalsMFB - Microfinance BankMFC - Microfinance Centre (for Central and Eastern Europe and New Independent States)MFI - Microfinance InstitutionMIS - Management Information SystemMTI - Ministry of Industry and TradeNBFI - Non-banking financial institutionNGO - Non-governmental organisationNIS - Newly Independent StatesOSS - Operational Self-SufficiencyPAEF - Polish American Enterprise FundPPP - Purchasing Power ParityRCP - Rural credit partnershipsRK - Republic of KazakhstanROA - Return on AssetsROE - Return on EquitySE - Small EnterprisesSEDF - Small Entrepreneurship Development FundSLB - Second Level BankSM - Subsistence MinimumSME - Small Medium EnterprisesSUM - Special Unit for MicrofinanceS&P - Standard & Poor'sTA - Technical AssistanceTACIS - Technical Assistance to the Commonwealth of Independent StatesUK - United KingdomUN - United NationsUNCDF - United Nations Capital Development FundUNDP - United Nations Development ProgrammeUSAID - United States Agency for International DevelopmentUSD - United States DollarWB - World Bank

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CHAPTER 1

CONCEPTUAL FRAMEWORK

1.1 An inclusive financial sector for all

"The stark reality is that most poor people in the world lack access tosustainable financial services, whether it is savings, credit or insurance. Thegreat challenge before us is to address the constraints that exclude peoplefrom full participation in the financial sector. "

Kofi Annan (UN Secretary General)

Financial services are available only to a smallpercentage of the world's population, meaningthat the poor are usually excluded. A more inclu-sive financial sector would require that everyonein need of financial services could access themunder sustainable and cost-effective conditions,regardless of location, income, or assets. Microfi-nance is one concrete attempt to build an inclu-sive financial sector in a manner that couldalleviate poverty and help the poorest to helpthemselves. The term microfinance institutions (MFIs)refers to the broad range of organizations thatprovide such financial services to the poor.

The aim of microfinance is to help the poor andalleviate poverty both by enlarging access toservices and by providing financial and socialintermediation to low-income clients. Microfinance,however, is not merely finance; it is an essentialdevelopment tool to fight poverty and socialexclusion. Success stories have offered evidencethat microcredit and savings services can bepowerful tools to expand people's choices and toreduce their vulnerability. Low-income groups havebeen shown to use financial services to respond toeconomic opportunities, to reduce their vulnera-bility to risk, and to invest their profits in theirfuture and in the future of their children. In anenvironment rich with economic opportunities,micro loans can raise family incomes and im-prove the borrower's quality of life through in-creased expenditures on health, nutrition, educa-tion and shelter. Loans can also be used tomanage a crisis and maintain a business in oper-ation.

Figure 1.1 The poor use financialservices to�?

Poor usefinancialservices

Respondquickly toeconomic

opportunities

Invest intheir

future

Reducevulnerabilityto external

shocks

A brief overview of the history of microfinanceprovides important context for better understand-ing the latest developments in the sector. Duringthe 1970s and early 1980s, direct loans wereprovided to poor people under subsidized terms.These first programs, though innovative in theirnature, were limited in their scope, duration andvision. The facilities built were small, isolated,and project-based. After the initial period of fund-ing from donors, many of these MFIs went bank-rupt, leaving them unable to provide capital fornew loans. In addition to the lack of sustainabil-ity, the outreach of these initial experiments wasalso insufficient. Typically only the richest amongthe poor benefited from the services offered anddistortions in the local private market were com-mon.

Eventually, successes such as the Grameen Bankin Bangladesh and the Bank Rakyat Indonesiaprovided the first concrete evidence that the

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Microfinance in Kazakhstan: an inclusive financial sector for all

provision of financial access to the poor could beeffective in bringing people out of poverty. Cen-tral to these original models was a commitmentto self-sufficiency from the outset. These modelsproved to be successful because their founderswere first able to understand people's needs, sec-ond capable of delivering appropriate and highquality financial services, and third able to devel-op the right methodologies. The birth of grouplending methodologies, for example, is considereda milestone in microfinance history. The history,methodology, and organizational structures of thesesuccessful programs were quickly studied, andtheir best practices showed up in both newermicrocredit organizations and donor programs. Soonafter, more and more good and innovative exam-ples of MFIs emerged all over the world, adaptingthe new findings to the local context.

Today the microfinance industry has expandedglobally to include between 10,000 and 15,0001

institutions that consistently reach an estimated80 million2 poor people. Indeed, the annual aver-age market growth rate for the industry remains inthe double digits. The Consultative Group to As-sist the Poor (CGAP)3 reports even bigger numbers:they calculate that an estimated 750 millionaccounts (savings and credit) are open in alterna-tive finance institutions (AFIs). While these figuresmay be overly generous as they incorporate thewhole microfinance market below the level ofcommercial banks (including state-owned agricul-tural banks, development banks and postal banks),CGAP argues that that some substantial fraction ofthe clientele of these non-microfinance institu-tions are poor or near poor. Nevertheless, outreachhas deepened throughout the past twenty yearswith an increasing number of the poorest beingMFI clients.

The future of microfinance continues to lookbright: its full potential is still far from beingreached due mainly to limited supply. Most poorpeople already pay informal moneylenders forhigh-cost, low-quality financial products; the ex-perience of existing MFIs indicates that clientsare willing to pay for a variety of improvedservices. The market potential also remains vast:an estimated 1-2 billion people are demandingaccess to basic financial services. Moreover, suc-cessful methodologies have been developed thatallow financial sustainability without compromis-ing the outreach of microfinance services. The

importance of sustainability should not be undervalued. As CGAP states in its latest strategydocument: "The promise of sustainability meantthat microfinance could leverage relatively scarcedonor funding by attracting much larger pools ofprivate capital, thus expanding outreach to mas-sive numbers of the poor."4

The definition and breadth of microfinance haveevolved over time. The term now refers to finan-cial services that are targeted at low-incomeclients, including credit, savings, insurance andmoney transfer services. Indeed microcredit, theflagship product, has become one service amongmany. The role of savings and insurance serviceshas proven to be especially effective because noteveryone needs loans, but the majority of peopleneed to save money and insure against risks.Figure 1.2 summarizes the basic components ofmicrofinance.

1 UNDP staff estimates, 2005.2 Daley-Harris Sam, State of Microcredit Summit Campaign Report 2004, 2005; data refers to clients from about 3,000institutions in 2003.3 CGAP, Occasional Paper n 8, 2004 for details on statistics.4 CGAP, Phase III Strategy 2003-2008, 2003.

A credit methodology thatemploys effective collateralsubstitutes to deliver short-term micro loans to low-income clients.

MICROINSURANCE

MONEY TRANSFERS

MICROCREDIT

MICROSAVINGS

Deposit services that allowto store small amounts ofmoney in secure and readilyaccessible places.

Insurance services thatallow to mitigate andshare risks to reducepeople ’ s vu lne rab i l i t yto external shocks.

Financial services thatallow to safely transferfunds f rom di f fe ren tplaces.

Figure 1.2 Main components ofmicrofinance services

Even with all its promise, microfinance is not apanacea. MFIs can translate potential economicopportunities into tangible realities, but they can-not create business opportunities if the environ-ment is not conducive. The poorest of the poorrequire other kinds of assistance to be able to useloans and set up new businesses. Microfinanceremains only one of many powerful approaches tosocial and economic development.

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Microfinance does not exist in a vacuum. Micro-finance is a tool to enlarge access to financialservices, but not everyone should or needs toapply for loans. The lessons learned from the firstexperiments gave crucial inputs to MFIs andpolicymakers for developing sound managementand policy tools. Today best practices for MFIsare available for many of the pressing issuesconcerning microfinance. However, these practi-cal tools are not always widely adopted or imple-mented. To be the most effective, microfinancerequires integrated, focused strategies and effec-tive actions by several different actors other thanlenders (MFIs) and borrowers.

Specifically, microfinance would benefit fromcoordination between three different levels: themacro level where the government defines thelegislative framework; the meso level that in-cludes the whole financial infrastructure, such asthe services that MFIs can exploit to expand theirnetworks; and the micro level intended as thelevel of microfinance service distribution. As shown

in Figure 1.3 the poor stand at the center of thismodel. The poor are both beneficiaries (accordingto donors) and clients (according to the businessstructure), and understanding their needs must bea priority for all parties involved.

Donors are included in this model to stress theimportant role they continue to play in the devel-opment of microfinance, but are set apart tounderline that the donors' role is one of support.Donors should act as investors who help the MFIsto achieve their objectives.

National governments need to set the policyframework to sustain financial services targetedat the poor. Governments must maintain macro-economic stability, avoid interest rate caps, andrefrain from distorting markets. In special cases,public funding may be a useful means to devel-op the microfinance sector, but best practicesindicate that the government should refrain fromparticipating directly in microfinance activitiesin order to avoid market distortions and ineffi-ciencies.

Figure 1.3 Microfinance environment

MESO LEVEL

MICRO LEVEL

MACRO LEVEL

DONORS

FUNDS AND TECHNICAL

ASSISTENCE

POLICY, LEGISLATION

REGULATION, SUPERVISIONFINANCIAL

INFRASTRUCTURE

SERVICES TO THE POOR

Government

Insurers

Poor

CHAPTER 1 Conceptual framework

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Microfinance in Kazakhstan: an inclusive financial sector for all

1.2 Microfinance services and institutions1.2.1 Targeting microfinance to the

customer

MFIs seek to maximize the service value for thecustomer and minimize the financial provider'srisks and costs. To meet clients' requirements andbe accepted within the culture and environment,all aspects of microfinance services -- loan dura-tion, size, interest rate, and repayment schedules-- have to be tailored to the customer. Since thereis no "one size fits all" methodology, MFIs mayalso look at the informal sector to assess the localdemand for financial services. Customer satisfac-tion and low MFI operation costs are the besttests to assess the effectiveness of microfinance.

Potential users of microfinance services are indi-viduals with entrepreneurship potential, includingthe unemployed, but without means to accessbank services. The majority of entrepreneurs indi-cate the lack of required financial resources asthe main barrier to setting up a business. Evenwhen microfinance services are provided only inurban areas, traders and farmers still benefit. Themost successful MFI experiences also indicatethat women are among the best potential clients.The gender development of microfinance is avital topic explored later in this chapter.

In order to deliver high quality services to the poor,MFIs should concentrate on operating processes,institutional capacity and staff development. Alongwith the previous measures, a detailed market as-sessment should be developed and the MFI's missionshould be clearly stated. Such an analysis wouldcover the political and economic background of thecountry; government and social policies (in particu-lar microfinance sector policies and laws); and thelevel of the country's economic development (andthat of the financial sector). In order to create newbusinesses, the existence of some basic require-ments must be assessed: some level of economicstability -- such as the existence of markets (casheconomy), a manageable level of economic volatil-ity, and potential to grow -- is essential to imple-menting microfinance activities. Finally, the analy-sis must then identify current financial providers andthe target clients' characteristics, such as the leveland the depth of poverty, population density, educa-tion level, and cultural background (religion, cus-toms and ethnicity). The targeting should also takein account the potential role of women and thedifferent needs of the urban and rural poor.

1.2.2 Microfinance services

At present, microfinance includes micro lending,savings, insurance and payment transfers. Suchservices, labeled financial intermediation by theWorld Bank5, are sometimes accompanied bybusiness development services in order to helpclients develop business plans or better managetheir activities. MFIs can also provide anotherrange of services, called social intermediation,that focus on the process of building human andsocial capital through group formation, leadershiptraining and cooperative learning. Although abrief overview of the main characteristics andpurposes of all these services are provided in thischapter, the report will subsequently focus exclu-sively on microcredit activities.

Microcredit

Standing at the core of microfinance, microcreditis directed towards funding both existing andstartup enterprises. Microcredit activities seek toenhance the access to credit of those smallbusiness owners who are excluded from traditionalbank-provided loans, allowing them to expandtheir existing enterprises. As well, microcredit isused to finance disadvantaged entrepreneurs whoare willing to start their own businesses, but whocannot afford traditional funding. In short, micro-credit means granting small credits to poor indi-viduals in order to develop their own businesseswith the purpose of income generation.

The main characteristics of micro loans (size,maturity, interest and repayment rates) can varywidely. Although there is no common standard forthe size of microcredit loans, MFIs have shownthat even small amounts of money can have adramatic impact on the life of a poor individual.Loans can start from USD 5 to USD 500 in theleast developed countries and reach to USD 10,000in middle-income countries; the Micro BankingBulletin calculates the average loan size as USD5326. Micro loan maturity is usually very short(under 3 months and rarely beyond 12 months)with weekly or even daily repayment schedules.As with commercial banks, most MFIs offer differ-ent and better conditions, such as longer repay-ment schedules or bigger amounts, to conscien-tious borrowers. To cover the cost of micro lend-ing and thereby ensure the financial sustainabilityof microcredit services, interest rates are usuallywell above those of commercial loans, but fall farbelow the usurious terms of moneylenders.

5 World Bank, Microfinance Handbook, 1999.6 The loan average size is calculated upon data from 124 major MFIs for which data are available.

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The last 20 years have seen the rapid develop-ment of sustainable micro loan methodologiesthat offer practical tools for MFIs to design betterand more innovative services. The best and mosteffective of these is group financing. In this formof lending, self-selected groups of 3-10 peoplejoin together in so-called "solidarity groups." Eachmember fulfills his or her own credit liabilities butalso shares some degree of responsibility for othermembers' repayments, varying from legal guaran-tees to the loss of further access to credit. Trustwithin the crediting group is central to grouplending and serves as a substitute to standardbanking collateral and allows MFIs to test forreliability before members apply for bigger indi-vidual loans.

Loan services can be made most effective andaffordable to the poor if they meet the followingrequirements:� Loan use should be flexible. The poor use

loan money to meet needs as diverse asstarting business activities, sending children toschool or paying their monthly rent. As aresult, the flexibility of money use is veryimportant for these clients. A light control ofmoney utilization and a detailed knowledgeof the borrower and of his or her repaymentcapacity should be sufficient; at this stage theperson is more important than the businessproject. Tied loans produce costs for bothlenders and borrowers alike and unnecessaryrequirements are seen as obstacles that limitaccess.

� Transaction costs should be minimized. Thepoor ask for simple procedures and quickaccess to money in order to exploit economicopportunities as they come. Unnecessary re-strictions, administrative requirements and longloan processes increase transaction costs. Aconcern for transaction costs is essential tounderstanding poor people's needs and allow-ing them to benefit from microfinance. In-deed, transaction costs that represent a burdenfor both MFIs and clients should be mini-mized. Quick access to loans and easy ad-ministrative requirements should characterizecredit services.

� Collateral substitutes, such as group guaran-tees, should be accepted as an alternativesecurity for credit repayment. Because thepoor often do not own the property or havethe viable credit records required by standardbanking sector collateral practices, MFIs needto rely on collateral substitutes. The previous-ly given example of group lending illustratesmany of the alternatives to collateral that can

be used to prevent delinquency and assuredue repayment:� ñommunity relationships;� social sanctions;� group or shared responsibility;� reputation;� informal or personal properties (personal

value more than commercial value);� continued access to MFI services.

� Loans should be tailored and designed tomeet client's needs. MFIs should provide ap-propriate products that are adequate to theenvironment and meet local demand.

� Only stable and viable institutions should pro-vide loans. Only stable and viable institutionscan guarantee the long-term prospects for mi-crofinance services. To achieve sustainabilityMFIs should not depend only on donors' assis-tance, but rather are encouraged to applymarket prices to their costumers. Doing soallows MFIs to maintain services in the faceof competition.

Successful micro loans have been shown to im-prove the borrower's economic security by:

� increasing the borrower's liquidity in theshort and long term;

� increasing the borrower's economic power;� reducing risks of economic shocks through

diversifying incomes and creating oppor-tunities to pursue viable economic oppor-tunities.

Microsavings

Saving can be more important than borrowing forthe poorest of the poor. While in the past micro-finance institutions and experts have focused moreon loans than savings, a consensus has recentlydeveloped acknowledging that most poor peoplesave, even if their savings are not financialassets. Savings typically take the form of veryilliquid assets such as cattle, crops, and jewelry.The CGAP recognizes that the demand for savingsis even higher than the demand for loans amongpoor families, and it is often the lack of financialservices that impedes their access to safer andmore liquid forms of savings.

Microsavings are intended as micro deposits thatallow the poor to store small amounts of moneyin a safe place. Easy accessibility and highliquidity are the conditions most demanded. Mic-rosavings enable low-income households to accu-mulate resources for future purchases and invest-ments, or to have reserve funds in case of limitedincome due to crop failure. Access to savingsservices protects these households by making them

CHAPTER 1 Conceptual framework

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Microfinance in Kazakhstan: an inclusive financial sector for all

less vulnerable in relation to external factors.Savings undertaken for these purposes (referred toas voluntary savings) are distinct from the loanpractice that requires keeping a specified amountof money in the lending institutions as collateral(referred to as compulsory savings).

To minimize the risks associated with savings, allindividuals seek to place their deposits in areliable and stable institution. MFIs, following theregulations that govern private savings, are rarelyallowed to collect voluntary savings. Savings ser-vices to the poor are now often provided bypostal banks or state agricultural banks that havethe widest coverage in the poorest areas and areunder government supervision. However, MFIs areoften in the position to offer better targeted sav-ings services and ad hoc regulation should incertain situations exempt these organizations fromstrict central bank regulations.

Microinsurance

Microinsurance is the latest experiment in micro-finance. Microinsurance is an effective tool forreducing vulnerability by enabling people to cov-er unexpected expenses in cases of emergencysuch as illness, death, or injury. Access to micro-insurance can also help the poor to achieve animproved standard of living, mitigate the effectsof potential adverse external factors and facilitatepoverty alleviation. The demand for coverage ishigh among the poor and nearly poor, who seekhealth and life insurance services. Rural farmersare particularly attracted to insurance that wouldprotect against a bad harvest. Despite this wide-spread interest, few institutions, even among MFIs,provide such products. Some group lending pro-grams currently provide compulsory insuranceschemes in order to mitigate shocks like thedeath of one of the group members. It is likely

that these financial services will continue todevelop and eventually reach a wide enoughaudience to include the poor.

Money transfers

The importance of the delivery and security ofmoney transfers is sometimes underestimated.Because remittances from developed countries alonerepresent one of the biggest income transfers tothe poor in many developing countries, financialservices that allow for the safe transfer of moneycan be valuable tools. Money transfer servicesusually develop alongside other microfinance ser-vices such as credit and savings.

Non-financial services

The provision of financial services can be accom-panied by other, non-financial services that aim tomaximize the client's business development, suchas training in entrepreneurial skills, marketing,quality assurance and institution building. Whilethese types of services are often demanded byclients, making them compulsory for borrowerswould increase transaction costs and thus shouldbe avoided. Training can also be used to targetwomen and other particularly vulnerable groups toraise their self-esteem and cultivate appropriatebusiness conduct.

1.2.3 Microfinance institutions

A microfinance institution (MFI) is an organizationthat provides financial services to the poor. Giventhat microfinance intermediaries range from highlyformalized institutions to shopkeepers, many organi-zations potentially can be described as MFIs. How-ever, the term MFI is traditionally limited to thelevel of services below commercial banks and themarket (stocks and securities). Figure 1.4 classifiesthe spectrum of microfinance providers by sector.

Figure 1.4 Microfinance service providers

Saving and

credit

associations

Rotating

saving

groups

Microfinance banks

Individual

moneylenders

Traders and

shopkeepers

Banks

(commercial banks,

state banks, rural

banks, postal banks,

etc)

International

development banks

Other financial

companies

Credit unions

Specialized and

multipurpose NGOs

Village banks

Savings and credit

cooperatives

Registered self-help

groups

Development projects

Non registered self-

help groups

(

Formal Sector Semi - formal Sector Informal Sector

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Institutions that belong to the formal sector, suchas state banks and private companies, fall underbanking regulations and oversight. While the branchnetworks of formal sector agricultural and postalbanks play a key role in enlarging access of thepoor to financial services, it is the semi-informalsector that serves as the incubator for most micro-finance institutions. Examples of institutions inthis sector include credit unions, specialized NGOs,village banks and cooperatives. In the informalsector moneylenders, traders and informal creditand saving associations provide some basic --though often expensive -- financial products. De-pending on the country's environment and finan-cial development it is possible to find manycombinations of formal, semi-informal, and infor-mal sector financial providers.

Despite the broad sectoral range of these organi-zations and their obvious differences in mission(making profits vs. providing social services to thepoorest), all MFIs share common elements due tothe products they offer:

� governance systems;� ownership frameworks (shareholders and

stakeholders);� human resources;� products and processes;� management information systems and fi-

nancial management systems.

Key indicators of good governance include astrong, long-lasting and committed leadership, aclear identification of an MFI's mission, a skilledboard, and the shared values of loyalty, transpar-ency and accountability among the staff. A capa-ble and motivated staff with the right economicincentives is the principal resource for MFIs.Governance also has a strong relationship withownership: MFIs have to respond to shareholdersand stakeholders and to meet their different prior-ities. Products, information management systems,reporting systems and financial prospects are often

1.3 Financing microcreditand sustainability

1.3.1 Source of funding for microcreditactivities

Money is an essential component of financialservices and all MFIs face the challenge ofraising funds. Sources of funding for MFIs can beeither internal (retained earnings) or external (anykind of money transfer to the MFI). The followinglist includes major external funding sources formicrofinance activities:

� grants and donations;� soft loans;� commercial loans;� other market-based products (securities,

etc.);� shareholder capital;� deposits.

The above list can be loosely grouped into threecategories: donors, commercial sources and sav-ings accounts. MFIs usually benefit from multiplesource financing but each MFI has to carefullyplan its financial needs, check availability offunds and calculate the financial costs that canbe covered by operations. The possibility of ac-cessing funds varies on the basis of an MFI's

BOX 1.1 Average characteristics of self-sustainable MFIs*

• Total Assets: USD 19.9 million (Banks: USD 60 million, NGOs: USD 10 million)• Total number of borrowers: 81,510• Average outstanding loan size as GNP per capita: 83%• Average outstanding loan: USD 752• Adjusted return on assets: 5.5%• Adjusted return on equity: 14.1%• Portfolio at risk > 90 days: 2.3%• Number of active borrowers per loan officer: 408• Yield on gross portfolio (approximately equal to interest rate): 40.6%

Note: * the average was calculated with data from 62 financial self-sustainable MFIs around the world. Significantdifferences emerged among the surveyed MFIs.

Source: The MicroBanking Bulletin, Issue No. 8, November 2002, MIX

similar for different kind of MFIs that operate inthe same market. The management of loans, cli-ents and branches is also common to all MFIs.

While the goal of being effective and efficient isshared by informal community savings associationsand big commercial banks alike, different types ofinstitutions face unique challenges in deliveringmicrofinance services. For example, NGOs canbenefit from donors' funds during their start upwhile commercial banks have to reform their busi-ness culture to promote microfinance activities.

CHAPTER 1 Conceptual framework

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Microfinance in Kazakhstan: an inclusive financial sector for all

financial characteristics and ownership structure.Not all organizations can benefit from donorgrants. Similarly, financial market products areavailable only to MFIs that have achieved finan-cial sustainability and voluntary savings are oftenexcluded from use due to national prudentialrequirements. An MFI's funding structure is alsocorrelated to the MFI's stage of development;indeed the most successful NGOs sooner or latermove up from donor financing to the market inorder to achieve their business development ob-jectives.

1.3.2 Sustainability and effectiveness ofmicrofinance operations

Outreach and viability are the two macro vari-ables that must be considered in evaluating MFIs.Outreach is an indicator of poor people's accessto financial services and commercial funding.Viability, the key factor to sustain the delivery ofquality financial services over a long period, is anecessary condition to cover the largest numberof the poor.

Outreach measures the achievements of the MFIin targeting financial services to the poor. It isevaluated by identifying:

� outreach scale (number of people served);� outreach depth (degree of poverty target-

ed);� quality of services (liquidity, convenience,

availability, and flexibility).

Some of the most common outreach ratios in-clude:

� number of clients;� number of poorest as a percent of total

borrowers;

� number of women as a percent of totalborrowers;

� average loan size;� average disbursed loan size as percent of

per capita GDP.

Both the number of people and the number of thepoorest are used to qualify the outreach of anMFI. Such measures notwithstanding, the qualityof services as perceived by clients must alwaysremain at the top of the list of factors used toevaluate microfinance activities.

The term viability theoretically encompasses twoaspects of sustainability: financial sustainabilityand institutional sustainability. Financial sustain-ability refers to the MFI's capacity to reach thebreak-even point without donor grants or subsi-dies. History has shown that the most successfulMFIs became self-sustaining. The Micro BankingBulletin counts 66 financially self-sufficient MFIs,reporting an average return on assets (ROA) of 5.7percent. Several MFIs have experienced evenhigher financial performance than traditional com-mercial banks due to very good repayment recordsand high interest rates. While sustainability is aprecondition for reaching a high number of cli-ents, the concern that the depth of outreachwould be damaged by microfinance sector "mar-ketization" should always be taken in consider-ation. Box 1.1 lists some financial sustainabilityindicators.

Institutional viability is a broad term assess theMFI's overall governance structure and its capacityto face internal and external challenges. Indicatorsof productivity and efficiency (Box 1.2) are used tojudge the institution's health and to evaluate anMFI's mission and business plan prospects7.

7 Definitions of financial sustainability and institutional viability indicators can be found in the glossary.

BOX 1.2 Indicators of financial and institutional sustainability

FINANCIAL SUSTAINABILITY

� Financial RatiosPortfolio YieldAdjusted Returns on AssetsAdjusted Returns on Equity

� Performance RatiosOperational Self SufficiencyFinancial Self Sufficiency

� DelinquencyArrears RatePortfolio at RiskLoan Loss Rate

INSTITUTIONAL VIABILITY

� Productivity ratiosActive loan clients per loan officerPortfolio outstanding per loan officer

� Efficiency ratiosAdministrative efficiencyOperational efficiency

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1.4 Microfinance social and economic impact

8 International Year of Microcredit Fact Sheet, www.yearofmicrocredit.org, 2005, and Elizabeth Littlefield, JonathanMurduch, and Syed Hashemi, Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?, 2003.9 UNCDF and Unitus, http://uncdf.org/english/microfinance/10 Sean Kline, Freedom from Hunger - Measuring and managing social performance (www.id21.org).

1.4.1 Microfinance as a tool foreconomic growth and povertyreduction

Underlying all microfinance activities is the be-lief that financial services are useful tools toreduce the vulnerability of the poor. Microfinancecan have a direct impact on local economies andcan play a significant role in alleviating poverty.By creating jobs through self-employment andnew businesses, it promotes a better use of pro-ductive capital. The availability of microcreditalso enlarges the supply of goods and services tolow-income populations, thereby expanding thechoices available to them.

International data indicates that the new incomeobtained through microfinance is often investedinto activities that can improve family livingstandards, such as sending children to school orupgrading household facilities8. Extensive qualita-tive surveys conducted around the world haveconfirmed this positive impact. For example, im-pact studies conducted in more than 24 countriesfound dramatic improvements in household in-come levels9. However, it is difficult to assess thedirect correlation between improved living stan-dards and specific services like micro loans. Notall the studies conducted prove a clear and strongrelationship between microfinance and increasedstandards of living. The enlarging of people'schoice and the creation of physical and humancapital are more often seen as direct consequenc-es of microfinance.

Through income creation opportunities, microfi-nance can help fight social exclusion by integrat-ing traditionally marginalized groups into themainstream. Indeed, empowerment and increasedself-esteem, particularly among women, are con-sidered to be among the most beneficial out-comes of microfinance activities.

Several actions can be implemented in order toenhance positive, long-term social outcomes forclients and the local society10:

� assure outreach to poor people;� ensure MFI focus and clarity of purpose;� build management and board commitment

to serving the poor;� emphasize vision and mission in staff

recruiting and training;

� shape organizational culture and staff in-centives to support clients' well-being;

� identify clear indicators for measuring socialand financial performance;

� train management and non-managementstaff to influence social performance;

� provide regular, transparent reporting onsocial performance.

1.4.2 Microfinance contribution to theMillennium Development Goals

�Microfinance is much more than simply an incomegeneration tool. By directly empowering poor people,particularly women, it has become one of the keydriving mechanisms towards meeting the MillenniumDevelopment Goals, specifically the overreaching tar-get of halving extreme poverty and hunger by 2015.�

Mark Malloch Brown(former Administrator of the United

Nations Development Programme)

The Millennium Declaration, outlining a set ofeight development goals, was signed by worldleaders at the UN Millennium Summit in Septem-ber 2000 to address global development challeng-es (see Box 1.3). The multiple roles of financialservices for the poor parallel the multiple dimen-sions of poverty captured in the Millennium De-velopment Goals (MDGs); therefore it is not sur-prising that microfinance is contributing signifi-cantly to the achievement of many of the devel-opment goals.

BOX 1.3 The 8 MilleniumDevelopment Goals

• Eradicate extreme poverty and hunger• Achieve universal primary education• Promote gender equality and empower

woman• Reduce child mortality• Improve maternal health• Combat HIV-AIDS, malaria and other

diseases• Ensure environmental sustainability• Develop a global partnership for devel-

opment

CHAPTER 1 Conceptual framework

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Microfinance in Kazakhstan: an inclusive financial sector for all

Specifically, improved access to financial servicesenhances the capacity of the poor to help them-selves to reach the MDGs in a sustainable frame-work. Financial services enable the poor to in-crease and diversify incomes and improve theirlives, enabling vulnerable individuals to activelyparticipate within the local economy. Evidenceshows that poor people choose to invest in a widerange of assets: better nutrition, improved health,access to schooling, and better housing facilities.Microfinance has already contributed to severalMDGs11:� Eradicate extreme poverty and hunger. Micro-

finance increases and diversifies incomes, al-lowing the poor to increase consumption andinvestments. A study on Bank Rakyat Indone-sia borrowers on the island of Lombok inIndonesia reports that the average income ofclients had increased by 112 percent and that90 percent of households had moved out ofpoverty12.

� Achieve universal education. Households thathave access to microfinance services spendmore on their children's education.

� Promote gender equality and women's em-powerment. A high percent of microfinanceclients are women. Microfinance has empow-ered women by increasing their self-esteemand their control over household budgets dueto their increased income contribution. TheTulay Sa Pag-Unlad Inc. in the Philippinesreported that program participation increasedthe percentage of women who were the prin-cipal managers of household funds from 33percent to 51 percent13.

� Reduce child mortality, improve maternal healthand combat disease. Poor people that haveaccess to microfinance services are able toinvest more in nutrition, housing and health.

� Ensure environmental sustainability. Increasedincomes stemming from access to financialservices bring new investments in housing,water, and sanitation. Many microfinance pro-grams provide loans specifically to financetube-wells and toilets. Programs, such as theSelf-employed Women's Association in India,provide loans to upgrade community infra-structure (including tap water, toilets, drain-age, and paved roads)14.

1.4.3 Gender aspects of microfinance

Women are the most targeted group among micro-finance programs for two main reasons: womenhave proven to be among the best clients andthey tend to spend increased income in develop-ment-related activities.

Although women often form the majority of theeconomically active population, they face numerouseconomic barriers. Women working in the informalsector often have fewer assets, jobs and opportuni-ties than their male counterparts. Moreover, womengenerally lack access to start-up capital or workingassets, they face severe obstacles in accessingservices and securing property rights, and they areregularly subject to unequal wage distribution.

Within the context of these challenges, microfi-nance can play an important role in enlargingwomen's access to services and jobs. Studies haveshown that women are not only capable of individ-ual enterprise development, but that they also tendto be more careful in business administration anddecision-making, more responsible in compliancewith assumed obligations, and more cautious inavoiding unnecessary risks. Finally, existing micro-credit experiences show that the majority of individ-uals borrowing money for the short term are women.

Development theories argue that women are morelikely than men to invest income in householdwell-being and on their children's future, a predic-tion that has been shown correct in numerousmicrofinance programs. Microfinance records alsoreport that women have some of the best repay-ment rates among microfinance clients.

Perhaps even more important than improvementsin family income and well-being is the impact offinancial services on women's empowerment. Thosewomen who can access services become moreself-confident, more assertive, more willing toparticipate in family decisions, and better able toface gender challenges. Effective microfinanceprograms have had a strong positive impact onwomen's self-esteem and have resulted in womenowning more assets and having a more activerole in budget decisions.

However, women's empowerment does not invari-ably follow from the implementation of microfi-

11 CGAP, Phase III Strategy 2003-2008, 2003.12 Panjaitan-Drioadisuryo, D.M. Rositan, and Kathleen Cloud, "Gender, Self-Employment, and MicrocreditPrograms: An Indonesian Case Study", Quarterly Review of Economics and Finance 39 (1999).13 CGAP, Focus Notes. 24, 2003.14 Syed Hashemi, Consultative Group to Assist the Poor in id21 insights, issue #5.

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nance programs. Given the complexity of genderissues, services must be specially designed withgender-specific requirements. For example, anyassets purchased with loans to women should beregistered in their names to both increase theircontrol over assets and decrease the risk thatother family members will misappropriate or oth-erwise misuse the women's increased income.Some MFIs, including the Grameen Bank, includethis and other conditions in their operations tomaximize women's empowerment.

1.5 Challenges, findingsand conclusions

Microfinance has catalyzed opportunities for millionsof poor people. While many have already had thechance to become economically productive mem-bers of society as cash income earners and entrepre-

neurs, the number that have not had this opportunityis even larger. It is in fact for many of these mostvulnerable individuals that the impact of microfi-nance is most significant and convincing. The chal-lenge is to create a financial sector that serves thesegroups -- an inclusive financial sector for all.

Microfinance has already proven to be an effec-tive tool to fight poverty and a useful means toachieve the MDGs in a sustainable way. Yet theimpact of microfinance is not limited to thecreation of new and diversified incomes -- thepositive personal and social outcomes are ofteneven more striking. The enhancement of self-esteem, the expansion of people's choices and theempowerment of women are among the bestassets produced by micro loans.

In summary, some of the main findings of CGAPexperts regarding microfinance are included inthe Box 1.4 below.

BOX 1.4 Key messages for the Year of Microcredit

• The poor need a variety of financial services, not just loans.• Microfinance is a powerful instrument against poverty.• Microfinance means building financial systems that serve the poor.• Financial sustainability is necessary to reach significant numbers of poor people.• Microfinance is about building permanent local financial institutions.• Microcredit is not always the answer.• Interest ceilings can damage poor people�s access to financial services.• The government�s role is as an enabler, not as a direct provider.• Donor subsidies should complement, not compete with private sector capital.• The lack of institutional and human capacity is the key constraint.• The importance of financial and outreach transparency.

Source: CGAP, Key Messages for the Year of Microcredit 2005, www.cgap.org

CHAPTER 1 Conceptual framework

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Microfinance in Kazakhstan: an inclusive financial sector for all

CHAPTER 2MICROFINANCE GLOBAL

DEVELOPMENT

2.1 International initiatives in support of microfinance

2.1.1 The Microcredit Summit Campaign and beyond

�Our purpose as an assembly is to launch a global campaign to reach 100million of the world�s poorest families, especially the women of those families,with credit for self-employment and other financial and business services bythe year 2005. We commit to the development of sustainable institutions,which assist very poor women and their families to work their way out ofpoverty.�

Microcredit Summit Declaration 1997

Considered the first major international effort toaddress and support microfinance activities, theInternational Microcredit Summit took place inWashington DC in February 1997. As part of itsefforts to launch a global anti-poverty movementwith the development of microcredit at its core,the summit committed itself to achieving animportant goal: ensuring that 100 million of theworld's poorest families were receiving microcre-dit by the year 2005.

The summit, and the valuable resources on micro-finance practices it generated, created an impetusthat a year later led the United Nations GeneralAssembly to declare 2005 as the InternationalYear of Microcredit. As it approached the interna-tional community to push the implementation ofmicrocredit programs around the world, the Gen-eral Assembly suggested that all parties engagedin poverty reduction take additional measures tomake available loans and related services for thepoor to facilitate opportunities for self-employ-ment and other profit-making activities. Specifi-cally, the UN proposed that governments, NGOs,the private sector and the mass media includemicrocredit in their poverty reduction strategies,underlining its contribution to social developmentand its positive influence on the lives of peopleliving in poverty.

Many countries took up this challenge during the2002 World Summit on Sustainable Developmentin Johannesburg, South Africa. There governments

tried to negotiate a common plan of action formicrofinance development, setting the followingobjectives:• to build and strengthen microcredit and mic-

rosavings networks to provide services andshare experiences;

• to introduce training programs for MFI staffand clients;

• to promote adequate policies and legislativeframeworks for the development of microcredit.

The latest State of the Microcredit Summit Cam-paign Report (2004) reveals that progress has beenmade towards the goal set back in 1997. As ofDecember 2003, approximately 2,936 microcreditinstitutions reported an outreach of about 81 millionclients, 55 million of whom are considered amongthe poorest. When counting family members, thisoutreach is estimated at 274 million people. More-over, the annual client growth rate averaged justunder 39 percent between 1997 and 2003.

Based on this success, at the recent Latin Amer-ica/Caribbean Microcredit Summit in Santiago,Chile, it was announced that the campaign wouldbe extended to 2015 to better contribute to achievingthe MDGs. The new goal of the campaign istwofold: to ensure that 175 million of the world'spoorest families are receiving credit and relatedservices for self-employment by the end of 2015,and to ensure that 100 million of the world'spoorest families move from below USD 1 a dayto above USD 1 a day by the end of 2015.

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2.1.2 The International Year of Microcredit 2005

"The great challenge before us is to address the constraints that exclude peoplefrom full participation in the financial sector. The International Year of Micro-credit offers a pivotal opportunity for the international community to engagein a shared commitment to meet this challenge. Together, we can and mustbuild inclusive financial sectors that help people improve their lives."

Kofi Annan (UN Secretary General)

The 2005 International Year of Microcredit (IYM)aims at building an inclusive financial sector andstrengthening the entrepreneurial spirit existingwithin impoverished communities. To this end, theIYM has among its goals:

• to increase public awareness and under-standing of microfinance, particularly itscontribution to poverty alleviation;

• to develop strategies to include and con-sider microfinance as a part of everycountry's financial system;

• to enable MFIs to become more effectivein servicing the poor;

• to strengthen donor and government ca-pacities to support MFIs;

• to expand MFI outreach by encouragingpartnership among governments, the Unit-ed Nations, the private and public sec-tors, and non-governmental organizations.1

Within this large IYM framework, three majorinitiatives have been undertaken:

• the Global Microentrepreneurship Awards:Celebrating Entrepreneurship Around theWorld;

• the Data Project: What Type of AccessDo Poor and Low Income People Have toFinancial Services?; and

• the Blue Book Project: Why Are So ManyBankable Clients Unbanked?

The last of these initiatives, the Blue Book Project,is a particularly innovative global project de-signed to address the challenges of microfinanceby identifying key constraints and opportunities.Led by the United Nations Capital DevelopmentFund (UNCDF) in collaboration with the WorldBank, International Monetary Fund (IMF), Interna-tional Labor Organization (ILO) and InternationalFund for Agricultural Development (IFAD), thisproject is based on the commitment of SecretaryGeneral Kofi Annan to the goal of "addressing theconstraints that exclude people from full partici-pation in the financial sector" and the globalcommitment to collective action established dur-ing the 2002 International Conference on Financ-ing for Development in Monterrey, Mexico. Theconclusion of the project will be marked by the

publication and dissemination of the Blue Bookon Building an Inclusive Financial Sector.

2.1.3 CGAP, UNCDF and otherinternational organizations

The Consultative Group to Assist the Poor (CGAP),a consortium of 28 public and private develop-ment agencies, is considered one of the world'sleading microfinance think tanks. In its efforts torealize a world where all poor people havepermanent access to affordable and client-respon-sive financial services, CGAP has become aneffective platform to generate global consensus onmicrofinance standards and norms.

In its five focus areas -- financial transparency,enabling policy frameworks, poverty outreach,institution building, and donor effectiveness --CGAP serves a variety of roles.

First and foremost, CGAP is a resource center forthe entire microfinance industry, where it incubatesand supports innovative products, ideas, and cutting-edge technology for MFIs. As well, CGAP providesmicrofinance stakeholders (development agencies,MFIs, government authorities, auditors and ratingagencies, etc.) with advisory services, training, andresearch services. Finally, CGAP is also active inconsensus building and information sharing, with itsconcept dissemination and best practices analysisamong its most successful activities.

The United Nations Capital Development Fund(UNCDF) also has developed a special expertisein microfinance. UNCDF supports the develop-ment of reliable and sustainable MFIs throughseveral different means. Its Special Unit for Mi-crofinance (SUM) uses experienced practitionersto help develop a range of financial services forthe poor. SUM supports the MicroStart program,which seeks to innovate in the development ofnew microfinance ventures by supporting youngand promising financial operators in a sustainablemanner. SUM also supports the MicroSave pro-gram, which promotes savings systems in Africa.Services are tailored to support countries withemerging microfinance sectors and include grants

1 2005 International Year of Microcredit brochure, www.yearofmicrocredit.org, 2005.

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and soft loans, technical and policy guidance,training and information dissemination.

In addition to these two leaders, the UnitedNations Development Organization, World Bank,UN Food and Agricultural Organization (FAO),ILO, IFAD and other international organizationshave committed to developing microfinance bycontributing their knowledge and resources. Per-haps even more important are the internationalNGOs, which are sharing and disseminating theirsuccessful experiences to sister organizations allover the world.

2.2 Microfinance bestpractices

2.2.1 International experiences and lessonslearned

Over the last few decades a large collection ofresources, tools, guidelines, training courses and bestpractices for NGO, MFIs and donors have beenproduced and disseminated in the area of microfi-nance. From this vast collective experience, one factsoon emerged: while the economic and povertyalleviation goals of microfinance are the same aroundthe world, microfinance solutions must be tailored tothe different needs of each individual country.

Microfinance is a flexible tool that has beenadapted to the most varied conditions around theworld. Indeed, many successful examples existand can be chosen as best practices for adapta-tion on the basis of local needs assessments.

There is now global consensus that any playerinvolved in microfinance activities, including MFIs,the government, the financial sector, or donors,should conform with international practice stan-dards. Below are some of the most importantlessons learned.

• Poor clients are willing to pay for avariety of financial services.

• Even the poorest save.• Financial sustainability is the key to offer

durable and valuable microfinance servic-es to the poor and to expand outreach.

• Financial services should be tailored toclient needs and not be supply driven.

• MFIs, and not donors, should design ser-vices for the poor.

• The time needed to reach financial sus-tainability can vary from 5 to 10 yearsdepending on the country environment.

• MFIs should invest in efficiency to reducecosts and provide high-quality services.

• National level microfinance associationscan support capacity building of MFIs

and influence the political agenda.• Accurate and comparable financial state-

ments are essential for all stakeholders.• A government's primary role is as a facil-

itator, not as a direct provider of financialservices.

• Interest rates should be market-oriented.• Replication and expansion are necessary.• NGOs need specific training.• National coordination and strategy owner-

ship are needed.• Impact upon the poor should be mea-

sured.• Many official microfinance poverty alle-

viation programs have not been effectivein the past.

Several obstacles to the development of microfi-nance exist in many developing countries. Thesetypically include:

• political interference in program imple-mentation and in the selection of eligibleborrowers;

• little knowledge and understanding amongstpolicy makers and regulators on microfi-nance;

• lack of a sound legislative framework formicrofinance activities, and in particularlack of regulations that allow MFIs tocollect savings and impose collateral re-quirements;

• distorted interest structures and interestrate caps;

• weak institutional and human capacities;• an underdeveloped and unreliable finan-

cial sector;• non-availability of well-planned and well-

structured support services (e.g., ratingservices, training centers, etc.);

• presence of government or donor-subsi-dized loan programs;

• lack of retail capacity that bottlenecksmicrofinance development.

Addressing these barriers is necessary for creatinga healthy environment for microfinance activities.

2.2.2 International best practices

Two highly successful MFIs -- the Grameen Bankin Bangladesh and Fundusz Micro in Poland --give some sense of the variety of microfinanceexperiences across different regions.

Bangladesh's Grameen Bank is arguably the world'sbest-known MFI. From its founding in 1976 withina research program, Grameen has grown throughits exceptional success in reducing poverty tobecome an independent bank with special status:the Central Bank of Bangladesh, which owns arelevant share in Grameen Bank, regulates onlyits network extension. At present, the Grameen

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2 ADB, Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America, ADB Institute Discussion PaperNo.15, 2004.

Bank covers practically all rural areas in Bang-ladesh and extends its services mainly amongpoor women. Every month, the Grameen Bankgrants loans totaling USD 25 million and servesmore than 2 million borrowers in 36,000 Bang-ladeshi villages.

The Grameen Bank applies operational modelsbased on a credit-saving scheme. After gender-based loan groups are formed according to in-come levels, the microcredit process begins withsmall weekly contributions by group members toa savings pool. Obligatory savings deposits aremade 3-4 weeks before the loan extension, andduring the first stage only group members canapply for loans. Once loans are disbursed, repay-ment takes place in equal installments over 50weeks and the borrower must contribute 5 percentof the loan amount into the group savings fund.Because the Grameen Bank grants loans to peoplewho have no education, property, or expertise,group relationships form an alternative collateral;the group is responsible for loan repayment incase an individual fails to do it.

Five to eight groups then join together to form a"development center" run by a chairman and secre-tary. To promote discipline, timely repayment, re-porting, and credit recovery, participation in weeklygroup meetings is obligatory for all members. Trans-parency is maintained throughout, with all opera-tions made openly at the meetings and in thecenter. If a group successfully fulfills all its obliga-tions, loan terms can be expanded. These loans canrange from USD 100-300 with a 20 percent annualinterest rate. During the entire process, loan groupsare supervised and supported by a Grameen Bankofficer who manages loan provisions and monitoringfor an average of 200-300 clients a month.

While the Grameen Bank has achieved success inAsia, the Polish Fundusz Micro Fund has provento be one of the most notable microfinanceinstitutions in Eastern Europe. Fundusz Micro, anNGO MFI, was established in 1994 by the PolishAmerican Enterprise Fund (PAEF) to promote thedevelopment of micro enterprises in Poland. Itnow has 32 branches operating in all regions ofthe country. The fund has served 33,800 microenterprises throughout Poland, with a total loandisbursement of about USD 170 million. The fundcombines lending services with savings collec-tion, training and consulting. Using individual,group and rotational models, the fund employeesa set of standardized terms that typically includean average loan size of USD 1,500, a three-month repayment period, and an effective interestrate of 35 percent. Forty-two percent of Fundusz

Micro's borrowers are women and the delinquencyrate is under 3 percent.

2.2.3 New challenges

MFIs constantly encounter new challenges in theirefforts to provide financial services to the world'spoorest. Expansion is a central challenge -- MFIsmust expand their outreach to rural and remoteareas to meet the huge untapped market andexpand their services with savings and insuranceproducts to meet demand, all while maintainingfinancial sustainability. Creating a sound policyenvironment is also a constant concern.

When MFIs reach a high level of developmentand a relevant number of clients, the manage-ment faces a different set of challenges involvingtransformation and the problem of finding newmoney through access to financial markets, sav-ings collection and loans from commercial banks.In 1992, Banco Sol in Bolivia became one of thefirst NGO MFIs to become a commercial bank.Not long after, Banco Sol financially outperformedBolivian commercial banks and gained access tointernational capital markets. Following this suc-cessful example, several other well-known NGOsin other regions transformed themselves into com-mercial banks between 1992 and 20032. This newoption raised concerns over whether the povertyreduction goal of the NGOs might be damagedby the transformation. Yet while NGOs enteredthe commercial sector, commercial banks havebegun downscaling programs in an attempt toreach the poor.

2.3 Microfinance intransitional economiesand in Central Asia

2.3.1 Overview of the social andeconomic aspects of microfinancein Central Eastern Europe and inthe Newly Independent States

Countries labeled as transition economies shareone major historical commonality, namely a move-ment away from socialism and a centrally-plannedeconomy towards democracy and a market econ-omy. While many state-run companies were dis-mantled, growth of the private sector has beenuneven. Self-employment and small businesseshave been the main replacement for state-ownedenterprises, but high taxation, excessive regula-

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Microfinance in Kazakhstan: an inclusive financial sector for all

Table 2.1 Microfinance in Central Eastern Europe and in the Newly Independent States

Institutions NumberPortfolio

outstanding(Mln. USD)

Activeborrowers('000)

Totaldeposit

(Mln. USD)

Activedepositors('000)

Averageloan size(USD)

DepthRatio(%)

Credit unions 5,447 408 1,453 455 2,244 211 15

NGO MFIs 100 108 197 0.7 17 1,501 124

Commercial banks 24 125 23 N.A. N.A. 7,741 648

Microfinance banks 10 158 42 218 96 123 553

Total 5,581 800 1,715 674 2,356

3 Microfinance Centre for CEE and NIS, The State of Microfinance, 2003.

Table 2.2 Top 10 MFIs in CEE and NIS (number of clients)

Notes:

1 OSS = Operational Self Sufficiency2 ROA = Return On Assets3 Depth ratio = average loan balance as percentage of GDP per capita

Source: MFC for CEE and NIS 31/12/2002

MFIs Country TypeYear ofoperation

Number ofborrowers

Loanportfolio(Mln USD

Profitability(OSS1

or ROA2)

DepthRatio3(%)

Microfinance Bank Georgia MFB 1999 29,815 34.7 1.7 197

KMB Bank Russia MFB 1998 21,708 136.3 - 378

Kyrgyz Agricultural FinanceCorporation

KyrgyzstanPublic

Company1997 20,000 21.5 - 399

FINCA Kyrgyzstan NGO 1995 19,789 4,2 139 78

Constanta Foundation Georgia NGO 1997 16,134 2.9 111 31

Mercy Corps Women'sMicroCredit Program

Kyrgyzstan NGO 1997 12,869 1.4 402 40

UMCOR/AREGAK Armenia NGO 1997 11,841 2.9 142 49

XAC Bank Mongolia MFB 1999 11,063 4.9 -2.3 113

FORA Russia NGO 2000 10,788 6.4 121 36

Microfinance Bank of Serbia Serbia MFB 2002 9,941 40.1 -2.7 407

Source: MFC for CIS and NIS 2001

tions and corruption have hindered the formalsector. Even a decade after the fall of the SovietUnion, the old and the new systems continue toco-exist in many of these countries.

This economic transition has had high social coststhat include increased poverty, inequality, andunemployment. Many well-educated individualsformerly employed in state companies lost theirjobs and have been unable to maintain theirstandard of living. The existence of these "newpoor" distinguishes poverty in transitional econo-mies from that in developing countries.

Since the early 1990s, the countries of Central andEastern Europe (CEE) and Newly Independent States(NIS) reformed their financial sector along thewestern model. Although private banking devel-oped from privatization policies and foreign invest-

ment, many banks, particularly public ones, facechallenges like weak governance, bad debts andundercapitalization. Even taking into account vari-ations between countries, few of these financialinstitutions are focusing on small- or medium-sizeenterprises. MFIs have developed to serve the hugeuntapped market, but compared to other regionsthe outreach is poor: it is estimated that only 5percent of the market is served. Nevertheless, thesector growth rate reported by the MicrofinanceCenter (MFC) for CEE and NIS is remarkable: thenumber of clients grew by 30 percent a year overten years. By 2001, MFIs had reached 1.7 millionborrowers and 2.3 million depositors in the CEEand NIS3. The contribution of MIFs to povertyreduction and business development has been sig-nificant, even if the outreach is far from optimal.

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Transitional economies share certain features incommon:

• risks associated with inflation and deval-uation;

• high tax rates on public sector enterpris-es;

• prevalence of cash in the payment sys-tem;

• exposure of creditors and clients operat-ing outside the banking system;

• lack of a reliable system of communica-tions and information on the microfinanceservices market.

Within this context, regional differences betweenEastern Europe and Central Asian states can besubstantial, particularly in regard to levels ofeconomic development and the prevalence ofcertain kinds of organizations. For example, thedevelopment of credit unions was remarkable inEastern Europe, while in Central Asia they scarce-ly exist. Despite the equal availability of donorfunds (mainly from European Bank for Reconstruc-tion and Development and European Union/Tacis),the most developed MFIs can be found in EasternEurope and in the Caucasus while the lowestlevels of activities are in Central Asia and Russia.Due to the fact that the development of microfi-nance varies considerably between sub regions,the following pages will focus on Central Asiaexclusively.

2.3.2 Microfinance in Central Asia

Microfinance is relatively new to Central Asia, firstarriving in the region only during the mid-1990s.As a result of this late start and lack of systematicdata, it is hard to draw a comprehensive picture ofthe sector. Nevertheless, in 2001 and 2002 theMFC for CEE an NIS and the World Bank conduct-ed two surveys of microfinance developments inthe region that showed promising initial results:microfinance institutions have been established andactively operate with the support of governmentsand international organizations.

The World Bank, as of December 2002, estimatedoutstanding loans for MFIs operating in CentralAsia at USD 200 million, with a yearly growthrate of nearly 40 percent. These loans are goingto an estimated 200,000 microfinance clients, aclient base that is itself growing at 20-30 percentper year4. These numbers indicate both that mi-crofinance sector development is at an earlystage and that the potential of microfinance out-reach is wide.

4 World Bank, Microfinance and the Poor in Central Asia, 2002.5 Microfinance Centre for CEE and NIS, The State of Microfinance, 2003.6 Microfinance Centre for CEE and NIS, MFC Spotlight Note 12, 2004.7 Microfinance Bulletin, Benchmarking Microfinance in Eastern Europe and Central Asia, 2004.

Table 2.3 MFIs in Central Asia

Institutions NumberPortfolio

outstanding(Mln. USD)

Activeborrowers('000)

Credit unions 384 12 30

NGO MFIs 80 45 147

Commercialbanks

23 143 24

Microfinancebanks

1 n.a. n.a.

Total 489 200 201

While credit unions rank first in terms of the sheernumber of institutions in Central Asia, they arecomparatively small in terms of number of clientsand portfolio size. Rather, MFIs operated by NGOsachieve the greatest outreach, while commercialbanks own, as expected, the largest outstandingportfolios. Indeed, NGO MFIs and commercialbank downscaling programs dominate the microfi-nance market in Central Asia. Good performancewas achieved by only small number of NGOMFIs, such as the Foundation for InternationalCommunity Assistance (FINCA) and Mercy Corpsin Kyrgyzstan and the Kazakhstan Loan Fund(KLF) in Kazakhstan. The majority remain small,young and with limited financial sustainability.Among commercial banks, those in Kazakhstanattained the widest outreach, but they serve onlythe richest among the poor5. Only one microfi-nance bank has so far been established and islocated in Tajikistan. In their most recent survey,the Microfinance Center found that half of theMFIs interviewed have less than 500 clients. Onthe other side there are on average 3,300 activeborrowers per MFI, indicating that there are sev-eral institutions serving more than 10,000 clients6.

Considering that MFIs in the region are the youngestin world, their financial and operational efficien-cy levels are good, if varied. The MicrofinanceBulletin estimates that Central Asian MFIs haveoperated on average for four years compared tothe global average of eight years7. The Microfi-nance Bulletin sets the average operational self-sufficiency ratio at 135 percent in Central Asia(compared with 117 percent in CEE and NIS), thehighest among the sub regional groups. RegardingMFI productivity (measured here as active borrow-ers per loan officer), figures indicate that CentralAsia stands behind the best performers in CEE andNIS: there are 123 active borrowers per loan

Source: WB 2003 survey

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Microfinance in Kazakhstan: an inclusive financial sector for all

officer in Central Asia compared with 219 in theCaucasus and 206 in the Balkans8. Three KyrgyzMFIs figure among the Microfinance Center's topten list, and successful examples can also befound in Kazakhstan. However, local MFIs servetheir clients mainly through working capital loans,while insurance and savings (except compulsorysavings) services are not provided. Central AsiaMFIs also offer a smaller number of loan productsin comparison with CEE and NIS due manly tolimited outreach.

The table below shows that microfinance servicesin Central Asia target the poor. The depth ofoutreach compares GDP per capita with averageloan size. Generally a ratio under 250 percentindicates that the poor are the main clients; in allfour states considered (Kazakhstan, Kyrgyzstan,Tajikistan, and Uzbekistan) the level is far belowthis line. However, it is clear that only a tinypercentage of the poor benefit from the access tofinancial services. The best performer, Kyrgyzstan,still has an outreach ratio of 3 percent, a level farbelow that of Eastern Europe. The untapped mar-ket is even bigger for the other three countries,which do not go beyond the 1 percent threshold.

Table 2.4 Outreach indicators for Cen-tral Asia

Outreachindicators

Kazak-hstan

KyrgyzRepublic

Tajiki-stan

Uzbe-kistan

Microfinance clientsas % of total poor

0.4 3.0 0.8 0.1

Microfinance clientsas % of rural poor

0.7 4.0 1.0 0.1

Depth of outreach(%)

17 154 41 17

The degree of poverty in Central Asia ranges fromKazakhstan, the wealthiest country in the region,to Tajikistan, the poorest. Unemployment and lowsalaries are among the main causes of poverty,which is concentrated in rural areas. Microfinancehas shown it can alleviate poverty in the region,but the rural outreach is still minimal. Part of thisproblem stems from the fact that MFIs are oftenbased only in the main cities or in oblast capitals,even though about half of the population lives inthe countryside. As well, MFIs usually serve theunfulfilled financial needs of the self-employedand small and micro entrepreneurs in urban areas,

rather than targeting the poor in less accessibleareas.

Given their differences in levels of social andeconomic development, financial sector develop-ment and the number and characteristics of thepoor, Central Asian countries not surprisingly havevarying microfinance environments. The strongestMFIs are found in Kyrgyzstan and Tajikistan,while in Kazakhstan and Uzbekistan microfinanceoutreach is very limited in relation to total pop-ulation. A brief summary of the current microfi-nance situation in each country is provided be-low:• Kazakhstan is the wealthiest and most devel-

oped country in the region. It is equippedwith an advanced and liquid financial system,but the microfinance sector is underdevel-oped. Because MFI activities are concentratedmainly in urban areas, outreach is below 1percent of the poor with about two millionrural people lacking access to financial ser-vices. MFIs' operation sustainability varies,but the cost of activities is among the highestin the area. Several commercial banks areengaged in microlending and the governmenthas drafted a large state support program forsmall and medium enterprises.

• Kyrgyzstan is a poor country with a low levelof economic development and a relativelyunderdeveloped financial sector. Despite thesefactors, microfinance outreach is the best inthe region, even in rural areas. Of the signif-icant MFIs operating in the country, three areamong the top ten in the CEE and NIS region-- the Kyrgyz Agriculture Finance Corporation,FINCA and Mercy Corps women's microcreditprogram. The country offers one of the bestlegislative environments to support microfi-nance sector development. Success has evenallowed some MFIs to access commercialfunds. The portfolio growth of credit unionMFIs in particular must be noted. This devel-opment should be studied in more detail toshare good practices and experiences in re-gions where these MFIs are underdeveloped.

• Tajikistan was seriously weakened by civilwar during the 1990s and remains the countrywith the lowest per capita GDP within theNIS. The economy is highly dependent onagriculture and remittances, and the financialsystem is weak and undercapitalized. Microfi-nance is developing quickly in the country,but outreach remains below 1 percent. Spe-cialized NGO MFIs provide the most finan-cial assistance to the poor. New microfinance

8 Microfinance Centre for CEE and NIS, MFC Spotlight Note 12, 2004.

Source: WB 2003 survey

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legislation was enacted in 2003 and the re-gion's only microfinance bank initiated itsactivities in the country.

• Uzbekistan's microfinance sector is only at avery early stage of development. MFIs, oftenstarted as NGOs launched by internationaldonor programs, suffer from a weak and gov-ernment-controlled financial sector. Commer-cial banks are not currently involved in mi-crofinance. Despite having the fastest microfi-nance demand-driven growth in the region,the legal and regulatory environment is inad-equate due to detrimental state policies suchas interest rate caps. The new law on creditunions helped establish some institutions, buttheir scale of operations is still minimal.

2.4 Major findings andconclusions

The International Year of Microcredit 2005 con-cludes a period of strong development for micro-finance theory and practice. Since the Internation-al Microcredit Summit, international microfinanceawareness campaigns have been able to reachboth donors and the wider public. Internationalconsensus now considers microfinance as one ofthe main tools for reducing poverty and improvingpeople's well being. Yet while many international

organizations and numerous NGOs have raisedfunds and developed strategies in support of mi-crofinance activities, the global outreach of mi-crofinance is far from optimal.

Microfinance arrived in Central Asia only in theearly to mid 1990s, leaving countries in theregion far behind the world's average for develop-ment in the sector. Despite this late start, one ofthe highest growth rates in the world has quicklybegun to reduce this gap. Indeed, the financialand operational efficiency levels of Central AsianMFIs show good results, but access to microfi-nance services remains limited. Microfinance hasshown positive impact on poverty alleviation amongthe CEE and NIS countries, with successful exam-ples in Russia, Poland and other parts of EasternEurope. Of all the best practices gathered throughresearch into the wide variety of existing micro-credit methodologies and practices, it is acknowl-edged that one remains paramount: any schemeshould be tailored to the specific needs of poorclients, taking into account local traditions, cus-toms, legislation and economic structures. Forexample, while a wide range of microfinanceprograms from around the world could be adaptedto Kazakhstan, their success will depend on howwell they account for Kazakhstan's unique charac-teristics in terms of its people, culture, history andcurrent level of socioeconomic development.

CHAPTER 2 Microfinance global development

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CHAPTER 3

MICROFINANCE IN KAZAKHSTAN

3.1 BackgroundThe main conclusions and recommendations ofthis report are based on a number of importantstudies that were recently conducted on the mi-crofinance sector in Kazakhstan. Chief amongthese was a UNDP-sponsored survey conducted bythe Institute for Social Survey in February andMarch 2004. The survey included focus groupsand in-depth interviews in 6 of Kazakhstan's oblasts.UNDP and the Association of Microfinance Orga-nizations in Kazakhstan organized another surveyin August and September 2005 to assess thesupply of microfinance in Kazakhstan.

Other resources contribute to this analysis of themicrofinance sector in Kazakhstan as well, in-cluding the following:

• A study entitled "Justifying Areas of UNDPTechnical Assistance to Support MicrocreditDevelopment in Kazakhstan" conducted in 2002.This study included interviews with 17 ex-perts, whose answers provided an overall pic-ture of microcredit in Kazakhstan at that time.

• A study entitled "Financial and Credit Support ofSmall Enterprises in Kazakhstan" conducted in2003 by the NGO Kazakhstan Business Service.

• A survey of microfinance in Central Asiaconducted in the winter of 2003 by the WorldBank. This report provides an overview of themajor types of -- and detailed financial infor-mation about -- existing MFIs in Central Asia.

• A report entitled "Reviewing Microcredit AgencyOperation and Developing the Concept ofMicrocredit Agencies to Enhance Access toFinancial Resources: Analyzing and Develop-ing Monitoring Indicators" published in 2003by the TENIR-Project Company. This reportincludes a brief narrative based on researchconducted by the Center for Marketing andAnalytical Research.

These analytical works include a number of com-mon conclusions:• Although there are several successful MFIs

with 6-7 years of experience in Kazakhstan,microfinance remains a relatively new con-cept here. Many MFIs remain at the stage of

experimentation in their development.• Microfinance reduces the activities of money-

lenders and promotes the entry of entrepre-neurs into the formal economy as well asincreasing the attractiveness of such entrepre-neurs as creditworthy clients for the formalfinancial sector.

• The Government should continue strengthen-ing the environment for MFIs, including re-moving administrative barriers, further devel-oping the economic infrastructure, and facili-tating the development of services for MFIs.

Overall, systemic actions on the part of theGovernment, donor community and NGOs arehelping to create a network of experienced micro-finance organizations. Such organizations in turnwill help ensure increased access to financialresources in the future for enterprises and individ-uals who are currently excluded from the formalfinancial system.

3.2 Microfinance sectoroutlook

Often the terms microfinance and microcredit areconsidered to be synonymous. In Kazakhstan, thereappears to be some confusion between theseterms as well. In fact microfinance refers to a fullrange of financial services, whereas microcreditrefers only to a specific type of financial service.Unfortunately, Kazakhstani legislation recognizesonly the concept of microcredit even thoughmicrocredit services are being provided not onlyby microcredit organizations (MCOs), which oper-ate under the "Law on Microcredit Organizations,"but also by other non-banking financial institu-tions (NBFI) that specialize in providing microloans. This report includes all such organizationsin the term "microfinance institutions" (MFIs).

During the second half of the 20th century, micro-finance developed quickly around the globe. Inrecent years the trend has been to diversify finan-cial services based on market demands. Microfi-

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1 Standard and Poor's, Bank Industry Risk Analysis: Kazakhstan (Republic of), 2004.2 National Bank of Kazakhstan, 1 January 2005.

Table 3.1 Microfinance institutions in Kazakhstan

Level Actors Number

I Second-tier banks (including EBRD Downscaling Programme) 7

II Non-banking financial institutions 32

Credit partnerships 89

Pawnshops 78

III Microcredit organizations 208

TOTAL Microfinance institutions 414

Source: National Bank of Kazakhstan, 1 March 2005

nance is considered to be especially attractive fortransitional economies, as shown by the experi-ences of Eastern Europe and the Balkans. Presentcircumstances suggest that dramatic growth inmicrofinance services could take place in Kaza-khstan as well.

Indeed, since Kazakhstan's independence, supportinglow-income groups has been a priority of the Govern-ment's social and economic development strategy. Asin many other transitional economies, the promotionof small and micro enterprises is considered to beone of the most effective methods to address poverty.Microfinance is a central component of such growth.In fact, since the initial development of its ownmarket economy, Kazakhstani consumers and entre-preneurs have been demanding more and more ac-cess to financial services.

The distinctive features of microfinance in Kaza-khstan derive from its unique socio-economiccontext and the characteristics of its financialsystem. Important factors include good perfor-mance in the banking sector, positive trends inthe industrial and agricultural sectors, and a lowpopulation density.

According to Standard & Poor's, Kazakhstan's bank-ing system is more developed than in many otherCIS countries1. Tougher banking regulations in the1990s, recalls of licenses and mergers resulted inthe consolidation of banks, the number of whichfell from 44 in 2000 to 36 in 20052. Furtherconsolidation and concentration presumably willtake place in the future as a result of continuedhigh growth in this sector.

Other distinctive features of Kazakhstan includeits unique geography and demographic profile.The most successful examples of microfinance arefound in Bolivia and Bangladesh, both of whichhave rather high population densities. In contrast,Kazakhstan has only 15 million people in a vastterritory of 2,725,000 square kilometers.

Thus, further development of the microfinancesector in Kazakhstan faces a paradox. On the onehand, high economic growth, a revival in domes-tic demand, progress in the regulatory framework,and improvements in banking credit and manage-ment systems are all positive signs for futuredevelopment. On the other hand, Kazakhstan'slimited market size, low population density, un-even distribution of human resources, and patternsof internal migration and livelihoods could con-strain such development.

In any case, bank credit remains inaccessible tomany small enterprises and individual entrepre-neurs. This situation in itself creates an incentiveto further develop microfinance as an integral partof the country's financial system and povertyreduction strategy.

The advent of microcredit in Kazakhstan is asso-ciated with the establishment of a legislativeframework in the mid-1990s with adoption the"Law on Banks and Banking Activity." This result-ed in the emergence of banks along with newparticipants who later became the main promotersof microfinance: non-banking financial institutions,credit partnerships, and pawnshops. Initially, theGovernment concentrated its efforts primarily onstrengthening the banking sector and credit part-nerships (e.g., the Agrarian Credit Corporation),while international organizations focused on mi-crofinance projects to provide financial servicesto the poor (e.g., the Kazakhstan Loan Fund,Asian Credit Fund, etc.). The development ofpawnshops was solely the result of private sectoractivity. Finally, the adoption of a 3-tier creditsystem and related laws on credit partnerships andmicrocredit organizations became the foundationsin promoting microfinance in Kazakhstan. Theorganizations listed in the following chart makeup today's microfinance sector in Kazakhstan.

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According to the latest official figures, there areover 400 registered microfinance institutions in allthree levels of the financial system. However,these figures should be taken with some cautionsince not all of the listed organizations are inoperation, and many have only a small number ofclients and/or limited turnover.

Although the seven banks listed above have activemicrocredit downscaling programs, non-banking fi-nancial institutions, credit partnerships, pawnshops,and microcredit organizations constitute the vastmajority of entities serving this sector. As well,although not listed in this table, informal lendingactivities have not disappeared based on the con-tinuing high level of demand for microcredit.

Further development of the microfinance sectorcould positively affect the social and economicdevelopment of the country. The following out-comes are of particular relevance for Kazakhstan:• Increased living standards and poverty reduc-

tion as additional income is used to improvequality of life, increase economic securityand alleviate poverty;

• Employment creation as new and expandedbusinesses help create jobs;

• Personal empowerment as microfinance helpsincrease choice and expand opportunities;

• Gender equality as microfinance borrowersare often women;

• Entrepreneurial development as the incentivesgrow to set up and expand small businesses;

• Business promotion as improved financial skillsand credit histories facilitate the access ofsmall entrepreneurs to formal sector bank loans.

Thus, in addition to being an important part of thefinancial system, microfinance could very wellhelp address many of the economic and socialchallenges currently faced in Kazakhstan. Thus itwill be vitally important to promote and monitorthe impact of microfinance on social and eco-nomic development in the years to come.

3.3 Microfinance inKazakhstan:institutional outline

3.3.1 Microfinance stakeholders

The main stakeholders in the microfinance sectorin Kazakhstan are:• the state;• international organizations;• commercial banks;

• NGOs and credit partnerships; and• the Association of Microfinance Organizations

in Kazakhstan.

On the macro-level, the main function of thestate is to develop a conceptual approach, estab-lish a legislative basis, set up the institutionalinfrastructure, and create appropriate opportuni-ties. On the meso-level, state support is effectedthrough developing specialized sectoral programsand allocating resources from national and localbudgets. In Kazakhstan, the state is involved insupervising commercial banks and non-bankingfinancial institutions, while microcredit organiza-tions are exempted. Although the state budgetfinanced several microfinance projects during thepast ten years, these achieved only limited resultsdue to the lack of experience and a clear strat-egy. New measures to promote microfinance arecurrently being supported.

International organizations, such as UNDP and theWorld Bank, contributed to the formation of themicrofinance sector in Kazakhstan. Bilateral donors,such us the US Agency for International Develop-ment (USAID), also participated actively by fundingseveral projects. Major international NGOs operat-ing in Kazakhstan, such as the Soros Foundation,Eurasia Foundation and Mercy Corps, also contribut-ed. The role of development banks was notable inpromoting downscaling programs in commercial banks.Through advocacy, grants, concessional loans andtechnical assistance, international organizations pro-moted reforms and helped MFIs to grow.

Although Kazakhstan's financial sector is welldeveloped compared with other countries in theregion and many reforms have already been un-dertaken, commercial banks have only had alimited impact on microfinance. The most notableresults have been achieved through downscalingprograms supported by international developmentbanks. The recent emergence of loan agreementsbetween leading MFIs and banks is opening newdoors for future development of the sector.

Although the state, international organizations andcommercial banks have all supported the devel-opment of microfinance in Kazakhstan, NGOsand public funds have in fact been the mainproviders of microfinance services on the ground.Indeed, in their work with socially-vulnerablegroups, NGOs were among the first organizationsin Kazakhstan to develop and implement effec-tive methods for delivering financial services tothe poor. Such NGO-MFIs were often establishedwith the support of international donors throughgrants and technical assistance. However, giventhe economic development of Kazakhstan and thedecline in donor funding, many leading MFIs

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3 Law on Credit Partnerships as of 28 March 2003.4 Government's Decree #753 as of 28 July 2003.5 Kazakhstanskaya Pravda Newspaper, 19 December 2003.

have now become non-profit organizations, oftenin the legal form of public funds. As of 1 March2004, there were 36 NGO-MFIs providing micro-credit services in Kazakhstan.

Credit partnerships officially emerged in Kazakh-stan in 1997 when the first regulations on creditpartnerships were adopted. Currently the "Law onCredit Partnerships"3 regulates their activities. Creditpartnerships are defined as legal entities estab-lished to provide financial services to members byaccumulating internal and external financial re-sources. Credit partnerships have been most effec-tive in rural areas. However, rather than providingtraditional agricultural loans, many such creditspartnerships focus on more short-term loans withhigher interest rates (up to 30 percent a year). Thelack of reliable data on credit partnerships inKazakhstan requires additional research to under-stand their effectiveness, usefulness and outreach.

In the beginning of 2004, based on the initiativeof leading MFIs, the Association of MicrofinanceOrganizations of Kazakhstan (AMFOK) was creat-ed to help coordinate and promote microfinance.The main goals of the association are to furtherdevelop and strengthen the microfinance sector inKazakhstan, to lobby government and legislators,to address social issues and economic problemsby providing low-income people with access tofinancial services, and to provide technical assis-tance to its members. As of 31 August 2005, 31MFIs had joined AMFOK. Such an umbrella orga-nization is vital for further development of themicrofinance sector.

3.3.2 Financial sector developments: thethree-tier model

The "Concept of Finance Sector Development inKazakhstan" was adopted by the Government inmid-2003 to further streamline the development ofKazakhstan's financial sector by identifying maintargets and priority areas for the period 2003-2006. This concept presented a three-tier modelfor the sector:4

• Level 1: commercial banks• Level 2: non-banking financial institutions,

credit partnerships, pawnshops• Level 3: microcredit organizations

This framework suggests that institutions in thesecond and third tiers will deliver microfinanceservices. Credit partnerships, pawnshops, mortgagecompanies and other organizations providing li-censed banking services comprise the second tier.The target clients of such organizations include

small and medium enterprises (SMEs) and individ-uals. The third tier is comprised of organizationsengaged only in microcredit. The "Law on Micro-credit Organizations," adopted in March 2003,allows MCOs to work with less regulation, forexample, without formal licensing. KazakhstanMCOs only have to register with the Agency ofStatistics and local juridical bodies. There are noadditional requirements from the National Bankfor licensing and monitoring. This approach isdriven by the desire to promote the developmentof a network of MCOs. Equally important is thedesire to significantly reduce the expensive formsof informal lending, which are currently the mainsource of financing for micro entrepreneurs.

MFIs generally deliver services that are comple-mentary to commercial banks. Commercial banksare often not interested in micro loans because oftheir relatively high transaction costs, and microenterprises are often not able to meet the condi-tions required for commercial loans, especiallywith regard to collateral. MFIs on the other handare more willing to conduct relatively small fi-nancial operations because they have developedeffective technologies to ensure profits and lowerrisks even with relatively small loans. MFIs alsohave a comparative advantage in rural areas,especially through the use of membership organi-zations such as credit unions or cooperatives.Thus MFIs fill a gap in providing services that arenormally beyond the interests of commercial banks.At the same time, MFIs contribute to strengthen-ing commercial banks by actively mobilizingsavings, encouraging successful entrepreneurs toset up SMEs, and preparing clients for entry intothe formal financial system.

This three-tier concept of financial services under-lies the overall structure of the financial system inKazakhstan. Such a structure is intended to pro-mote a range of actions to:• improve the banking system;• promote fair competition among banks;• upgrade the normative and regulatory frame-

work of credit partnerships and pawnshops;• develop state support mechanisms for MFIs;• provide preferential taxation for MFIs; and• approve and implement a public microcredit

program that includes training and technicalassistance5.

Relationships between financial institutions in eachof the three levels should move further towardsbuilding partnerships and expanding outreach andservices.

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3.3.3 Evolution of microfinancelegislation

Three main laws regulate Kazakhstan's financialsector. An overall framework is provided by the"Law on Banks and Banking Activity," while twoother laws on microcredit organizations and creditpartnerships -- enacted in 2003 -- provide specificregulations for MFIs.

The legislative foundation of Kazakhstan's finan-cial market is the "Law on Banks and BankingActivity" adopted in the mid-1990s. Thus, in thebeginning, microfinance licenses were distributedamong different institutions unified by the frame-work of a single law. It was necessary at thattime for the organizations involved in microfi-nance to be under National Bank's supervision,encouraging the establishment of clear and trans-parent activities.

As the microfinance sector developed, two newlaws were approved: the "Law on Credit Partner-ships" and "Law on Microcredit Organizations."Later, the three-tier credit system acquired moreweight with the Government decision to approvethis conception of the financial sector. The "Lawon Microcredit Organizations" places MCOs undermarket principles and establishes the basis forsimplified procedures to establish new MCOs.MCO activity does not require licensing and isnot under central bank surveillance.

The "Law on Credit Partnerships" considerably in-creases the effectiveness of the credit system throughsetting rules for credit unions. Along with pawn-shops, mortgage companies, and other non-bankingfinancial institutions, credit partnerships have be-come an important component of the second tier of

Table 3.2 Microfinance law framework

# Law Date Summary

1. Banks andBanking

31 August1995

This law provides the legal framework for banking activities both forbanks and organizations carrying out banking operations. It establishesregistration procedures, organizational and legal structures, amounts ofchartered capital, and operations and reporting requirements.It also defines the responsibilities of banks in: (a) disclosing their termsof operations, (b) granting special terms for individuals with whombanks have special relations, (c) regulating bank operations and (d)protecting the interests of depositors. The law also specifies thesupervision authority under which banks and non-banking financialinstitutions operate.

2. MicrocreditOrganizations

6 March2003

This law governs the relations in the provision of microcredit andprovides specifics regarding the establishment, legal status, operations,and re-organization and liquidation of microcredit organizations.

3. CreditPartnerships

28 March2003

This law establishes a special regime for mutual credit, which allowsaccess to credit for small enterprises. In addition, the law providessimplified procedures for private individuals and legal entities to setup and withdraw funds from credit partnerships, specifies the terms ofparticipation in credit partnerships, and defines simplified proceduresfor their licensing and supervision.

the credit system. The law provides simplified toolsfor joining and leaving credit partnerships, equalrights for members, and simplified rules for creating,licensing and regulating credit partnerships.

3.4 Assessing microcreditdemand and supply

With the growth of microfinance activities in Kaza-khstan and the establishment of a firm legal founda-tion as discussed above, this sections provides anassessment of the actual demand for microfinancein Kazakhstan and a description of the supply ofmicrofinance services. Two different approaches areused to estimate microfinance demand: the standardof living approach and the private sector approach.Microfinance supply is assessed on the basis ofexisting legal categories of MFIs: commercial banks,non-banking financial institutions, credit partnershipsand microcredit organizations.

3.4.1 Assessing microcredit demand

Traditionally, microfinance was intended to sup-port low-income people and stimulate entrepre-neurship. The transition to a market economycaused uneasy transformations in the labor marketand disruptions to the social benefit system inKazakhstan. This process increased social vulner-ability for a significant part of the population.

Indeed, in the early years of the transition period,poverty became a serious problem as a result ofthe widespread closure of enterprises, forced va-cations, unemployment, and high inflation. In1998, almost 40 percent of the population (about5,923,000 people5) had incomes below the subsis-

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5 Agency of Statistics of Kazakhstan, 2005.6 ADB, Development Prospects for Asian Countries, 2004.7 UNDP, Poverty in Kazakhstan: Causes and Cures, 2004.8 Agency of Statistics of Kazakhstan and UN Theme Group on Poverty Alleviation, Living Standards and Poverty inKazakhstan, 2004.9 Agency of Statistics of Kazakhstan, Living Standards and Poverty in Kazakhstan. Preliminary data for 2005.

As in many other countries, the incidence ofpoverty in Kazakhstan is higher for the ruralpopulation than the urban population. In 2004, thepoverty level was almost three times as high inrural areas as it was in urban areas8. Higher levelsof education and greater economic opportunitiesfor urban residents are two of the main factorscontributing to such differences. There are alsoimportant regional disparities: the ratio betweenthe highest and lowest poverty rates in oblastsincreased to 26.5 in 2004. Kostanay, Atyrau,Mangystau, Zhabul, South Kazakhstan and Kyzy-lorda oblasts are the poorest regions in the coun-try with poverty rates higher than 18 percent.

In addition, Kazakhstan suffered a crisis in itssmall towns (defined as towns with less than

50,000 inhabitants). The economy and social in-frastructure of many such towns were dependenton state enterprises. Many of these enterprisesfailed during the transition process to a marketeconomy, leaving a sizeable population withoutwork. The Agency of Statistics in 2000 reportedthat unemployment levels in some small townsreached as high as 47 percent. In many suchtowns unemployment is chronic. Nearly 87 per-cent of the unemployed may be without employ-ment for over 12 months, and even highly qual-ified workers often experience difficulties in find-ing employment.

In light of the poverty situation outlined above,many people turned to microcredit during thetransition period as a way to overcome the eco-nomic challenges they faced. By 2004, accordingto the Agency of Statistics, 50,600 people re-ceived microcredit loans, a 57 percent increaseover the 32,300 people that received microcreditin 20039. Preliminary estimates for 2005 indicatethat there are 60,000-70,000 active microfinanceclients in Kazakhstan.

Formal and informal sector enterprises (both inurban and rural areas), unemployed, and house-holds are potential MFI clients. The potentialdemand for microfinance can be studied by under-standing the type of perspectives of micro enter-prises that look for financial resources to grow,and by understanding poor households that seekloans for a wider set of needs. Based on theseconsiderations, two different models can be for-mulated to asses microfinance demand:• Standard of living approach• Private sector approach

While these are not intended to provide precisefigures, both models aim at building credible scenar-ios to indicate the magnitude of potential microfi-nance demand. Potential demand provides an indi-cation of development and market opportunities.

Standard of living approach

In the standard of living approach, the demand formicrofinance is estimated conservatively by counting20 percent of vulnerable households in the coun-try. This value defines the percentage of house-holds that most likely would want to accessmicrofinance services. It is common practice touse the household as unit of analysis, since totalhousehold income is often used to verify repay-ment capacity10. The number of vulnerable house-

tence minimum (i.e., the value of a basket ofgoods and services necessary to meet humanbasic requirements for living).

In recent years this trend has reversed: between1999 and 2002 aggregate GDP growth exceeded40 percent. In 2003 and 2004, the economycontinued to grow at a fast pace: the growth ofreal GDP equaled 9.5 percent and 9.2 percentrespectively6. By 2004, only 16.1 percent of thepopulation lived below the subsistence minimumof KZT 5,427 per month (or about USD 3.5 perday at purchasing power parity), compared to 39percent in 1998. Other indicators, such as povertydepth and severity, which characterize the in-come shortfall of the poor and the degree ofinequality, clearly show improvements in the re-cent years as well.

Yet, in spite of these remarkable improvements,many people continue to live in poverty today. InKazakhstan, about 58 percent of the poor arepeople of working age, unemployed or with sala-ries so inadequate that they cannot provide forthemselves7. Proposed changes to the subsistenceminimum value would change the percentage ofpeople that are considered poor or near poor.

Table 3.3 Poverty in Kazakhstan

Proportion of popula-tion with income below Poverty

depthPovertyseveritySubsistence

minimumFoodbasket

1998 39.0% 16.2% 12.8% 3.8%

2004 16.1% 4.3% 3.3% 1.0%

Source: Agency of Statistics of Kazakhstan and UNDP, 2005

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Microfinance in Kazakhstan: an inclusive financial sector for all

holds is estimated using the concept of subsis-tence minimum defined by Kazakhstan authorities(i.e., people with incomes less than KZT 5,427per month). Therefore, based on an estimated687,755 poor households in the country, the de-mand for microfinance in Kazakhstan could in-clude about 140,000 clients.

Table 3.4 Microcredit demand -standard of living approach

11 Agency of Statistics of Kazakhstan, Living Standards and Poverty in Kazakhstan. Preliminary data for 2005.12 Agency of Statistics of Kazakhstan, Living Standards and Poverty in Kazakhstan. Preliminary data for 2005.13 ADB, 2001.14 Agency of Statistics of Kazakhstan, Women and Men of Kazakhstan: Gender Statistics, 2003.

Totalpopu-lation

Vulner-able po-pulation*

Averagesize of

households

Vulner-able hou-seholds*

Microfi-nancedemand

14,951,200 2,407,143 3.5 687,755 137,551

Private sector approach

A more accurate picture is provided by looking atthe private sector and the unemployed. However,it must be noted that these approaches are usedonly for rough estimates. Following this proce-dure, the potential demand for microfinance isestimated by looking first at the characteristics ofthe unemployed, and second at the number ofSMEs in the country.

The following refers mainly to data from theAgency of Statistics from 2004. The unemploy-ment rate in Kazakhstan was 8.4 percent totaling658,800 people, 42.7 percent men and 57.3 per-cent women respectively11.

The age distribution of the unemployed shows thatalmost half are in age brackets favorable to entre-preneurial activity. People with higher educationand incomplete higher and special vocational ed-ucation comprise 18 percent of unemployed menand 29 percent of unemployed women12.

A survey conducted by the Asian Development Bankshows that the unemployed in Kazakhstan are in-volved in different kinds of informal economic activ-ities, such as farming small plots and small traderelated activities. Unemployed earnings consist ofincome from household plots (26 percent), smalltrade (24 percent), temporary work (22 percent),grants from relatives (16 percent), sale of personalproperty (6 percent), rent revenues (3 percent), andbegging and illegal operations (2 percent)13.

The social picture of managers/heads of SMEshelps identify the potential of the unemployed asentrepreneurs. Men and women aged 41-50 com-prise 40 percent of the managers/heads of SMEs,followed by people aged 31-40 at 30 percent.While 65 percent of the managers/heads of SMEshave higher education, 25 percent have incom-plete higher and secondary education. Differencesin the education levels between men and womenas managers/heads of SMEs are insignificant. Theprofessional status of entrepreneurs was quite highbefore they entered the market. Almost half (45.5percent) were previously employed as managers/leaders, and 22.5 percent were specialists. Inother words, the ranks of entrepreneurs are filledmostly by managers/leaders of all levels. Thesefigures also indicate that a high percent of entre-preneurs are highly educated people14.

It is possible to estimate that about 20 percent ofthe unemployed have the required personal charac-teristics (age, education, professional experience) tolaunch entrepreneurial activities. Because they haveto start their own businesses with little or no re-sources, however, it is likely that they would needthe help of MFIs. Factors such as the lack ofentrepreneurship skills and business knowledge (man-agement, marketing, planning, etc.) may reduce thenumber of potential microfinance clients. The neg-ative effects of these factors could be compensatedthrough developing a network of educational, infor-

BOX 3.1 Small and medium enterprises in Kazakhstan

Individual enterprises are private individuals engaged in business activities without a legal identityand with no characteristics of a legal entity.

Micro enterprises are private individuals or legal entities employing up to 10 people. Microenterprises fall under the category of small enterprise entities.

Small enterprises are private individuals and legal entities employing up to 50 people and owningassets valued up to 60,000 times the monthly calculation index (over USD 430,000).

Medium enterprises are private individuals and legal entities employing up to 250 staff and owningassets valued up to 325,000 times the monthly calculation index (approximately USD 2,340,000).

Source: Law of the Republic of Kazakhstan #1543-XII On protection and support to private enterprise of 4 July 1992,Art. 4�

*The vulnerable population is calculated using the 2004subsistence minimum ratio of 16.1 %

Source: Agency of Statistics of Kazakhstan, data for 2004

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15 Agency of Statistics of Kazakhstan, April 2004.16 Law of the Republic of Kazakhstan on Protection and Support to Private Enterprise as of 4 July 1992.17 Small Entrepreneurship Development Fund, 2005.

Table 3.5 Microcredit demand - private sector approach

Microfinance clientsDemand for microfinanceservices (potential clients)

Average loan sizeDemand for microfinance

services (USD)

Unemployed 131,760 people 1,700 224,000,000

Individual entrepreneurs 70,000 entrepreneurs 2,500 175,000,000

Micro-enterprises 16,500 enterprises 25,000 413,000,000

TOTAL 218,260 clients 812,000,000

CHAPTER 3 Microfinance in Kazakhstan

mation, and consultation services to help entrepre-neurs, as well as through establishing financialorganizations that promote start-up businesses.

Individual entrepreneurs are another category oftarget clients for microcredit. As of April 2004,there were about 428,000 individual entrepreneurs(IE) in Kazakhstan, including 350,000 in opera-tion. About 40 percent of all IEs (136,000) areinvolved in trade and with the remainder inagriculture (134,000) and other services (30,000).From a regional standpoint, there are 73,000 IEsin the South Kazakhstan oblast (21 percent), 47,000in the Almaty oblast (14 percent) and 39,000 and24,000, respectively in the East Kazakhstan andKaraganda oblasts (or 11 percent and 7 percent).As a conservative estimate, the potential microfi-nance demand is calculated using a 20 percentthreshold for operational IE. This results in 70,000potential clients15.

According to the "Law on Protection and Promo-tion of Private Entrepreneurship," micro enterprisesare individual entrepreneurs and legal entitieswith less than 10 employees. As of 1 April 2004,the total number of enterprises employing lessthan 10 people was about 82,400, or 84 percentof the total number of operational SMEs. Microenterprises engaged in trade and construction con-stitute about 61 percent of the total number ofmicro enterprises16. Micro enterprises have limitedstarting capital/equity and face market conditions,such as high inflation, in which working withborrowed money brings potential benefits. This isespecially true in the trade and construction sec-tors, where enterprises have high capital turnoverand/or high demands for working capital. Thus,based on business size, sector affiliation, andexternal financing needs, the demand generatedby micro enterprises is not insignificant. By apply-ing a conservative line of 20 percent, microenterprises would include at least 16,500 potentialclients for microfinance.

The above analysis shows that more than 200,000people need access to basic financial services in

Kazakhstan. In monetary terms, it is estimatedthat the market for microfinance services couldbe as much as USD 810 million. Clearly Kazakh-stan has a high potential for development of thedomestic microfinance sector.

Finally, credit demand from enterprises, includingshort-term loans, can be also assessed by lookingat the accounting reports of SMEs. Though thesedata apply to all SMEs, the results of the analysisare similar for micro enterprises. The need forexternal funding for working capital is even high-er in micro enterprises, and they have feweropportunities to access financial services.

In general, according to accounting reports fromSMEs, 18 percent of working capital originatesfrom social capital and 72 percent from credits17.Working capital for SMEs comes mainly throughloan instruments available in the formal financialmarket (i.e., banks, credit unions and cooperatives)and from moneylenders. The latter financial flowsare not reflected in formal reporting. The marketdoes not meet the external funding needs of SMEs.About 40 percent of SMEs define the shortage ofworking capital as the main challenge to business.The size of this problem has not decreased overtime. To address this problem legally and helpentrepreneurs avoid the informal markets, a net-work of financial institutions should exist to pro-vide micro and short-term loans to finance workingcapital: in other words, a network of MFIs.

It is possible to conclude on the basis of officialstatistics and "informal" reporting that only 30-35percent of SMEs operate without loans. The priorityfor the remaining entrepreneurs is to attract exter-nal funding. This issue is more acute for microenterprises in comparison with larger businesses.

3.4.2 Assessing microcredit supply

Assessing the supply of microfinance is a complextask. Although official figures indicate that over400 MFIs exist, this offers only an insight into thereal level of supply. Not all registered MFIs are

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Microfinance in Kazakhstan: an inclusive financial sector for all

18 Agency of Statistics of Kazakhstan, per capita GDP in 2004 was USD 2,713. Depth of outreach is considered good ifunder 250%.

Active credits accounts Credit amount (USD) Average credit size (USD)

ATF Bank 3,126 643,3245 2,058

Bank TsentrKredit 3,408 5639,366 1,655

Kazkommertzbank 5,448 10,102,944 1,854

Narodny Bank 7,226 13,709,060 1,896

TemirBank 1,809 3,486,194 1,927

Bank TuranAlem 7,188 12,465,034 1,734

Tsesnabank 237 567,804 2,396

TOTAL 28,442 52,397,647 1,842

Table 3.6 Commercial banks' microcredit portfolio

Source: International Partner Search, 31 January 2005

1. Registration USD 100

2. Licensing USD 100

3. Rent of premises USD 200

4. Purchase of equipment USD 1,000

5. Salaries (2 workers - $150 each) USD 300

TOTAL USD 1,700

Source: UNDP staff estimates based on data from the Agency of Statistics of Kazakhstan

BOX 3.2 Starting a micro-enterprise in Kazakhstan

operational and most of them are small familybusinesses with an insignificant number of clients.The following sections provide a brief overview ofMFIs in Kazakhstan with field survey data on aselected sample of MFIs.

As part of the three-tier model, four legal institu-tions are allowed to provide microfinance servicesin Kazakhstan:• Commercial banks• Non-banking financial institutions• Credit partnership• Microcredit organizations

Commercial banks

As of 31 January 2005, about 28,450 activemicrocredit accounts with a total value of USD52.4 million were registered with commercialbanks. The average credit size ranges from USD1,650 to USD 2,400 with a good depth of out-reach, with average loan sizes between 61 per-cent and 88 percent of per capita GDP respec-tively18. Seven commercial banks (as listed in the

table below) are using credit lines from the Euro-pean Bank for reconstruction and Development(EBRD). Kazkommertzbank and Narodny Bank alsobenefit from the German Kreditanstalt fur Wieder-aufbau (KFW) credit line for supporting SMEs.

Some NGO-MFIs have conducted feasibility stud-ies to analyze the benefits of becoming banks.However, very strict capital requirements haverestricted this opportunity, even for the most suc-cessful MFIs.

Non-banking financial institutions

Non-banking financial institutions are legal enti-ties that obtained a credit license from the Na-tional Bank. As of 1 March 2005, there were 48non-banking financial institutions in Kazakhstan.The biggest MFIs, such as Kazakhstan Loan Fund(KLF) and Asian Credit Fund (ACF), have obtainedlicenses for their credit operations. However, thebenefits of the transformation from MCO to NBFIare still unclear, leaving several MFIs withoutclear strategies.

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Credit partnerships

Credit partnerships (CP), recognized around the worldas credit unions, are legal entities established byphysical persons and/or legal entities to providecredit and other financial services to its members.As of 1 March 2005, there were 89 registered creditpartnerships in Kazakhstan.

Microcredit organizations

Microcredit organizations are legal entities that pro-vide microcredit under USD 7,00019. MCOs can beprofit and non-profit organizations. As of 1 March2005, there were 208 registered MCOs in Kazakh-stan, of which 84 (40 percent) were operational.Among the operational MCOs, only 6 had more

BOX 3.3 MFI best practices in Kazakhstan: Kazakhstan Loan Fund

Kazakhstan Loan Fund (KLF) is a non-profit organisation carrying out banking operations under acredit license from the National Bank credit license. The Fund was created by ACDI/VOCA andsupported financially with USAID grants. KLF started its operations in Taldykorgan in 1997. Now thefund has offices in Taldykorgan, Shymkent, Almaty, Taraz and Turkestan. KLF is one of the mostdeveloped Central Asian microfinance institutions that delivers financial services to group andindividuals.

Key to KLF�s success are well-developed financial management tools, continued relations withclients, and feedback and monitoring of financial and administrative indicators. In a few years KLFreached remarkable financial and outreach goals: more than 11,000 clients are served with a totalloan portfolio of USD 6 million. The MFI is both financially (105 percent - 2004) and operationally(122 percent - 2004) self sustainable.

Achievements as of 30 June 2005

Active borrowers 11,858 clientsCredit portfolio USD 6,961,675Branches 5Loan Officers 60

19 One thousand monthly calculation indicator, about USD 7,000.

Figure 3.7 Number of microcredit organizations in Kazakhstan

8596 102

114122 129

140 146157 163

171 177

0

20

40

60

80

100

120

140

160

180

200

01_2004

02_2004

03_2004

04_2004

05_2004

06_2004

07_2004

08_2004

09_2004

10_2004

11_2004

12_2004

than 10 employees, while the vast majority had lessthan five. The growth of registered microcreditorganizations after the implementation of the newlaw is impressive: from 85 MCOs in January 2004to 177 in December 2004 to 208 in March 2005.

Operational MCOs are concentrated mostly in theSouth Kazakhstan oblast (32 percent) and Almatycity (18 percent). The table below shows thenumber of MCOs at the oblast level. Cultural,economic and geographic explanations lie behindthe distribution. South Kazakhstan is one of themost densely populated areas in the country andalso one of the poorest oblasts. On the otherhand, Almaty is Kazakhstan's financial center,where the some of the first MFIs were establishedand where the entrepreneurial spirit is high.

Source: Agency of Statistics of Kazakhstan, 2004

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Table 3.8 Geographical distribution of micro-credit organizations in Kazakhstan

3.4.3 UNDP/AMFOK survey onmicrofinance institutions inKazakhstan

The United Nations Development Programme andthe Association of Microfinance Organizations ofKazakhstan conducted a survey to assess thecharacteristics of MFIs in Kazakhstan. Data wascollected between August and September 2005,from among AMFOK members and 22 non-mem-ber MFIs. Considering limitations in the datacollection, lack of reliable information, scarceutilization of international financial reporting prac-tices, and a general culture that does not offerincentives to disclose information, figures fromonly major MFIs are presented in detail. SixteenMFIs completed the questionnaire prepared byUNDP, while basic information is available onmost AMFOK members.

AMFOK aggregate data as of 30 July 2005 indi-cates that its members have an active portfolioUSD 29,585,850 with a total of 16,833 clientsserved. Although AMFOK members do not repre-sent the entire spectrum of microfinance servicesin Kazakhstan, they offer an indicative picture ofthe microfinance sector.

OblastNumber of

MCOs% oftotal

Almaty City 15 17.9%

Astana City 4 4.8%

Aktobinsk Oblast 2 2.4%

Almaty Oblast 2 2.4%

Atyrau Oblast 2 2.4%

East Kazakhstan Oblast 6 7.1%

Zhambyl Oblast 2 2.4%

West Kazakhstan Oblast 4 4.8%

Karaganda Oblast 7 8.3%

Kostanai Oblast 5 6.0%

Kyzylorda Oblast 4 4.8%

Pavladar Oblast 2 2.4%

North Kazakhstan Oblast 2 2.4%

South Kazakhstan Oblast 27 32.1%

Total 84 100%

Source: Agency of Statistics of Kazakhstan, 2004

Table 3.9 UNDP/AMFOK survey results: largest MFIs in Kazakhstan

NameTypeofMFI

Activeclients

Activeportfolio(USD)

% ofwomenclients

Averageloan size(USD)

Loanproducts

Loanofficers

Clientsper loanofficer

Operationself-suffi-ciency

Portfolioat risk

(30 days)

Kazakhstan LoanFund

NBFI 12,209 7,268,624 81% 595 4 60 203 145% 0.0%

Valut TransitMicrocredit

MCO 9,266 7,713,605 NA 832 16 NA NA 138% 9.0%

MCO Bereke MCO 2,182 906,751 98% 416 3 11 198 175% 1.3%

Association ofSocieties Baspana

NBFI 512 561,876 48% 1,097 NA 5 102 100% 2.4%

Asian Credit fund NBFI 420 2,331,604 66% 5,551 6 12 35 120% 0.3%

Credit Union OrdaCredit

CP 93 3,658,424 19% 39,338 NA NA NA NA NA

Credit Union AkBulak

CP 34 10,499,374 30% 308,805 6 2 17 NA NA

Credit Union AlmatyCredit

CP 10 2,695,805 0% 269,581 NA 2 5 NA 0.3%

Notes:MFIs with a loan portfolio larger than USD 500,000Active clients and active portfolio as of 30 July 2005Percentage of women clients as of 31 December 2004Other columns as of September 2005NA = Not Available

Source: AMFOK/UNDP survey, September 2005

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MFIs with a loan portfolio larger than USD 500,000are listed in table 3.9. An analysis of the surveydata provides some useful insights on the supplyof microfinance services in Kazakhstan:

• Outreach. Only one MFI has more than 10,000clients and only two have more than 1,000.Among the 18 AMFOK members for whichdata is available, 10 have less than 100clients. NGO-MFIs have the biggest outreach,while credit partnerships have the smallest.The MCO Valut Transit is an interesting casesince the organization was founded by a com-mercial bank.

• Loan portfolio. Only eight MFIs have an ac-tive portfolio that exceeds USD 500,000. Theaverage size of loans varies greatly from USD275 to USD 212,000. While NGO-MFIs havea lower average loan size, the highest loansizes were found among credit partnership.

• Size. With few exceptions MFIs are small inKazakhstan: they often have only one office/branch and cover only one oblast. The num-ber of loan officers employed confirms therelative small size of Kazakhstan MFIs. Asnoted before, outreach is limited but the sizeof the portfolio is not always linked with thenumber of clients due to the existence ofdifferent kinds of borrowers. Therefore, MFIsthat show better results in terms of clients arenot necessarily the ones with the biggest loanportfolios. Kazakhstan MFIs are decidedlysmaller, both in terms of portfolio and numberof client, than the international average.

• Clients. Two kinds of borrowers emerge: smalltraders, farmers and entrepreneurs on one side,and SMEs on the other. The size of loansvaries greatly from USD 300 to more thanUSD 200,000. The MFIs that widely employgroup loans have the lowest average loansize.

• Loan products. Kazakhstan MFIs offer onlymicrocredit services but have developed dif-ferent products, such us solidarity group loans,individual loans, agriculture loans, and hous-ing loans. Some of them require collateral.

• Self-sustainability. Almost all of the MFIs thatresponded to the survey are nearly or fullyself-sustainable. This validates the fact thatMFIs in Kazakhstan have relatively good fi-nancial records.

• Source of funding. It is difficult to draw amap of funding sources. However it seemsthat very few MFIs received money from thegovernment. Otherwise there are good indica-tors of private sector involvement. MFIs thatreceived donor grants tend to have betterperformance overall.

3.4.4 Matching demand and supply

Putting the above considerations of microfinancesupply and demand together, it becomes obviousthat the demand far outstrips the supply in Kaza-khstan. The demand for microfinance services hasbeen estimated to include between 140,000 and220,000 clients, and the total value of the micro-finance market could exceed USD 800 million.However the real demand could easily expandbeyond these numbers as more than two millionvulnerable people could benefit from increasedaccess to microfinance as well.

Up to now the existing supply has not been ableto fulfill this demand. Members of the Associationof Microfinance Organizations of Kazakhstan claimabout 17,000 clients. Commercial banks serve anadditional 30,000 microcredit clients. Althoughcomprehensive data is not available from NBFIs,MCOs and credit partnerships, the Agency ofStatistics indicates that about 50,600 people re-ceived microcredit loans in 2004. All told therecould be between 60,000 and 70,000 active mi-crofinance clients in Kazakhstan today.

Despite the fact that there are a variety oforganizations providing microcredit, the weight ofmicrocredit in the aggregate credit portfolio of thecountry is still marginal. As well, the consider-ation of only microcredit services is a limit initself. Microsavings, microinsurance, and leasingservices are needed among the poor or nearlypoor households as well. For these cases there isno supply.

The main reasons for sector underdevelopment arethe institutional immaturity of MFIs and financialbottlenecks. These limitations call for improved strat-egies and methodologies to promote in Kazakhstan.

3.5 Microfinancestrategies andmethodologies

In this section current MFI strategies and method-ologies in Kazakhstan are reviewed in order toenrich the description of the microfinance sectorin Kazakhstan with qualitative data. The follow-ing objectives should be taken into account whenanalyzing the effectiveness of MFI managementstrategies:• To develop efficient information systems that

connect microcredit service units and man-agement to improve decision making;

• To develop products that meet client needsand streamline credit procedures;

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Microfinance in Kazakhstan: an inclusive financial sector for all

• To implement reliable indicators to assessborrower solvency and business capacity.

Microcredit methodologies employed by MFIs inKazakhstan derive from international practices. How-ever, even at this stage there are methodologies thatare clearly local in nature. In Kazakhstan themajority of MFIs provide collateral individual loansand mortgages. Such credit schemes lower risks forthe MFIs, but result in very low outreach. Thus,AMFOK reported that, as of 1 January 2005, only 2of its members used group-lending schemes. Thatbeing said, these organizations alone -- the Kazakh-stan Loan Fund and MCO Bereke -- serve nearly 90percent of the total clients of AMFOK members.

Summarized below are the findings from the surveyconducted by the Institute of Sociological Survey(ISS) in 2003/2004 on a selected sample of MFIs:• Entrepreneurs with low income constitute the

target client group of microcredit projects.• The lack of assets and collateral among entre-

preneurs is a major obstacle for obtaining loans.Farmers use MFI services as they fail to accessbanks. Banks and some MFIs tend to rateassets and loan guarantees provided by ruralborrowers -- such as second-hand equipment,rural real estates and livestock -- as non-liquid.

• Collateral recovery involves considerable costs,which most MFIs cannot afford. The businessof the borrower is the most common guaran-tee for loan repayments. In-depth analysis ofthe business, financial flows, and borrowerreputation, as well as estimates of future cashflows, are fairly good indicators of the repay-ment capacity of he borrower. Non-liquid itemscan be accepted as the above-mentioned in-dicators are satisfactory.

• Loan disbursement strategies are based on thefast delivery of financial services to borrowers:3-4 days are required to obtain the initial loan;further loans may be obtained within 1-3 days.

In-depth interviews identified the following creditpractices in MFIs:• Many MFIs disseminate information about ser-

vices through free awareness raising seminars,outreach activities, information leaflets, etc.

• As part of their microcredit activities, manyMFIs provide consultations and training servicessuch as preparing mini-business plans. However,they do not deliver on a regular and continuousbasis comprehensive training programs on howto handle loans, how to effectively run a busi-ness, or how to choose an appropriate marketstrategy. Only some MFIs, such as Bereke (Semi-palatinsk), conduct group workshops on a regu-lar basis. The Association of Women, Moldir(Almaty), delivers a training course where par-ticipants can proceed to apply for a loan.

• A great many MFIs do not apply updatedapproaches to the analysis of client business-es. This analysis is usually based on a reviewof mini-business plans with a projected in-come and expense statement and loan repay-ment schedule.

• When making a decision on individual loan,MFIs usually appraise loan guarantees withoutany external assistance. However, appraisalsare most often undertaken in partnership withreal estate centers, which are in place in alloblasts. While low, the cost of such an apprais-al is the responsibility of credit recipients.

• Credit committees usually include MFI direc-tors, chief accountants, and credit specialists.Applications are considered on a "first come,first served" basis.

• Many MFIs make agreements with bank dis-bursement and cash departments (DCD) forthe issuance of loans to reduce costs. Workingwith banks is beneficial and convenient forboth clients and MFIs, since setting up theirown DCD would involve high maintenancecosts and security risks. Agreements with banksoften entail some other benefits as well suchas discounts on bank commissions.

• Findings from the focus group interviews showthat credit recipients see monitoring visits asfriendly visits, even if the main purpose is toassess a client's loan repayments. In addition,borrowers would like to make such monitoringvisits more frequent to receive business ad-vice from credit experts.

The common practice among Kazakhstan MFIs isto provide individual loans at an average monthlyinterest rate of 3-7 percent with monthly repay-ments for up to 3 months. Twice-per-month repay-ments are also used. Interest is charged on fixedschedules. Depending on the borrower's credit his-tory, type of business and actual turnover cycle,reduced interest rates may be considered. A creditcommittee decides whether the loan should beissued. All loans must be secured by personalproperty, which as a rule is the borrower's business.Guarantees provided by a third party may beaccepted as collateral as well. Loans are onlyissued to registered enterprises. Below are theprincipal strengths of individual loan products of-fered by MFIs in comparison with bank products:• Flexible interest rates• Less strict requirements for loan guarantees• Access to further loans under simplified proce-

dures and preferential conditions• Fast access to credit.

In international practice, group loans are thebasis for most microfinance projects. Today thereare only few MFIs practicing extensive group

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lending schemes in Kazakhstan. KLF and MCOBereke experiences have shown that a well-devel-oped approach to group lending brings both goodfinancial performance and satisfactory outreach.

Group lending in Kazakhstan is channeled throughloan groups consisting of 5-7 members, usuallybusiness partners or market neighbors. Groups areself-built, with members free to choose partnersand elect leaders to perform monetary manage-ment, screening of new applicants, loan approv-als, and monitoring of loan repayments.

Each group member gets an individual loan basedon his/her needs. Subsidiary liability of the groupfor each member's liability is a common versionof this model. In some MFIs, in order to reducerisks, groups are encouraged to set up a reserve tobe used in cases of member repayment failure orduring emergencies. Personal interaction betweenloan officers and group members is essential tobuild trust. Loan officers work with groups ratherthan individual borrowers. A gradual increase incredit lines and better credit terms are based ongroup credit records.

Kazakhstan MFIs often employ a step-by-step prin-ciple for loan issuance. The amount of the initialloan to be issued to the group is based on thetotal amount of all individual loan applications,provided each of them is no more than KZT20,000-70,000. The average loan period is 2-10months. When moving up to the next stage, thegroup can obtain an increase in the loan size orpreferential interest rates.

In summary, out of all lending models, individualguaranteed credit schemes are most common inKazakhstan. Kazakhstan MFIs generally believethat group credit schemes have high initial costssuch as staff training, borrower training, monitor-ing, etc. There is also a cultural argument againstgroup lending. At the same time, it will bedifficult to expand client groups in the future ifgroup lending schemes are not employed. Thesuccesses of KLF and MFO Bereke demonstratethat investing in methodology, staff training andmonitoring eventually proves to be a justified andfinancially sustainable strategy.

At the initial phase of development, MFIs oftenrequire external sources of funding to invest inmanagement and technical upgrading. Donors andthe government could play a leading role infacilitating the training of staff and adoption ofstate of the art microfinance technologies. How-ever, as MFIs become mature, technical assis-tance should be reduced as the management itselfshould be ready to invest money in productivitygrowth and innovation.

A good management information system (MIS) is akey element for MFI development. The commonthreshold in the industry for moving to a professionalmicrofinance MIS seems to be approximately 2,000clients. However, some MFIs managing their infor-mation manually have grown to more than 30,000clients. If an MFI has a limited number clients, andlimited plans for growth, then a system that relieson spreadsheets for managing its loan portfolio issufficient, affordable and preferable considering thecosts of MIS software packages and hardware. Somesoftware firms offer microfinance MIS products thatwork in a stand-alone mode, which could be aninexpensive means to automate small microfinanceoperations. Typically, it is much easier for an orga-nization to step from a manual system to a partiallyautomated system, and then to specialized softwareapplications, rather than leaping directly from amanual system to sophisticated information systems.Furthermore, given the time it takes to select andimplement an MIS software application, it is alsorecommended that an organization implement thesoftware before pursuing aggressive growth, ratherthan as a reaction to such growth.

As the sector develops, the introduction of interna-tional microfinance standards and up-to-date man-agement techniques assumes greater importance.Management and accounting improvements will helpMFIs to:• be transparent;• improve strategic planning;• determine industry standard models;• analyze and improve output and management

skills;• introduce international auditing and rating.

BOX 3.4 Best world practices in microfinance sector accounting system

Today CGAP-MIX (microfinance sector information exchange) is a modern method of informationcollection, accounting system and global dissemination mechanism.

MIX provides:• MFIs� detailed reports in a chronological order (demand)• MFIs� global comparison within their own (groups of homogeneous structure)• Reports on subsidization organization and opportunities (supply)

More details can be found on www.themix.org

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Microfinance in Kazakhstan: an inclusive financial sector for all

International practice includes several well-knownrating systems that share internationally-recognizedrating principles, such as ACCION CAMEL (Cap-ital Adequacy, Asset Quality, Management, Earn-ings, and Liquidity Management), PlaNet FinanceGIRAFE (Governance, Information, Risk Manage-ment, Activities and Services, Financing and Li-quidity and Efficiency and Profitability) and oth-ers. The CAMEL-based rating is offered as anexample below. The ACCION CAMEL� is adiagnostic and management tool designed to helpMFI managers assess the organization's financialhealth and overall performance. The original CAMELmodel was developed in 1978 by the US FederalReserve to evaluate the solvency of US banks. In1993, ACCION, a leading international microfi-nance NGO, adapted the CAMEL to MFIs.

International private funds, and among them interna-tional venture funds, often require international rat-ings prior to investing in an MFI. MFIs with goodresults should consider international ratings as aprecondition to apply for international capital. Inter-national ratings are an expensive tool for MFIs, butmany donors are keen to provide ad hoc resources.CGAP in Washington and international donors activein Kazakhstan are helping NGO-MFIs to obtainthese valuable international certifications.

In July 2005, the Microfinance Center for Centraland Eastern Europe and New Independent Statesand CGAP opened the Central Asian MicrofinanceCenter (CAMFC) in Almaty. CAMFC is ideally

Table 3.10 ACCION CAMEL quantitative and qualitative indicators

Source: ACCION International, 1998

QUANTITATIVE INDICATORS QUALITATIVE INDICATORSCAPITAL ADEQUACY

Capital Adequacy Ability to Raise Equity Adequacy of Reserves

ASSET QUALITY Portfolio at Risk Write-offs/ Portfolio Classification System Write-off Policy Productivity of Long-Term Assets

MANAGEMENT Governance Management Human Resources Processes, Controls and Audit Information System Strategic Planning and Budgeting

EARNINGS Return on Equity Interest Rate Policy Operational Efficiency Return on Assets

LIQUIDITY MANAGEMENT Liability Structure Cash Flow Projections Productivity of Liquid Assets

positioned to make a significant and timely im-pact on the emerging microfinance industry inKazakhstan in the areas of policy dialogue, donorcoordination, training and capacity building, trans-parency, and dissemination of industry standardsand best practices.

The establishment of a Credit Bureau is consid-ered to be a means to lower MFI risks and costs.By accessing a common database of credit histo-ries, MFIs can reduce time and effort in ratingborrowers' credentials. A Credit Bureau has beenrecently established in Kazakhstan. MFIs shouldwork closely with the newborn Credit Bureau toparticipate in the creation its database and bene-fit from the information made available.

3.6 Barriers for developingmicrofinance

The development of the microfinance sector inKazakhstan is necessary for several reasons:

• Traditional credit sources are not accessible tosmall and micro businesses;

• The requirements for collateral property aretoo high;

• Information about microcredit policies are noteasily available;

• There is lack of management experience amongMFIs;

• Borrowers are uneasy in managing credit re-sources; and

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• Microcredit schemes and methodologies stillexhibit a number of weaknesses.

In general, barriers affecting microfinance can bedivided into two big blocks. The first block con-cerns the whole set of microfinance stakeholders,while the second directly concerns the ongoingactivities of MFIs.

There are several environmental obstacles thatrestrain the development of the microfinance sec-tor as a whole:

• Legal barriers;• Low population density;• High transportation and security costs;• Underdeveloped collaboration between MFIs,

state administrations and national develop-ment institutions and funds;

• Poor interaction between domestic banks andnon-banking organizations and MFIs;

• Lack of advanced managements and monitor-ing systems, internal control procedures, im-pact assessment tools and appropriate man-agement software;

• Lack of agreements with postal services andbanks with branch networks;

• Lack of services providers for MFIs.

No doubt the above-mentioned factors affect MFIactivities as well, and efforts to overcome theseproblems will have a positive impact on both themicrofinance system and its participants. The chal-lenges faced by MFIs in their everyday activitiesinclude the following:

• Operational deficits;• High costs of funds;• Shrinking grant commitments;• Shortages of qualified personnel;• Lack of methodologies and training programs

for staff;• Poor methodological and accounting know-how• Low levels of computer skills;• Unequal competition terms with commercial

banks21.

In the initial stage of development, most MFIsreceived grants from donors who also contributedby defining MFI strategies and long-term priori-ties. Today most of MFIs work on market-basedcriteria. Therefore it is especially important todevelop mechanisms to attract capital flows fromthe market.

It is necessary to design a systematic and compre-hensive approach to microfinance, which takesinto consideration the complexity of state supportand the adaptation of international best practicesof microfinance to local conditions. Differentmeasures should also be directed toward increas-ing the attractiveness of MFIs to potential inves-tors. A set of measures to be promoted to over-

come existing barriers has been developed:

Legal barriers: it is necessary to remove legalobstacles that prevent the development of themicrofinance sector, such as limits on microcreditsize. Legal improvements and suggested law amend-ments are analyzed in detail in chapter four.

Technological barriers: it is necessary to providemore opportunities to MFIs to operate with state ofthe art technology, enabling them to be moreflexible and effective in making decisions. It hasbeen suggested to develop and promote specificsoftware packages for MFIs, which would maximizeinformation, risk analysis, and portfolio quality man-agement and monitoring. The introduction of updat-ed MIS could be a priority. Donors and state fundscould play a crucial role in promoting new technol-ogies and thus reducing the costs for MFIs.

Planning and ownership barriers: the developmentof a state microfinance strategy and a morecoordinated approach to microfinance could bebeneficial considering the different governmentprograms and funds that are currently operational.Better coordination is also needed among donorsto channel money into priority areas. On theother side, MFIs should take the leadership indefining priorities and solutions.

Financial bottlenecks: the creation of specializedwholesale-credit institutes is being considered asa mechanism to increase MFI activities and op-portunities through the delivery of technical assis-tance and credit lines. The same institutions wouldalso function as a magnet to introduce interna-tional standards, thus enabling MFIs to developeffectively in the long-term.

The above-mentioned measures are intended tosupport more effectively the microfinance sectorthrough developing a competitive market for MFIsthat could possibly play a greater role in socialstabilization.

3.7 Institutional actors: thestate, internationalorganizations anddonors

3.7.1 The state

In Kazakhstan, microcredit is considered to be aneffective mechanism for supporting entrepreneur-ship and is becoming an integral component ofthe country's economic and social strategy through(a) developing the economic capacity of privateentrepreneurship, (b) providing new job opportuni-

21 Government of Kazakhstan, Program of the rapid measures for the development of the small and medium entrepreneurshipin the Republic of Kazakhstan for the years of 2005-2007.

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22 Kurasova A.M., Justifying Areas of UNDP Technical Assistance to Support Microcredit Development in Kazakhstan, 2002.23 Kazakhstanskaya Pravda Newspaper for 14 December 2002.24 Ministry of Agriculture of Kazakhstan, 2005.

ties for low- and medium-income people, and (c)stimulating the creation of new SMEs. The devel-opment of different state credit programs, aimedat ensuring a broader coverage and better target-ing of microfinance services, is necessary.

The Ministry of Industry and Trade (MIT) is theagency responsible for developing the microfi-nance sector in Kazakhstan. In mid-2004, MIT incooperation with AMFOK drafted a national mi-crocredit program for 2005-2007, which, unfortu-nately, was not adopted.

Currently several state programs with microfi-nance components are in operation. Different stateauthorities and ministries (especially the Ministryof Agriculture) are involved besides the MIT. Thegovernment has created several funds in supportof small business and agriculture that are engagedin microfinance activities. Therefore, relevantgovernment projects are briefly reviewed below.

Under the Microcredit Program to the PoorestCitizens of Kazakhstan (1998-2000), pilot micro-credit projects were initiated in five oblasts (SouthKazakhstan, Zhambyl, Kyzylorda, Almaty, and theEast Kazakhstan). A special fund was establishedto allocate KZT 40 million. The loan size (USD400) and annual interest rate (5 percent) werefixed. Credit duration varied from 3 to 12 monthsdepending on the type of activity. A network ofaffiliated NGOs "Microcredit" was established inseven oblasts to implement the program. Loanswere disbursed directly from state funds to borrow-ers. Relevant problems rose in relation to highnon-repayment rates (and several cases were broughtto court). Lack of experience was evident. Verylow interest rates are often a guarantee of failurein microfinance, and that was true in this situa-tion. Moreover, there was not enough interest andinvolvement among organizations involved in theprogram. The program ended in 2000, but few"Microcredit" NGOs are still operating22.

The Agrarian Credit Corporation (ACC) was setup by the Ministry of Agriculture to providefinancial resources to rural enterprises. ACC was apilot project implemented according to a Govern-ment resolution dated 2001. A 100 percent statecorporation was created and a network of ruralcredit partnerships (RCP) was established. Themain goal of the RCPs is to ensure agriculturalproducers have access to credit. The mechanismis based on the RCP network, established by theACC jointly with agricultural organizations as co-founders holding not less than a 35 percent share.ACC also provides financial support to RCPs at

preferential terms. Profitable RCPs may decide toattract financial resources from external sources.Today 84 RCPs operate in 12 oblasts with theinvolvement of 2,733 agricultural organizationsowning 5.5 million hectares of land. The RCPsissued loans for KZT 4.6 billion to 1,036 agricul-tural organizations, and the RCPs managed toensure full return of credit resources to the corpo-ration. An association of RCPs was established tocoordinate members' activities, analyze develop-ment trends, facilitate external financing, andrepresent members' interests23.

The Fund for Financial Support to Agriculture(FFSA) was established by the Ministry of Agricul-ture to support small rural farmers and providemicrocredit in rural areas. FFSA provides micro-credit services to the rural population. FFSA worksdirectly both through its branches as well asthrough contracting MCOs on a competitive basis.Bids require MCOs to have the following qualifi-cations: two years of previous experience, a focuson rural residents, 100 percent return on credit,repayment terms of 3-5 years, and interest ratesnot higher than 12 percent. Thus, KZT 4.515billion was allocated as follows:

• KZT 0.650 billion (5 percent) through MCOsat 12 percent interest

• KZT 3.685 billion (95 percent) through FFSAaffiliates at 8 percent interest

This mechanism proved to be far from optimal asthe interest rates (8 percent and 12 percent) weretoo low to cover expenses. It is estimated thatinterest rates had to be at least 25 percent tocover all operational costs. An interest cap of 12percent for MCOs causes management problemsthat prevent a healthy development in clientNGOs and in the entire system24.

The Small Entrepreneurship Development Fund(SEDF) was established to stimulate and promoteeconomic growth and entrepreneurship in Kazakh-stan and to increase the efficiency of state fundsin support of small businesses. The fund providesloans to small business projects as well as com-petitive distribution of funds through second-levelbanks. SEDF aims to:

• Participate in developing and implementingstate financial support to small entrepreneur-ship and contribute to the development ofbusiness centers and SMEs incubators;

• Create new jobs through helping SMEs, smallentrepreneurs and the self-employed to grow;

• Provide guarantees to small entrepreneurs inorder to access credit from banks;

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• Provide financial resources to MFIs;• Provide technical assistance to MFIs (software

implementation, consulting, training);• Participate in credit programs as established

by the Government of Kazakhstan.

In 2002, to ensure greater accessibility, SEDFformed its own network of branches in 14 oblastsand maintained its head office in Almaty, abranch in Astana and special representatives inZhezkazgan and Semipalatinsk. SEDF recentlydeveloped a strategy for the development of themicrofinance sector25. SEDF intends to supportMFIs with direct participation in social capitalprograms. This approach has been chosen to spon-sor a step-by-step growth path for the microfi-nance sector and to facilitate MFI creation anddevelopment. Besides helping the formation of aMFI network, SEDF provides financial supportthrough soft credit lines (6 percent interest rate upto 5 years)26.

State intervention in microfinance should be aimedat the creation of a favorable environment for anindependent and effective system of MFIs. Previ-ous attempts of the Government to directly deliv-er microfinance services to the final borrowerwere not successful in Kazakhstan. The fourthchapter analyzes the new government strategybased on a willingness to establish a wholesalecredit institution.

3.7.2 International organizations anddonors

By analyzing the origin and development of theKazakhstan microfinance sector, the role playedby international organizations becomes important.They helped to introduce international best prac-tices and state of the art microfinance technolo-gies, adjusted methodologies, and developed soft-ware and other management tools. All of thesewere significant contributions as local managershad very little or no experience on how toorganize MFIs. Also, international organizationsand donors provided the starting capital for mostMFIs.

In this context, international donors provided tech-nical assistance, which was necessary for thedevelopment of microfinance institutions. Techni-cal assistance projects are intended to providemethodological tools, information, know-how, andnon-financial resources to support recipient organi-zations in developing their activities and strate-gies. Good examples come from UNDP, the US-AID/PRAGMA program on the development ofentrepreneurship, CAMFA, the EBRD Central AsiaBusiness Advisory Services Programme, and theTACIS program.

Several development banks have worked in themicrofinance sector in Kazakhstan, among them:

25 Small entrepreneurship development fund "Concept on development of system of microcredit in Kazakhstan", 2005.26 Small entrepreneurship development fund, 2005.

BOX 3.5 Best practices in Kazakhstan: European Bank for Reconstruction and DevelopmentDownscaling Programme

In 1997 the European Bank for Reconstruction and Development (EBRD) introduced a KazakhstanSmall Business Programme (KSBP) to provide small businesses with a sustainable long-term source offunding by ensuring access to credit resources of Kazakhstan commercial banks. The KSBP was madepossible through a credit line of USD175 million provided by the EBRD and technical assistance togive the partner banks skills and necessary know how. The overall aim of the KSBP is to build abridge between Kazakhstan banks and entrepreneurs. The Programme was originally aimed atintroducing effective credit procedures and training competent personnel in servicing micro and smallbusiness. Now as the credit portfolio grows and the institutional structure develops, the KSBP focuseson ensuring access to financial resources for the smallest businesses and creating competition forworking with such. Not only did the KSBP help many entrepreneurs to expand their business andincrease their capital but to develop new areas of work, which resulted in creating new jobs andmaintaining existing ones. Over 298,000 new jobs have been created over the period the Programmehas been operational.

Achievements as of 30 June 2005

Current Portfolio 47,700 credit, USD 328 mill.Total loans 152,000 credits, USD 944 mill.Regional network 206 offices in 45 towns and citiesNumber of officers 629 officers

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27 World Bank, Second Agricultural Post-Privatization Project, Project Appraisal Document, 2004.

• European Bank of Reconstruction and Devel-opment

• World Bank• Asian Development Bank• Kreditanstalt fur Wiederaufbau• Islamic Development Bank

These financial institutions provide funds for entre-preneurs generally through soft credit lines. Inorder to realize these programs, development bankscollaborate closely with financial organizations,such as banks, and state organizations. EBRD hasthe most extensive microcredit downscaling pro-gram (see the box below).

Three banks -- Kazkommertzbank, Narodny Bankand Almatinsky Torgovo-Finansovy Bank -- areimplementing a KFW credit line supporting SMEs.In 2001, the credit line policy was that the finalborrower gets credit at a 12 percent annual interestrate in hard currency. The loan size varies fromEURO 500 to 750,000 and lasts up to 4 years.

The World Bank's new "Second Agricultural Post-Privatization Assistance Project" will have animportant microfinance component. The rural mi-crofinance development component (USD 5.4million) aims to enhance the rural portfolio ofselected MFIs in view of the increased impor-tance of microfinance in the country and thepotential contribution of microfinance to ruralareas. The project will provide to selected MFIsboth technical assistance and capital. The Gov-ernment will lend credit facility proceeds to MFIsin tenge at the National Bank of Kazakhstan'sdiscount rate. The maturity of these loans will be3 years, with a one-year grace period. MFIs willbe able to set their own interest rates27.

The outline below offers a brief summary ofall international donors active in Kazakhstan

with interest and experience in microfinance.

The US Agency for International Development(USAID) conducted its microfinance projects throughthe CF "Kazakhstan Loan Fund" which is one ofthe leading MFIs in Central Asia. KLF deliversfinancial services to small entrepreneurs in theform of non-collateral group lending. USAID pro-motes institutional development of Kazakhstansmall business through a number of other projectsas well.

CAMFA is a USAID-funded four-year project (2002-2006) administered to support and expand micro-finance agencies operating in rural and urbanareas of Kazakhstan, Kyrgyzstan, Tajikistan andUzbekistan. CAMFA has a wide range of toolsand services and provides grants to credit organi-zations in order to develop their credit operations,internal systems, and human resources. Organiza-tions willing and taking the responsibility to carryout credit operations and achieve self-sustainabil-ity are eligible for the program. CAMFA assessesMFI credit operations, strengths and weaknesses,international control systems, and managementand financial performance. An expert team incooperation with the microfinance organizationdevelops a plan of action to support the program.CAMFA provides trainings, technical assistanceand grant packages for MFIs, which must submitfinancial reports quarterly over the next year.

The United Nations Development Program (UNDP)supports the development of SMEs by promoting asupportive environment, creating business advisoryservices and building national capacities in relat-ed fields. UNDP implemented microfinance projectsin Semipalatinsk, Kyzylorda and Atyrau. CurrentlyUNDP is assisting in developing the network ofmicrofinance organization in Kazakhstan.

BOX 3.6 MFI best practices in Kazakhstan: MCO Bereke

KMLO Bereke has emerged as an independent non-profit organization from the UNDP microcredit forwomen project in Semipalatinsk. The project started in 1997 as the initiative of UNDP, Mercy Corpsand Government of Kazakhstan. In 2001 the Government of Japan and Japan Women in DevelopmentFund disbursed funds to the UNDP Semipalatinsk Programme. Public fund MCO Bereke was foundedin May 2003. Bereke pursues the economic and social development of Semipalatinsk region,contributing to foster entrepreneurial activity and increase people�s welfare. Women make up 98percent of the actual 3,200 clients. Bereke plans to increase the number of borrowers involving bothman and women and expanding further to rural areas. Bereke, with a loan portfolio of about USD1 million, achieved both financial and operational self-sufficiency. Bereke has successfully imple-mented individual and group loans with mainly monthly repayments. An external evaluationconducted under the umbrella of UNDP Semipalatinsk programme recognized Bereke effectivenessin alleviating poverty indicating that economic position of clients has improved as a result ofborrowing from Bereke.

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Gesellshaft fur Technische Zusammenarbeit (GTZ),in the framework of the Houston Initiative, haslaunched a program for the development of SMEscalled PROSME. The main goal is to provide acomplete package of business consultation servicesto SMEs. In the framework of PROSME new sup-port has been provided to existing business associ-ations to promote the use of modern technologies.

Starting in the early 1990s, donors have conduct-ed considerable activities directed towards thedevelopment of microfinance. Currently the vol-umes of donor funding are shrinking in Kazakh-stan. It is necessary to analyze in-depth how tomaintain established relations with KazakhstanMFIs, and to transfer their unique experience toyoung organizations in the years to come. Thenew framework opens new challenges for MFIs.MFIs need to find alternative resources from themarket and to persuade investors to put money inthe microfinance sector, which, to date, has re-ceived support from international donors for overten years.

3.8 Principal findings andconclusions

Despite the diversity and multiplicity of operatingMFIs, there is still a high unmet demand forcredit. Further growth of the microfinance sectorwould positively affect the social and economicdevelopment of the country and contribute to theformation of a strong group of small entrepreneurs.

Despite all efforts and a relatively good legalframework, microfinance legislation still needs tobecome effective in supporting MFIs. While muchwork has already been done to improve and strength-en the legislative framework, several amendmentsto the current law are needed to empower MFIs.

Microfinance is a relatively new concept in Kaza-khstan. The Agency of Statistics indicates that50,600 people received microcredit loans in 2004,a 57 percent increase over the 32,300 people thatreceived microcredit in 2003. Preliminary esti-mates for 2005 indicate that there are 60,000-70,000 active microfinance clients in Kazakhstan.The potential demand indicates an immediate

market of 140,000-220,000 clients, but the idealobjective would be to provide financial servicesto all of Kazakhstan's 700,000 poor households.Even if the supply grows at an incredible rate, thesupply of microfinance will not be adequate.There are very few MFIs with a significant num-ber of clients, resulting in a major populationsegment without access to modern financial ser-vices. Starting from the best practice in thecountry, a more concrete effort to expand servicesand outreach is needed. MFIs are at the stage ofexperimentation in their development. Microfi-nance methodologies should be updated in orderto expand the outreach and the quality of servicesprovided. The demand for training and MIS ishigh among MFIs. International rating of MFIs isonly at the very initial stages of development inKazakhstan.

Financial institutions belonging to all three levelsof the credit system (commercial banks, non-financial banking institutions, credit partnershipsand microcredit organizations) should work tostrengthen partnerships to offer a wider range ofservices to poorer borrowers and SMEs. In additionto being an important segment of the financialmarket of the country, the microfinance sectorcan be an adequate economic tool to address thesocial problems by promoting long-term sustain-able development. Microcredit is also closelyassociated with entrepreneurship development andthe creation of a middle class.

All these premises, such as the existence ofnumerous MFIs, state funds, and projects, demon-strate the positive attitude of the Government andinternational donors towards microfinance, show-ing good prospects for improvements. Despite thissupport the microfinance sector is still consideredunderdeveloped and young in Kazakhstan. Supportand attention from both the state and internationalorganizations are required to assure microfinanceexpansion. A too rapid withdrawal of donors fromthe sector could stop the high growth rate andhinder the development of new MFIs. The weightof microcredit in the total credit portfolio of thecountry is still insignificant. This is a consequenceof inadequate development of MFIs, institutionalimmaturity and scarce financial resources to ex-pand microfinance activities.

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CHAPTER 4

OPPORTUNITIES AND CHALLENGES

4.1 Legal and policy improvements to enhancemicrofinance

The legal framework for microfinance in Kazakh-stan needs further improvement. Leading MFIsand the Association of Microfinance Organiza-tions of Kazakhstan proposed amending the lawon microcredit organizations. In April 2005, AM-FOK with the Kazakhstan Association of Finan-ciers and National Union of Entrepreneurs andEmployers Atamekent organized a roundtable onimproving the legal framework for credit partner-ships and microcredit organizations in Kazakh-stan.

The Agency for Supervising Financial Markets andOrganizations and the Kazakhstan Association ofFinanciers suggested the following amendments tothe law:1. Liberalizing operations for non-banking organi-

zations, for example by eliminating require-ments for the licensing and supervision ofcredit partnerships, pawnshops, and NFBIs.

2. Distributing net profits of credit partnershipbased on additional contributions. This wouldfacilitate market implementation of rules andmake additional contributions more attractive.

3. Revising taxation schemes for credit partner-ships since they are no longer licensed ormonitored by the Agency for Supervising Fi-nancial Markets and Organizations.

4. Expanding the definition of the term "borrowerof a microcredit agency" since it now onlyincludes small enterprise entities.

5. Increasing the maximum loan size for MCOclients from 1,000 times the monthly calcula-tion index (around USD 7,000) up to 4,000times the monthly calculation index (aroundUSD 28,000) and removing the 25percent lim-it for own capital.

6. Improving taxation schemes for MFIs.

Such changes would expand outreach, especiallyin rural areas, promote the involvement of smallentrepreneurs in this sector, contribute to legaliz-

ing informal moneylender activities, and fostergreater competition in the market1.

Other voices are calling for enabling MFIs tocollect capital by offering savings accounts. The-oretically, savings collection is an appropriate andsecure source of funding for MFIs, but it requiressome form of control from supervising bodies.Considering the strict requirements for institutionsto become banks, which are the only institutionslegally able to collect savings, and the need offunding to expand activities, a cautious policythat allow MFIs to raise capital by collectingsavings from the public could achieve good re-sults. Institutions that collect savings should al-ways be supervised depending on their specificsituation and requirements. Specific amendmentscould tailor accountability requirements to thescale of the deposit institution.

In any case, it needs to be kept in mind that mostNGO-MFIs lack the governance and institutionalcapacities to manage savings accounts. A goodside strategy to expand microfinance outreachwould be to develop savings products in commer-cial banks specifically targeted at the poor.

Finally, concerns remain regarding the advantagesand privileges banks have over MFIs, such asdifferent definitions of pre-tax expenses.

The proposal to simplify the structure of themicrofinance sector by eliminating the licensingsystem for non-banking financial institutions shouldbe carefully considered due to the possible nega-tive impact on the microfinance sector. If NBFIsare excluded from the "Law on Banks and Bank-ing Activity," several MFIs could be damaged bylosing their VAT and tax benefits and would beobliged to respect loan ceilings established forMCOs. If this change is introduced without ade-quately reforming the provisions for MCOs, themicrofinance sector could be negatively affected.

1 Finance and Credit, Monthly informational and analytical publication. Issue 5, 2005.

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Most of the MFIs that are now licensed as NBFIsdo not have the bases to transform themselvesinto banks and would be obliged to becomeMCOs instead.

Analyses of documents and interviews with ex-perts indicate that in Kazakhstan the managementof microcredit policies by the government is stillrelatively weak, which has often resulted in weakmanagement of government programs, and non-transparency in many MCOs.

The government has not clearly determined whatrole microfinance should play in socio-economicdevelopment even though the term microcredit isincluded in various government strategy docu-ments. Indeed the Kazakhstan Strategy 2030, whichis the key document guiding long-term govern-ment policies, defines microcredit as a tool forpoverty reduction. The "Concept on the Develop-ment of the Financial Sector in Kazakhstan" clear-ly regards microcredit as a practical tool tosupport SMEs and micro enterprises by includingmicrofinance in the country's financial infrastruc-ture. Finally the Poverty Reduction Program for2003-2005 considers microcredit as a tool to fightpoverty.

4.2 Alternatives to fostermicrofinancedevelopment

4.2.1 New resources to expandmicrofinance activities

There are several widely acknowledged fundingsources for MFIs. Equity contributions and loansoffered at concessional or market rates representthe main options. Many MFIs operate as non-profit organizations that implement microcreditprograms with financial support from internationaldonors in their initial stages of operation. In somecases funding from the state budget is provided ona reimbursable basis with low interest rates toprovided loans to SMEs; however, state grantshave to be "paid out" by extra administrative costscharged to borrowers and there are additionalrestrictions on their utilization. It must be notedthat MFIs can attract funds by collecting savingsand from commercial banks or investors.

Despite the financial problems and obstacles con-fronting MFIs in Kazakhstan as described above,opportunities have increased and access to newfinancial resources has become easier:• Donors: The second phase of the World Bank

Agricultural Post-Privatization Assistance Project

(APPAP-2), which has a large microfinancecomponent, is to begin in 2005. The EuropeanBank for Reconstruction and Development(EBRD), alongside their cooperation with com-mercial banks, is expected also to fund indi-vidual MFIs that meet EBRD requirements.

• Government: In 2005 the Government allocat-ed about KZT 3 billion for development of themicrofinance sector, and in 2006 and 2007 anadditional KZT 4 billion per year are expected.Thus the sector is to obtain government invest-ments totaling KZT 11 billion (roughly USD 8million) over three years. The management ofthese funds is under the responsibility of the"Small Entrepreneurship Development Fund"(SEDF).

• Private capital: Private capital largely ac-counts for the recent sector development. ManyMFIs use private funds and include thosewhich are set up by private individuals whoregard microfinance activity as their own fam-ily business.

� Commercial banks: Local banks are only slowlycoming to recognize the advantages of fund-ing and investing in MFIs. In some cases,MFIs work on the ground for banks by trainingpotential bank clients and teaching them thecredit culture. One large Kazakhstani bankhas decided to use a fast-track procedure forthe issuance of loans to borrowers with credithistories at KLF. This means there is no needfor the bank to fully screen entrepreneurs whohave a record of at least two loans from theMFI. On the other hand, as long as Kazakh-stani MFIs are not well developed, self-sus-tainable, and technically capable, banks donot seem to be particularly interested in work-ing with them. However several MFIs thathave reached self-sustainability have also suc-cessfully approached commercial banks, al-though the cost of commercial funds is high.ACF was provided with a USD 1 millionrevolving credit line from Demir KazakhstanBank. Another good example of MFI-commer-cial bank cooperation is the use of bankinfrastructure for client account managementand loan repayment, which reduces risks andoperational costs for MFIs. Both Bereke andACF have developed special agreements withbank branches and also obtained preferentialcommission rates from them.

� Transnational companies and large nationalcompanies have also developed social respon-sibility programs in cooperation with MFIs.ChevronTexaco, Citibank and ExxonMobile havefunded MFIs to develop microfinance pro-grams in different regions of Kazakhstan.

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Table 4.1 International microfinance investor funds in Kazakhstan

• Long- microfinance providersterm commitment to developing of sustainableMission

• Political independence and decision - making autonomyGovernance

• High quality management: microfinance expertise, managerial and financial skills, integrityManagement

• Use of clear selection criteria to fund MFIs

• Loans tailored to MFI cash flows and needs

• MFIs monitored via a few well - defined, enforced performance targets

Operations

BOX 4.1 Success factors for apex

Source: CGAP

Name Country Fund global Assets allo Active MFassets (USD) cated to MFIs (%) investments (#)

DBMDF United States 3,027,500 75.5% 27(30/06/04) (30/06/04) (30/06/04)

Dexia Microcredit Fund Luxembourg 51,669,512 89.7% 49(31/12/04) (31/12/04) (31/12/04)

ECLOF Switzerland n/a n/a n/aHTF Netherlands 22,713,167 91.2% 36

(31/12/04) (31/12/04) (31/12/04)I&P Development France 10,000,000 100.0% 5

(31/03/04) (31/03/04) (31/03/04)KFW Germany 85,400,000 26.9% 31

(01/01/02) (01/01/02) (01/01/02)MicroVest United States 15,000,000 51.3% 7

(29/11/04) (29/11/04) (29/11/04)Oikocredit Netherlands 275,899,893 23.5% 159

(31/12/03) (31/12/03) (31/12/03)ResponsAbility Fund Luxembourg 7,051,695 92.1% 22

(30/09/04) (30/09/04) (30/09/04)

Source: MIXmarket website (www.mixmarket.org), accessed July 2005

• MixMarket indicates that nine internationalfunds invested resources in the Kazakhstanimicrofinance market. In the table below, thegeneral characteristics of these investor fundsare summarized. There are an increasing num-ber of international private investors interestedin lending money to MFIs with good creden-tials. In dealing with international investors,some type of intermediation or brokering maybe required for small MFIs.

• Pension funds: After the latest pension reformsin Kazakhstan, several pension funds werecreated. These institutions have surplus liquid-ity that can be channeled to finance MFIsthrough advanced financial products (e.g., creditsecuritization). Even if the financial market isnot ready for such kinds of products, feasibil-ity studies should further explore this opportu-nity.

4.2.2 Introduction to apex funds

Apex organizations are wholesale institutions thatprovide funds (grants, loans, guarantees) and ser-vices to MFIs on a geographical basis. Fundingcan be provided with or without technical assis-tance. Apex organizations attract donors and in-vestors to supply funding and technical assistanceto MFIs. As reliable local institutions, apex orga-nizations are attractive because they provide for-eign investors -- such as donors, private invest-ment funds and even governments -- with in-creased confidence in supporting microfinanceactivities. In spite of these facts, only a limitednumber of successful apex experiences can befound around the world due to several challengesthat these organizations face. CGAP suggests somepractical factors to be addressed in order todesign a successful and effective apex system.

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Designing successful apex systems is a complexchallenge. These are problems that apex institu-tions usually face:• Apex planners often face the situation where

very few MFIs can apply for funds due tostrict selection criteria. Even in Bangladesh,where the microfinance sector is highly devel-oped, the Palli Karma Sahayak Foundationapex fund found that only 10percent of MFIsthat submitted applications satisfied fundingrequirements. Apex funds in Kenya, Domini-can Republic (FondoMicro), Columbia andPakistan had more money than qualified MFIs.

• Apex funds that conscientiously select organi-zations based on strict criteria cannot allocatefunds rapidly.

• Political pressures often influence MFI financ-ing decisions.

• Apex funds rarely become a bridge betweenMFIs and commercial banks and funds.

• Global microfinance experiences shows thatmicrocredit should be combined with techni-cal assistance, but apex funds are not alwaysequipped to provide TA.

Kazakhstan differs in some respects from othertransitional economies due to its relatively welldeveloped banking and insurance markets, en-abling microfinance laws, and number of success-fully established MFIs. In addition, the Govern-ment has so far given positive appraisal to micro-finance and appears prepared to provide financialsupport to the sector. However, the lack of acoherent sector strategy could hamper the furtherdevelopment of the sector. An apex institutionplanned by the Government in Kazakhstan couldpossibly play a positive role in the developmentof the sector, provided that the problems men-tioned above are faced transparently. The apex

BOX 4.2 Wholesale lending institutions in Central Asia: Frontiers Kyrgyzstan

Frontiers is probably the only wholesale lending intuitions that serves MFIs in Central Asia. Frontiersbegan its operation in 2004 with the support from CAMFA/USAID. In numbers (31-08-2005):• Outstanding portfolio: USD 1,987,453• Active Clients: 18• Loan size: from USD 5,000 to USD 200,000• Tailored repayment terms up to 2 years• Interest rates (12%-15%)

Main requirements for loan applications:- Legal registered entity- Reached or approaching operational self sufficiency- 3 years financial statements- Cash Flows projections

fund might act as a wholesale credit institutionfor MFIs, initially in Kazakhstan, possibly to bereplicated within the Central Asian region.

However, plans for developing an apex institutionseems somewhat ambitious for Kazakhstan, evenif the strategy would be well defined and de-signed. Considering the poor experience in bridg-ing government funds to MFIs collected in previ-ous microcredit programs, it would not be simpleto establish an apex institution and to guaranteeits independence of action. Further involvementof international organizations, international ex-perts, and the Association of Microfinance Orga-nizations in the process could be an instrument tobuild up credibility and assure effectiveness.

4.2.3 Beyond microcredit

Another option to foster MFI expansion is the intro-duction of a set of new, tested, and highly effectivefinancial services. These options and other consider-ations are analyzed below. International experienceshows that a population with low incomes canbenefit from additional financial services besidesloans. Microsavings, microinsurance and micro leas-ing services are most needed in Kazakhstan.

MFIs are encouraged to introduce a client focus -- and particularly a pro-poor focus -- and todevelop innovative products in order to meet andadapt to clients' needs. However, the develop-ment of new product requires accurate analysis.Before moving from core products like microcreditinto new areas, an organization should test itsgovernance system and carefully look at themarket. The organization Microsave developedseveral useful tools to help MFIs in the decisionto expand their services.

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Expansion to savings services is one option, evenif often such financial activity is strictly regulat-ed. One of the main tasks in the development ofan effective savings program is the adaptation ofMFI corporate culture to provide deposit services.As important is the need to have regulatingbodies supervising the institutions that collectsavings, including MFIs. Well-developed depositservices could lead to a successful integration offinancial services, reduce MFI dependence onexternal financing, and create a stable cash flowto cover operational costs. With savings services,MFIs obtain one important advantage: a stableand relatively cheap source of funds to expandloan operations. MFIs can also lower liquidityrisks and become less vulnerable to externalshocks. However, MFIs must be aware of otherelements -- most of which are beyond the controlof MFIs -- that are vitally important for thesuccessful provision of savings products:• a healthy macroeconomic environment and

healthy financial sector;• an efficient management structure;• proper liquidity risk management;• a legislative and supervisory framework that

ensures the safety of savings;• effective products and mechanisms that cover

expenses of savings collection.

The current legislation in Kazakhstan allows onlycommercial banks to collect savings. To become abank, MFIs have to meet strict requirements forcapital stock and guaranteed funds. KazakhstaniMFIs seem to frequently consider the possibility ofcollecting savings to mobilize financial means inthe credit portfolio and direct them as a compo-nent of their further development. Internationalpractice shows that managing savings increases theresponsibility and accountability of MFIs in com-parison with managing state grants or subsidies. Atthis stage, when efforts of the Agency for Supervis-ing Financial Markets and Organizations are fo-cused on enhancing control of commercial bankactivities, Kazakhstan MFIs could not hope to

begin collecting savings due to the fact that sav-ings restrictions are not likely to be amended soon.

Micro leasing, according to the International Fi-nancial Corporation (IFC), is a very attractivefinancial service for small and medium businessesand an option which might be easier for MFIs inKazakhstan that are planning to diversify theirservices. Entrepreneurs can acquire, with the helpof leasing service providers, equipment on thebasis of business cash flows and not on theircredit history or collateral. Some advantages ofleasing include2:

• Supply and demand. In most developing coun-tries leasing is one of the main forms ofmedium- and long-term financing of fixedassets. Leasing provides MFIs with an opportu-nity to reach new borrowers and expand exist-ing markets.

• Effective capital use. Leasing ensures efficientand effective use of the capital available. Insome cases leasing offers also the opportunityto set lower costs and fees due to high-volume purchases.

• Collateral financing. The leasing company keepsthe ownership of the leased asset, which isused as collateral. As the rightful asset owner,the leasing company has a stronger position incase of default.

• Low cost of operations. Leasing operations canbe fast and simple. Known characteristics ofcash flows peculiar to leasing makes planningeasier and reduces risks.

• Financing at a fixed rate. Leasing as a ruleoffers medium- and long-term financing at afixed rate.

Leasing also has some disadvantages that MFIsshould be aware of, including:

• Asset ownership. The lessor is in responsiblefor maintenance expenses related to obsoles-cence. In most cases the leasing period isshorter than the period of equipment use.MFIs must take into consideration the work-

2 Daley-Harris, Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families, 2002.

BOX 4.3 Developing new products

Microsave developed a set of tools to help MFIs to develop, design and launch new products. Theproduct development process is complex and needs to be faced through systematic steps. These arethe 5 phases in which the product development process is usually divided:

• Evaluation and Preparation• Market Research• Concept/Prototype Design• Pilot Testing• Product Launch and Roll out

Source: Microsave, www.microsave.org

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ing life of property and its resale potential.• Fixed rates. Most payment rates are fixed and

do not depend on characteristics of the client,leasing company or equipment. Therefore, thecost of operations for leasing cheap equip-ment will be higher.

• Asset value and liquidity. Derived incomemust exceed the leaser's asset value to beprofitable. MFI assets tend to have costs thatare higher than the prevailing market rates.Given the characteristics of leasing and thesignificant advance expenses, there is a riskof negative influence on MFI liquidity andreduction of profitability.

• Depreciation analysis. The leasing companydevalues leased assets during the leasing pe-riod. Measuring future asset value includesboth potential profits and possible losses, whichis vitally important to measure the profitabil-ity of leasing operations.

In Kazakhstan, no microfinance products havebeen provided except for microcredit. Other mi-crofinance products such as microsavings, micro-insurance and micro leasing are not commonlyused, since only specialized legal entities such asleasing and insurance companies may deliverthem. There are strict requirements for obtainingsuch licenses, including capital requirements, re-serves, adherence to prudential norms, asset place-ment, etc.

Kazakhstani MFIs have carried out a preliminarysurvey on leasing. It was found that micro entre-preneurs are very interested into purchasing mini-equipment and second-hand equipment. As a rule,leasing companies provide new expensive equip-ment, which is not affordable for the microfinancetarget group. Therefore, there is enough space forMFIs to establish pilot leasing projects to assessthe viability of micro leasing operations.

Insurance services are regulated following pruden-tial requirements. For this reason banks and otherfinancial institutions need to create affiliated com-panies to provide insurance. Requirements forsetting up new insurance companies discourageMFIs from entering the market directly. In gener-al, the insurance market in Kazakhstan is consid-ered to be relatively young and still underdevel-oped. An agreement between insurance compa-nies and MFIs to market innovative microinsur-ance products is probably the best option at thisstage of development. On this there have been nopilot projects or plans among MFIs to developmicroinsurance programs and there is a lack of

market research on the needs. Feasibility studiesto assess the actual demand in Kazakhstan andopportunities to expand insurance services to thepoor, and in particular to the rural poor, should besponsored by donors or the government. An inter-esting study was conducted in 2005 in Georgia toassess the demand for microinsurance service3.The Microinsurance Center provides easily acces-sible documents focusing on all aspects of provid-ing microinsurance4.

Money transfer services and remittance manage-ment are considered to be highly profitable services,but only banks and international companies providethese services in Kazakhstan. However, pilot studiescould be launched to assess the feasibility for largerMFIs to develop adequate capacities to offer thesevaluable services to their clients.

The delivery of microfinance services may be partof the cooperation between specialized financialinstitutions and MFIs. For example, under agencyagreements with banks and insurance companies,MFIs could promote a spectrum of financial ser-vices including microinsurance products specifi-cally designed for the poor.

4.3 Enhancing the impactof microfinance onsocial and economicdevelopment

4.3.1 Development of entrepreneurialinitiatives in remote areas

Business infrastructure development is not bal-anced throughout Kazakhstan. For example, inKyzylorda, Manghistau and Atyrau oblasts, lowentrepreneurial activity is registered with a corre-sponding lack of infrastructure such as transporta-tion and communication facilities. On the otherhand, in South Kazakhstan and Karaganda oblastsand in Almaty city, there is no need to go beyondfacilitating the SME environment since these re-gions already have a well-developed businessclimate. A regional needs-based approach andanalysis should therefore be applied to policiesaimed at developing the business infrastructure inan integrated manner. For example, enterprisedevelopment in the northwestern regions of Kaza-khstan, which suffers from relative poverty, alsohas a social dimension and could improve thelevel of employment, while the business attitudes

3 The Microfinance Center for CEE and NIS, Demand for Microinsurance in Georgia, Quantitative Study Results. 2005.4 Microinsurance Center, www.microinsurancecenter.org.

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5 Turjanov S.A., The small and middle business: problems of development, ways of solution, 2005.

are already prevalent in the relatively well-devel-oped areas of southeastern Kazakhstan.

SME distribution is highly imbalanced in Kazakh-stan. In particular, SMEs are mostly located in only3 regions: Almaty city and Karaganda and SouthKazakhstan oblasts. Seventy-five percent of SMEsare individual entrepreneurs and only 7percent ofall SMEs are engaged in manufacturing activities5.Such an environment highlights the need for aneffective microfinance sector. In general, the pro-portion of SMEs to GDP remains low in Kazakhstancompared to western economies.

The business environment is only slowly improv-ing for SMEs. The Agency for Statistics reportsthat as of 1 October 2004, the contribution ofsmall enterprises to GDP was as high as 24.6per-cent with 611,522 registered small enterprises,versus 23.7 percent and 494,297 small enterprisesas of 1 October 2003. On 1 October 2004, thenumber of workers employed in small enterprisesreached 1,384,500. However, heavy disproportionsin access to financial services are faced by SMEscompared with medium- and large-scale enterpris-es. A systemic approach to the development ofSMEs and the promotion of microcredit as a toolfor encouraging entrepreneurial initiatives couldbe beneficial.

Infrastructure problems do not have to prevent theactivity of MFIs in rural areas. All over the worldit has been proven that even people living inremote areas are in need of financial services andthat MFI operations in these areas can be profit-able. Until now, however, microfinance outreachhas been minimal in the rural areas of Kazakh-stan, where most of the poverty is concentrated.

4.3.2 A functioning and inclusive financialsystem

Microfinance is an effective instrument for en-couraging entrepreneurship and reducing poverty.The microfinance sector is an important compo-nent of the financial system and can cooperate

Table 4.2 Comparison of SME contributionsto the national economy in selected states

USA Canada Japan UK Italy KazakhstanSME contribution to national GDP 52.0% 43.0% 51.6% 52.0% 55.0% 20.0%Proportion of SME employees outof total employees 50.1% 47.0% 69.5% 55.5% 71.0% 18.0%Proportion of SMEs out of allenterprises 97.6% 99.8% 99.2% 99.1% 99.2% -Proportion of national budgetexpenditures on support to SMEs 0.04% 0.23% 0.21% 0.25% 0.4% -

Source: Turjanov S.A., 2005

with different players (banks, insurance, leasingand mortgage companies) to expand the range ofservices and the access to financial services.

The concept of financial system development ofthe Republic of Kazakhstan has been developedbelow to take better account of microfinanceplayers and to highlight the potential role of anapex institution.

4.3.3 Role of women in microcredit

Women often face the same challenges as men inrunning businesses but with increased severity dueto gender discrimination. Moreover, many womenwho are willing to start or expand their businessesnot only maintain their responsibilities at homeand earn money for their families, but also haveto overcome numerous social and cultural obsta-cles. MFI experiences show us that women areoften better borrowers than men and that micro-credit projects targeted at women in Kazakhstanare achieving remarkable results. In many micro-finance projects around the world it has beenfound that women demonstrate better repaymentrates than men.

The transition process resulted in higher unem-ployed among women than men in Kazakhstan. In2004, women accounted for 57.3 percent of allunemployed people. The specific profile of Kaza-khstan is that unemployed women are compara-tively well educated (both higher and vocationaleducation). In Kazakhstan, 42.3 percent of thoseself-employed in small businesses are women6.The self-employment of women, especially inrural areas, largely accounts for the high level ofwomen's participation in the economic activity ofKazakhstan. The traditional sectors of female self-employment are trade with clothes and foods,crafts, agricultural production, personal services,catering, advice-giving and teaching, folk medi-cine, cosmetology, etc. Such activities are goodcandidates to be financed by MFIs.

The development of networks and associations of

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BOX 4.4 Financial sector concept for Kazakhstan

LEVEL I: Banks

Services : all types of bank services (credit, deposit, etc.)

Supervision : high

Borrowers(individuals,corporateclients, etc.)

LEVEL III: microcredit institutions

Services: credit

Supervision : registration only

Small and microentrepreneursand individualswithout access tobank services

Equity capital,savings, syndicatedloans, externalloans, etc.

Internationalorganizations,state, privateinvestors…

APEXMainly statebudget, privateinvestors, banks

MicrofinanceInstitutions

LEVEL II: credit associations,pawnshops, and non bankingfinancial institutions;

Services : credit, leasing

Supervision : partial

SMEs,individuals

Internationalorganizations,state, privateinvestors…

Clients Source of fundingFinancial Service Providers

6 UNDP Kazakhstan, Gender equality and the status of women, 2005.

self-employed women and small businesses wouldhelp businesswomen to set up or expand theireconomic activities. The experiences of manycountries show that services and assistance target-ed at women have a positive impact on societyas a whole. Microfinance is usually promotedalong with training and business advisory services.The Association of Businesswomen in Kazakhstanand the national branch of the EnvironmentalAssociation of Oriental Women are the largestwomen's NGOs in this area. Projects focused onwomen in Kazakhstan include the following:

• The Association of Businesswomen in Kazakh-stan is implementing a project, called "TheStatus and Economic Advancement of Womenin Kazakhstan," which supports women in ru-ral areas. The project covers Kyzylorda city,and the Aral and Kazalinsky Rayon. Womencan receive microcredit, varying between USD100 and USD 600, for a period of threemonths. Microcredit is disbursed individually,by loan groups and to families. In total, microloans now total USD 255,500.

• The Environmental Association of OrientalWomen is working very actively in imple-menting a UNDP project on economic train-ing for women.

• The Golda Meir Mount Carmel InternationalTraining Center (Israel) has carried out a shorttraining course titled "Women in Business."The participants of the workshop includedheads of divisions, directors of companies,entrepreneurs, and leaders of women's NGOs.

• Annually, to stimulate woman entrepreneur-ship, the National Commission on Family andWomen Affairs carries out a republican com-petition -- Best Business Headed by a Woman-- in seven categories. There is also a specialannual campaign, Ak Niet, carried out by theNational Commission for rural women. Underthis campaign, more than a thousand womenhave been trained in business; the best amongthem received access to extra loans.

• Several MFIs specialize in providing microfi-nance services for women. MCO Bereke givesloans to women's groups and provides consul-tative and other services. About 98 percent ofthe 4,000 Bereke clients were women. Anindependent survey conducted under the um-brella of UNDP Semipalatinsk Programmeshowed real improvements in the lives ofBereke borrowers. In 2000, a study by YasushiTairo concluded that clients on average in-creased their profit KZT 4,215 over the credit

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Microfinance in Kazakhstan: an inclusive financial sector for all

7 UNDP Kazakhstan, Final evaluation of UNDP Semipalatinsk Programme outcomes, 2005.

period and saw an increase in wages by, onaverage, KZT 39 per hour. A Bereke surveyconducted in 2004 found that 87 percent ofthe clients interviewed reported an increase inthe profitability of their business7.

• Moldir Women's Association (an NGO) startedits activities in December 1993, operating onthe idea to develop self-help groups. Theassociation helps people to adapt to the mar-ket economy, fight unemployment, and col-lect resources to meet their financial needs.Moldir activities are related to the nationalprogram aimed at poverty reduction, employ-ment of poor people, development of thestrategy for the small business sector, andadvocacy for sound nutrition and healthy life-style. Self-help groups are actively in opera-tion following the principles of mutual helpand assistance.

In sum, as a result of the programs of a numberof microfinance associations, many women haveimproved their living standards.

Table 4.3 Moldir Women's Association activities

Activities Description of activitiesSocial services Organization of women into self-help groups by mobilizing members and external

resources; provision of training to women in how to articulate their own interests,protect their rights, and achieve independence.

Employment services Provision of help to vulnerable groups such as single mothers to obtain employmentthrough training and income generation activities. Research and lobbying in the interestsof unemployed.

Information service Promotion of organizational activities among target groups, government agencies, theprivate sector and NGOs. Publication of newsletter "Moldir" and other leaflets.

Legal advice Provision of professional legal advice; representation of interest of single mothers incourt and other institutions; assessment of the status of vulnerable families to feed intodraft laws.

Psychological services Promotion of active life styles, positive self-esteem, mutual understanding, trust building,psychological health and supporting environment, as well as delivering psychologicaladvice.

Other activities Provision of training workshops, conferences, and roundtables on socio-economicadvancement of low-income families, single women, disabled people, and children andproviding targeted social assistance.

Source: Moldir Women's Association, The Information Bulletin of Moldir

4.4 Major findings andconclusions

The microfinance legal framework of Kazakhstanneeds to be further refined. Some amendmentswere considered, such as relaxing licensing re-quirements for NFBIs and credit partnerships, re-vising taxation schemes, expanding the definitionof the term borrower of a MCO, and increasingthe maximum loan size for MCOs.

Various development options for the microfinancesector were analyzed:

• Attracting financial resources from various actorssuch as the private sector, commercial banks,international private funds, and pension funds.New government-financed microfinance projectscould also become an alternative to donorgrants.

• Introducing apex funds. The idea of creating anapex institution was reviewed by outlining theadvantages and disadvantages. The SEDF apex

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strategy proved to be well designed, but therisks associated with such funds remain highwhen implemented by government bodies.

• Expanding beyond microcredit. The opportuni-ty to expand microfinance services like mic-rosavings, microinsurance and leasing wasexamined. MFIs have been excluded fromcollecting savings. Further research is neededto assess the actual demand for leasing andinsurance products. When MFIs do not havetheir own capacity, agreements with commer-cial banks and insurance companies couldovercome barriers and are being used to intro-duce innovative microfinance products in thecountry.

Since there is no consolidated data, assessing theinfluence of microfinance on poverty and unem-

ployment in Kazakhstan is a difficult task. Avail-able information is sometimes contradictory inmeasuring the degree of outputs/outcomes andcan be difficult to verify. However, independentproject-based surveys indicate that borrower lifehas improved after being introduced to microfi-nance services. New statistics on the number ofhouseholds who have and who do not have ac-cess to financial services should be included inthe next statistical handbook. The Agency ofStatistics is only at the planning stage of tracingmicrofinance activities in the country.

In the report, infrastructure gaps and regionaldifferences between oblasts are highlighted. Thereport also suggests that the role of woman inmicrofinance is central for the development of thesector in Kazakhstan.

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Microfinance in Kazakhstan: an inclusive financial sector for all

Microfinance in Kazakhstan is still a relativelyyoung concept that was only introduced in themid-nineties. Despite the diversity and number ofexisting microfinance institutions, there is still ahigh demand for financial services that remainsunfulfilled. Microfinance has the ability to createenormous opportunities for people and in particu-lar the poor. Therefore, a strong and positiveimpact on the social and economic developmentof the country is expected from the formation ofa network of small and micro enterprises.

The findings of this report confirm that microfi-nance outreach is still very low in Kazakhstan: itis estimated that there were 50,600 microcreditclients in 2004, only 2 percent of the poor livingin Kazakhstan. Conservative estimates indicatethat the potential microfinance demand is be-tween 140,000 and 220,000 clients, although theideal objective would be to expand microfinanceaccess to all of the 700,000 poor households inKazakhstan. Only one microfinance institutionsurpasses the threshold of 10,000 active clients,while the vast majority has less than 500 clients.Rapid growth in the sector during the past fewyears indicates a prompt market response to thedemand of microfinance services. However, sever-al bottlenecks hinder further development of themicrofinance sector in Kazakhstan.

All of the options mentioned in this report toexpand microfinance services require a joint effortfrom all stakeholders. In order to overcome thebottlenecks that prevent the expansion of microfi-nance services and to promote sustainable devel-opment, the government, donor community, andmicrofinance institutions themselves are encour-aged to consider the following recommendations.

GOVERNMENT OFKAZAKHSTANA sound policy and legal framework for themicrofinance sector is an essential preconditionfor further development and should include provi-sions to:• Secure savings of the poor;• Promote competition in the microfinance sector;

• Develop the microfinance expertise of super-visory and regulatory bodies.

Prudent financial supervision in Kazakhstan onlyallows banks to collect savings. However, therequirements for becoming a bank are restrictiveand therefore prevent MFIs from accessing thepublic savings that they need. Consequently, un-regulated MCOs will not be able to attract theinvestors needed to diversify and expand theirservices. Many larger MFIs are using licenses asnon-banking financial institutions to operate, whileothers are planning to become commercial banks.A more balanced relationship between supervisionand flexibility in MFI operations is desirable. Acautious policy allowing certain MFIs to offersavings services could also be designed to expandmicrofinance outreach.

In this report some development alternatives forthe microfinance sector have been reviewed, in-cluding the following that directly involve thegovernment:• An effective state funding strategy with the

creation of an independent institution and atransparent and effective disbursement mecha-nism;

• The expansion of microfinance activities toinclude leasing, microinsurance and microsav-ings;

• Effective utilization of existing opportunities.

On the basis of these considerations the govern-ment is advised to:• Facilitate an open and inclusive dialogue on

microfinance in Kazakhstan and create a con-ducive environment for microfinance institu-tions.

• Promote amendments to laws that are in linewith international best practices to foster mi-crofinance growth in Kazakhstan as discussedin this report. Under the current law MCOshave several disadvantages relative to com-mercial banks in terms of savings mobiliza-tion, product diversification, and expansionopportunities. The loan size limits could beredefined, as could the narrow definition ofmicrocredit borrowers.

• Create a state coordinating body for microfi-nance, such as a National Committee, to

CONCLUSIONS ANDRECOMMENDATIONS

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coordinate the activities and initiatives thataddress the challenges that the poor face inaccessing financial services. Members shouldnot be limited to government bodies but shouldalso include representatives from multilateralorganizations, donors, MFIs, sector associa-tions, academia, and civil society.

• Prevent interventions that could distort themicrofinance sector. Subsidized lending pro-grams should be avoided as self-sustainablemicrofinance institutions may be excluded fromsubsidized competition.

• Promote the development of transparent andeffective mechanisms to transfer state funds toMFIs. The independence of the disbursinginstitutions would be the major factor in achiev-ing good results. International experience inimplementing apex funds should be looked atwith special attention. The involvement ofinternational organizations and experts in theprocess can help to assure credibility andtransparency.

• Strengthen microfinance expertise among thestaff in key ministries that work with microfi-nance projects.

• Sponsor an independent evaluation of ongoingstate microfinance projects.

• Encourage Government funds and programmesto follow international practices and encouragetransparency in decision-making processes.

The Government of Kazakhstan has established all thebasic preconditions necessary to develop the microfi-nance sector: a stable macroeconomic environment,an enabling legal framework for MFIs, and an explicitrecognition of microfinance as a tool to fight poverty.However, the State intervention in the microfinancesector will not be effective if there are no reliablemechanisms to ensure an effective implementation.The Government made a commitment to providefunds to MFIs. However, rather than being a directprovider of financial services it is recommended thatthe Government create a conducive environment formicrofinance institutions. Increased transparency andaccountability could make a difference in the resultsof Government sponsored projects/strategies.

DONOR COMMUNITYThe role played by donors in Kazakhstan indeveloping the microfinance sector was signifi-cant in the recent past. They contributed byintroducing international best practices and stateof the art technologies as well as providing start-up capital. Several projects can be consideredsuccessful and some can even be viewed asworld best practices. Partnerships with the private

sector, such as corporate social responsibility de-partments, particularly from oil sector companies,should be encouraged by donors. As donor com-mitments continue to decline, these partners maybecome potential sources of funding.

The donor community should continue to supportMFIs to grow in recognition of the important roleplayed by microfinance, especially for the ruralpoor and small-scale borrowers. It can be notedthat:• A significant portion of the poor are unable to

access even basic financial services;• There has not been enough time to create

stable, reliable and self-sustainable microfi-nance institutions in the country;

• Many MFIs still need technical assistance andcapital to disburse loans;

• A rapid withdrawal of donor assistance coulddamage sector prospects for growth in view ofthe continued dependence of many MFIs inKazakhstan on donor support to grow;

• Qualitative studies and surveys demonstratethat the lack of financial resources is a com-mon bottleneck that hampers sector growth.

Based on these considerations, donors should con-tinue to:• Provide inputs to the government to improve

the design of pro-poor policies and the micro-finance strategy;

• Participate in government microfinance projectsto assure transparency and effectiveness;

• Support MFI associations and networks;• Sponsor the creation of a market for MFI

services, such as training, international andlocal audits, and rating services;

• Finance MFI capacity building and expansion;• Disseminate information about best practices

and sector standards;• Conduct new surveys to better assess the

impact of microfinance in Kazakhstan and tostudy the introduction of innovative microfi-nance products;

• Develop suitable donor exit strategies for ex-isting projects;

• Support the introduction of microfinance ser-vices other than microcredit;

• Strengthen donor coordination.

MICROFINANCEINSTITUTIONSMicrofinance institutions themselves are the maindriver in fostering development in this field. Themain challenge for them is to expand their out-reach, while maintaining outstanding financial

Conclusions and recommendations

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Microfinance in Kazakhstan: an inclusive financial sector for all

records in order to build confidence in the sectorand become established as credible institutions.Although MFIs in Kazakhstan are young relativeto other similar institutions around the world, theyhave already achieved good self-sustainability andefficiency records. However, many MFIs in Kaza-khstan are still dependent on donor support tofinance their expansion strategies and there areonly few MFIs that are able to attract externalcommercial funding. A part of the reason is thatsince MFIs are not allowed to collect publicdeposits, donor and government support will re-main their major source of funding. In the comingyears the growth of the sector is at risk sinceshrinking donor involvement and uncertain gov-ernment funding could possibly worsen financialbottlenecks. A high sector growth rate is muchneeded as an additional driver to reduce the gapbetween the supply and the demand for financialservices in the country and, in particular, in ruralareas. At the same time, it is observed in thisreport that the advanced and liquid financialsystem in Kazakhstan offers many opportunitiesfor the development of the sector, which may beunique in this country.

MFIs are thus encouraged to:• Expand their outreach, especially in rural ar-

eas, where the poor are concentrated;• Gain ownership of the microfinance strategy

in Kazakhstan by researching and proposingspecific solutions to current challenges;

• Multiply networking and enhance nationalassociations;

• Promote investment in human resources andadopt modern international microfinance man-agement techniques;

• Comply with international standards in ac-counting and reporting;

• Seek international ratings;• Facilitate knowledge sharing of best practices

among MFIs in Kazakhstan and within theregion;

• Become proactive in their strategies by devel-oping creative and innovative methodologiesfor reaching clients and attracting resources;

• Approach national and international commer-cial banks, as well as international privateinvestors, to increase financial resources;

• Exploit available opportunities offered by thegovernment budget.

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Law on of the Republic of Kazakhstan Credit Unions as of 28 March 2003

Law on of the Republic of Kazakhstan Microcredit Organizations as of 6 March 2003

Law on of the Republic of Kazakhstan Republican Budget for 2003 as of 12 December 2002.

Law of the Republic of Kazakhstan on Protection and Support to Private Enterprise as of 4 July 1992.

Legal Culture Foundation, Comments on the Part 2 of the Civil Code of Russia. Legal CultureFoundation, 1996.

Littlefield Elizabeth, Murduch Jonathan, and Hashemi Syed, Is Microfinance an Effective Strategy toReach the Millennium Development Goals?, January 2003.

Microfinance Centre for CEE and the NIS, The State of Microfinance in CEE and the NIS. 2003 CGAP/World Bank Washington DC, USA

Microfinance Centre for CEE and the NIS, Overview of the Microfinance Industry in the ECA Regionin 2003. Spotlight Note 12, August 2004.

Microfinance Centre for CEE and the NIS, Demand for Microinsurance in Georgia, Quantitative StudyResults, April 2005.

Microfinance Information Exchange, Benchmarking Microfinance in Easter Europe and Central Asia. Areport from Microfinance Information Exchange, May 2004

Moldir Women's Association, The information Bulletin of Moldir. Almaty 2005.

Muzaparova Leyla, Challenges of Sustainable Development in Kazakhstan. Report prepared for WorldSustainable Development Summit. http://www.kisi.kz/Parts/EconSec/11-26-02Muzoparova.html.

Mukhtarova Karlygash, Poverty and Economics in Kazakhstan. Sayasat Magazine, Nr. 3-4, 2002.

Nautilson K., Handbook for Managers of Microfinance Organizations. Monitoring Financial Results. TheSEEP Network, 2003.

National Bank of Kazakhstan, Statistical Bulletin of the National Bank of Kazakhstan, Almaty,September 2003.

National Bank of Kazakhstan, Statistical Bulletin of the National Bank of Kazakhstan, Almaty,November 2003.

National Bank of Kazakhstan, Statistical Bulletin of the National Bank of Kazakhstan, Almaty,December 2003.

OECD, Microcredit in Transitional Economies General Distribution, OCDE/GD, Paris 1996.

Patrick Honohan, Measuring microfinance access: building on existing cross-country data. Reportprepared for the UNDP, World Bank and IMF Workshop Data on the Access of Poor and Low IncomePeople to Financial Services Washington, DC, October 26 2004.

Pearce Doug, Sustainability, Capacity and Outreach in Microfinance: Bank - MFI Linkages. Reportprepared for the conference Expanding Access to Microfinance in Central Asia, Almaty, April 2003.

Presidential Administration, Ministry of Economy and Budget Planning, Agency of Statistics, ofKazakhstan, 12 Years of Kazakhstan's Independence. Analytical Report. Almaty, January 2004.

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Robinson Marguerite S., The Microfinance Revolution: Sustainable Finance for the Poor, The WorldBank, Washington D.C. Open Society Institute, New York, 2001.

Robinson Marguerite S., The Microfinance Revolution: Lessons from Indonesia, The World Bank,Washington D.C. Open Society Institute, New York, 2002.

Russian Bank Encyclopedia. Eds. Lavrushin O., Moscow, 1995.

Salehuddin Ahmed, M.A. Hakim, Attacking Poverty with Microcredit. The University Press Limited,Dhaka Bangladesh 2004.

Schreiner Mark, Aspects of Outreach: A Framework for the Discussion of the Social Benefits ofMicrofinance, June 1999.

Srinivas Hari, Micro-Facts: Data Snapshots on Microfinance. Virtual Library on Microcredit. http://www.gdrc.org/icm/data/d-snapshot.html.

Stallard Janice K., Kazakhstan's Microfinance Law. Opportunities and future challenges. Essays onRegulation and Supervision. ACDI/VOCA, Central Asia Microfinance Alliance, June 2005.

Sean Kline, Freedom from Hunger - Measuring and managing social performance (www.id21.org).

Standard and Poor's, Bank Industry Risk Analysis: Kazakhstan (Republic of), 2004.

TACIS, Microfinance in Russia. Small Business Support. Programme Document prepared for TACISSMERUS, April 2001.

TENIR Project, Analysis of microcredit organizations' activities and development of the concept toexpand access of MCOs to financial resources. Analysis and development of microcredit monitoringindicators in Kazakhstan. Interim report, 2003.

Turjanov S.A, The small and middle business: problems of development, ways of solution, 2005

UN, We, the Peoples. The Role of the United Nations in the 21st Century. Report of the Secretary-General of the United Nations, 2000.

UNCDF, Increasing Access and Benefits for Women: Practices and Innovations among MicrofinanceInstitutions, www.uncdf.org, 2005.

UNCDF, Microfinance Distance Learning Course. UNDCF New York USA, 2002.

UNCDF, Microfinance in Turkey, 2003.

UNDP Evaluation Office, Microfinance. Essentials No. 3, December 1999.

UNDP, Microfinance and Anti-Poverty Strategies. A Donor Perspective. Programme Document, 1996.

UNDP/UNCDF, Financing the Development of Poor Household and Women. Presentation for the Launchof the International Year of Microcredit 2005 & Rural Savings Program of BDFC April 5, 2005.

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Bibliography

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Microfinance in Kazakhstan: an inclusive financial sector for all

ANNEX 1

GLOSSARY OF TERMS AND INDICATORS

General terms

Consumer Price Index (CPI) The consumer price index measures changes over time in the general level ofprices and services that a reference population acquires, uses or pays for. A con-sumer price index is estimated as a series of summary measures of the period-to-period proportional change in the prices of a fixed set of consumer goods andservices of constant quantity and characteristics, acquired, used or paid for bythe reference population. Each summary measure is constructed as a weightedaverage of a large number of elementary aggregate indices. Each of the elemen-tary aggregate indices is estimated using a sample of prices for a defined set of go-ods and services obtained in, or by residents of, a specific region from a givenset of outlets or other sources of consumption goods and services1.

Gross Domestic Product Macroeconomic indicator representing the total output of goods and services for(GDP) final use produced by an economy, by both residents and non-residents, during

a given period of time, regardless of the allocation to domestic and foreign claimsand is calculated without making deductions for depreciation. There are three me-thods of GDP calculation:

GDP per Ñapita Refers to the GDP value divided by the average annual population of thecountry.

Gini Coefficient Gini coefficient, which is one of the income differentiation indexes, measures theextent to which the distribution of income (or consumption) among individuals orhouseholds within a country deviates from a perfectly equal distribution. A valueof �0� represents perfect equality, a value of �1� perfect inequality.Gini coefficient is expressed by the following formula:

( )∑=

− +−=n

iii aa

nGini

11

11

wheren - total population;ai - cumulative proportion on quintile (20% of total population) or decile (10%

of total population) population groups.If the proportion of population is given in deciles, then in the main formula, �n�will be equal to 10.

Gross National Product A macroeconomic indicator reflecting the final product produced by an economy(GNP) during a given period of time, calculated at market prices. GNP includes both

cost of the products produced in the country and outside the country using in-dustries belonging to the country.

Inequality This is the difference in income and living standards between the different groupsof population, which are caused by a number of reasons of economic, regional,social, cultural and political nature.

Inflation Rate Refers to the rate of increase of the level of prices (measured by the consumerprice index) during a given period.

Poverty A human condition characterized by sustained or chronic deprivation of the re-sources, capabilities, choices, security and power necessary for the enjoyment ofan adequate standard of living and other civil, cultural, economic, political andsocial rights2.According to the absolute approach, poor people are those who have less thana certain absolute minimum. In other words, the concept of absolute poverty isbased on establishing a list of a person�s minimum basic needs (for example, theminimum consumer basket or the subsistence minimum), and the amount of re-sources needed to satisfy these needs. In particular, to determine needs

1 OECD Glossary of Statistical Terms.2 The definition is made by Office of High Commissioner on Human Rights. www.ohchr.org.

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for grocery items, physiological norms for calorie, protein, fat and car-bohydrate intake are used.According to the relative approach, wealth indicators for defining poverty arerelated to the predominant level of material wealth in a given country, ratherthan to minimum needs. In other words, people who have less than others areconsidered to be poor. In practice, according to this concept the relative povertyline is established as relative percentage of household�s average or medianincome.The subjective approach is based on the people�s subjective assessment oftheir living standards, it gives a possibility to the people themselves to judge ifthey are poor and if their income is enough to live a normal life. In this regard,this concept is closely connected with the principles of freedom and dignity ofthe human being and its rights to decent living standards, standard nutrition,access to health care services, education and other social and economicachievements of society. The subjective approach is widely used for qualitativeanalysis along with quantitative analysis.3.

Purchasing Power Parities The number of units of a country�s currency required to purchase the same rep-resentative basket of goods and services (or similar basket of goods and services)that a US dollar (the reference currency) would buy in the United States.4

Subsistence Minimum Subsistence level is the value of goods and services at prevailing prices necessaryto meet the basic requirements of a human being for supporting life.The subsistence minimum in Kazakhstan is an objectively determined level ofincome (expenditure) proportionate to the value of goods and services includedin the consumer basket.

Microfinance basic definitions

Microcredit A credit methodology that employs effective collateral substitutes to deliver short-term micro loans to low-income clients.

Microcredit Organizations Legal definition used by the Government of Kazakhstan. It indicates microfinanceinstitutions that provide microcredit, but that are not licensed or supervised by fi-nance authorities.

Microfinance Financial services that are targeted at low-income clients, including credit, savings,insurance and money transfer services.

Microfinance Institutions General term that refers to organizations that provide microfinance services to low-income people.

Microinsurance Insurance services that allow to mitigate and share risks to reduce people vulne-rability to external shocks.

Microsaving Deposit services that allow storing small amounts of money in secure and fastreaching places.

Money transfer Financial services that allow to transfer safely funds from different places.

Additional financial terms5

Adjustments Financial analysts often calculate a number of adjustments, most of which com-prise analytical additions to the reported expenses of the MFI. Four groups ofadjustments are common:* Subsidy adjustments* Inflation adjustments* Adjustments for non-performing loans

3 Human Development in Kazakhstan. A Textbook. UNDP Kazakhstan/Kazakh Economic University, 2003.4 Human Development Report 1997. UNDP, 1997.5 All definitions are taken from CGAP, Microfinance Consensus Guidelines 2003 and UNCDF Microfinance DistanceLearning Course 2002.

ANNEX 1 Glossary of terms and indicators

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Microfinance in Kazakhstan: an inclusive financial sector for all

Compulsory or obligatory The value of savings that an MFI�s clients are required to maintain as a conditi-savings on of an existing or future loan. Obligatory savings may be either a deposit

held by an MFI or a facilitated savings account maintained outside of the MFI.Deposits The total value of funds placed in an account with an MFI that are payable on

demand to a depositor. This item includes any current, checking, or savings ac-counts that are payable on demand. It also includes time deposits, which have afixed maturity date.

Gross loan portfolio The outstanding principal balance of all of an MFI�s outstanding loans, includingcurrent, delinquent, and restructured loans, but not loans that have been writtenoff. It does not include interest receivable. Although some regulated MFIs may berequired to include the balance of interest accrued and receivable, the MFIshould provide a note that provides a breakdown between the sum of allprincipal payments outstanding and the sum of all interest accrued. Some MFIschoose to break down the components of the gross loan portfolio.

Number of active The total number of individuals who currently have an outstanding loan balanceborrowers with the MFI or are primarily responsible for repaying any portion of the gross

loan portfolio. This number should be based on the number of individual bor-rowers rather than the number of groups.

Number of depositors or The total number of individuals who currently have funds on deposit with ansavers MFI whom the MFI is liable to repay. This number applies only to deposits that

are held by an MFI, not to those deposits held in other institutions by the MFI�sclients. The number should be based on individuals rather than the number ofgroups. It is possible that a single deposit account may represent multiple depo-sitors.

Portfolio at risk The value of all loans outstanding that have one or more installments of princi-pal past due more than a certain number of days. This item includes the enti-re unpaid principal balance, including both past-due and future installments, butnot accrued interest. It also does not include loans that have been restructured orrescheduled.

Total assets Includes all asset accounts net of all contra-asset accounts, such as the loan-lossallowance and accumulated depreciation.

Total equity Total assets less total liabilities. It is also the sum of all equity accounts net ofequity distributions such as dividends, stock repurchases, or other cash any pay-ments made to shareholders.

Value of loans written off The value of loans that have been recognized for accounting purposes as uncol-lectible. The process of recognizing an uncollectible loan is called a write off ora charge off.

Voluntary savings The value of savings maintained by MFI clients that is not required as a condi-tion of an existing or future loan. Voluntary savings may be deposits held byan MFI or facilitated savings maintained outside the MFI as part of the MFI�soverall financial services.

Microfinance Ratios6

Active loan clients per loan Measures the operational productivity by indicating the average caseload of eachofficer loan officer.

Number of active borrowers

Number of loan officers

6 All definitions are taken from CGAP, Microfinance Consensus Guidelines 2003 and UNCDF Microfinance DistanceLearning Course 2002.

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Administrative efficiency Measures the cost of lending a single unit of currency.Total operating expense - Cost of funds - Loan loss provision exp. + In-kind donations

Average outstanding portfolio

Adjusted return on assets Measures how well an MFI has used its asset base to generate income.Adjusted operating profits

Average total assets

Adjusted return on equity Measures return earned on equity used to finance the institution�s assets.Adjusted operating profits

Average total equity

Arrears rate Measures the portfolio risk. It compares the amount of loan installments past dueto the gross loan portfolio.

Total loan installments past due

Gross portfolio outstanding

Financial self-sufficiency Measures how well an MFI can cover its costs, taking into account a number ofadjustments to operating revenues and expenses. The purpose of most of theseadjustments is to model how well the MFI could cover its costs if its operationswere unsubsidized and it were funding its expansion with commercial-costliabilities.

Adjusted operating revenue

(Financial expense + Loan-loss provision expense + Operating expense +

Expense adjustments)

Loan loss rate It is a historical measure of loss from unrecoverable loans. It is calculated byusing loan write offs from a given period of time.

Total amount of written off (over a given period)

Average outstanding portfolio (for the same period)

Operational efficiency Measures the cost of lending a single unit of currency including both the costsof funds and loan loss provision expenses.

Total operating expense + In-kind donations

Average outstanding portfolio

Operational self-sufficiency Measures how well an MFI covers its costs through operating revenues. In addi-tion to operating expense, it is recommended that financial expense and loan-lossprovision expense be included in this calculation, as they are a normal (and sig-nificant) cost of operating.

Operating revenue

(Financial expense + Loan-loss provision expense + Operating expense)

Portfolio at risk (PAR) The most accepted measure of portfolio quality. Portfolio at risk is the outstan-ding amount of all loans that have one or more installments of principal pastdue by a certain number of days.

Portfolio at risk (X days)

Gross portfolio outstanding

Portfolio outstanding per Measures the financial productivity. It compares the gross loan portfolio outstan-loan officer ding to the number of loan officers.

Gross portfolio outstanding

Number of loan officers

Portfolio yield Measures how much an MFI has earned through its lending operations. Incomeused to calculate yields includes all cash interests and fee payments, but doesnot include interest accruals.

Income from lending

Average outstanding portfolio

ANNEX 1 Glossary of terms and indicators

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Microfinance in Kazakhstan: an inclusive financial sector for all

ANNEX 2

GENERAL REVIEW OF MICROFINANCE LITERATURE

Microfinance web sites:* Microfinance Gateway www.microfinancegateway.com

* CGAP www.cgap.org

* MIX MARKET www.themix.org

* UNCDF www.uncdf.org

* International Year of Microcredit www.yearofmicrocredit.org

* MicroSave www.microsave.org

* Micro Insurance Center www.microinsurancecenter.org

* Virtual Library on Microcredit www.gdrc.org/icm

* Microfinance center for CIS and NIS www.mfc.org.pl

* Banking with the Poor Network www.bwtp.org

* Grameen Bank www.grameen-info.org

* Accion International www.accion.org

* Russian Small Business Research Institute www.nisse.ru

* Russian Microfinance Centre www.rmcenter.ru

Resources on technical tools for microfinanceinstitutions(Recommended by CGAP, www.cgap.org)

Disclosure Guidelines for Financial Reporting byMicrofinance Institutions (Microfinance ConsensusGuidelines, 2001).The Disclosure Guidelines represent the CGAP�smember consensus on MFI financial reportingrequirements. The guidelines do not prescribeaccounting policies or any particular format forfinancial reporting. Rather, they indicate the min-imum information that should be included in MFIfinancial reports, regardless of how that informa-tion is presented.

Definitions of Selected Financial Terms, Ratios,and Adjustments for Microfinance (MicrofinanceConsensus Guidelines, 2003)

This guideline puts forward standard definitions forselected financial terms, commonly used, andsuggests a standard method of calculating finan-cial ratios.

Scoring: The Next Breakthrough in Microcredit?(Occasional Paper No. 7, 2003)

Scoring is a new way to judge the risk of whetherthe self-employed poor will repay their microcre-dit debts as promised.

Financial Transparency: A Glossary of Terms (Do-nor Brief No. 7, 2002)

Definition of terms that are often inconsistentlyused in collection, analysis, and disclosure ofMFIs financial information.

Microfinance Transparency and Reporting to Do-nors (Donor Brief No. 6, 2002)

Knowing and understanding the components thatcontribute to �transparency� in microfinance ishalf of the battle. It is also particularly useful toknow, with just a few strategic changes, howdonor reports can enhance transparency for thewhole microfinance sector.

Making Sense of Microcredit Interest Rates (Do-nor Brief No. 6, 2002)

Why do MFIs charge such high interest rates tothe poor? This brief gives donors a quick referenceto use when answering questions about the seem-ingly high microcredit interest rates. It also ex-plains how donors can tell if an MFI�s rates aretoo high and suggests what to do.

Resource Guide to Microfinance Assessments (Fo-cus Note No. 22, 2001)

Five of the better-known rating methodologies forMFIs are compared here: CAMEL of Accion Inter-

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national, PEARLS of the World Council of CreditUnions (WOCCU), GIRAFE of PlaNet Rating, andthe rating methodologies of MicroRate of Wash-ington, D.C., and Micro-Credit Ratings and Guar-antees India, Ltd. (M-CRIL).

Focus on Financial Transparency: Building theInfrastructure of a Microfinance Industry (CGAPbrochure)

This update outlines the activities of CGAP andother industry players in the area of financialtransparency. This document is part of a trilogy ofspecial reports on financial transparency in micro-finance.

Helping to Build a Microfinance Industry (CGAPbrochure)

This identifies the CGAP mission and its servicesto the microfinance industry as a whole.

Measuring Microcredit Delinquency: Ratios CanBe Harmful to Your Health (Occasional Paper No.2, 1998)

The paper reviews the experience of nationalmicrofinance apexes-wholesale mechanisms thatchannel funds, with or without supporting techni-cal services, to retail microfinance institutions ina single country or integrated market.

Cost Allocation For Multi-service MicrofinanceInstitutions (Occasional Paper No. 2, 1998)

The paper reviews the experience of nationalmicrofinance wholesale mechanisms that channelfunds, with or without supporting technical servic-es, to retail microfinance institutions in a singlecountry or integrated market.

Product Costing Tool (Technical Tool No. 6, 2002)

CGAP has developed a tool that helps MFI man-agers understand and analyze individual productcosts. The tool outlines two methods for determin-ing the administrative cost structure of individualmicrofinance products. Once product costs aredetermined, the paper suggests methods for under-standing how and why costs are incurred for thatproduct, and how the product contributes (or not)to the overall financial viability of the MFI. Thistool is currently being tested in the field.

Poverty Assessment Tool (Technical Tool No. 5,2003)

The Poverty Assessment Tool (PAT) was developedfor CGAP by the International Food Policy Re-search Institute. The multi-dimensional PovertyIndex constructed by the tool is targeted at donorsand investors who require a standardized, globallyapplicable set of poverty indicators to make pov-erty-focused funding decisions and to compareMFIs across regions and countries. Although it is

more complex and costly than the simpler client-targeting tools used by MFIs (such as meanstesting, the Housing Index, Participatory WealthRanking, Rapid Appraisals, and Participatory Ap-praisals), and less comprehensive (and thereforeless costly) than the World Bank�s HouseholdExpenditure Survey, the PAT nonetheless yieldsrigorous data that can also be used to rank largepopulations, determine the poorest inhabitants oflarge geographical regions, and make valid com-parisons across regions and countries.

Format for Appraisal of Microfinance Institutions:A Handbook (Technical Tool No. 4, 1999)

The Appraisal Format consists of detailed instruc-tions and Excel spreadsheets to guide an experi-enced microfinance analyst through a qualitative,institutional evaluation of a relatively mature MFI.The Appraisal Format evaluation process coversthe core components of a final evaluation report.The executive summary has quantitative and qual-itative reviews of key -conclusions and recom-mendations. Individual sections are devoted toinstitutional factors, MFI services/clientele/market,strategic objectives, and financial performance,respectively. The handbook�s annex provides addi-tional information on how to calculate theoreticalinterest yields.

CGAP Poverty Audit (Technical Tool No. 4-Com-panion, draft 2001)

Designed to complement financial sustainabilityoutlined in the Appraisal Format, the PovertyAudit provides instructions for conducting a qual-itative review of the poverty focus of an MFI. Theaudit concentrates on five sets of issues: thevision of the MFI, its client-targeting strategy,staff-client interactions, the alignment betweenpoverty focus and product design, and povertyimpact.

External Audits of Microfinance Institutions: AHandbook (Technical Tool No. 3, 1998)

Volume 1 is geared towards the clients of MFIexternal audits: boards of directors and managersof MFIs, donors, creditors, and investors. It re-views the difference between internal and exter-nal audits, details specific audit issues associatedwith MFI loan portfolios, and provides concretesuggestions on how to commission an externalaudit, including writing the terms of reference andselecting the auditor. Volume 2 is geared towardsexternal auditors, furnishing an overview of themicrofinance industry for auditors unfamiliar withthese financial institutions, and guidance on arange of audit issues specific to MFIs. to refertheir auditors to the External Audit handbook.

Using Microfin 3 A Handbook for Operational

ANNEX 2 General review of microfinance literature

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Microfinance in Kazakhstan: an inclusive financial sector for all

Planning and Financial Modeling (Technical ToolNo. 2, 2001)

Using Microfin 3.0 replaces the 1998 handbook,Business Planning and Financial Modeling forMicrofinance Institutions. This new handbook pro-vides detailed guidance on using version 3 ofMicrofin, the latest version of the Excel-basedfinancial modeling tool specifically designed formicrofinance institutions.

Microfinance Glossaries (2003)

Searchable glossaries in pdf format that coverbasic and more advanced terms used in microfi-nance. They were developed and reviewed bymicrofinance experts to ensure consistent transla-tion of CGAP documents.

Resources on legal and policy studies for micro-finance:

Increasing Access to Financial Services WhileBalancing Supervisory Interests, Ricki Tigert, Fed-eral Deposit Insurance Corporation of the US

Microfinance Regulation in Developing Countries- a comparative review of current practice, PatrickMeagher

CGAP Guiding Principles on Regulation and Su-pervision of Microfinance, Robert Peck Christen,Timothy R. Lyman and Richard Rosenberg

Microfinance Institutions and Public Policy, DanielC. Hardy, Paul Holden and Vassili Prokopenko.

A Framework for Regulating Microfinance Institu-tions, Greuning, Hennie van Gallardo, J.S. Randha-wa, Bikki K. / Washington, DC, USA: WorldBank, 1999

Regulating Microfinance - The Options, Christen,Robert and Richard Rosenberg. Journal of SmallBusiness and Enterprise Development. Universityof Manchester, U.K. Spring 2001

How to Regulate and Supervise Microfinance? -Key Issues in an International Perspective, AlfredHannig & Edward Katimbo-Mugwanya (Eds.), FSDSeries No. 1, Financial Systems Development(FSD) Project 2000

Regulation and Supervision of Microfinance Insti-tutions: State of Knowledge, Stefan Staschen,Deutsche Gesellschaft fur Technische Zusamme-narbeit (GTZ) GmbH Eschborn, August 1999.

Regulation and Supervision of Microfinance: AConceptual Framework. Draft for discussion only;Robert C. Vogel, Arelis Gomez, Thomas Fitzger-ald, IMCC, February 1999.

A Framework for Regulating Microfinance Institu-tions: The Experience in Ghana and the Philip-pines, Joselito Gallardo, Washington, DC: TheWorld Bank, 2001

Regulatory Requirements for Microfinance. A Com-parasion of Legal Frameworks in 11 CountriesWorldwide, Stefan Staschen, Eschborn: GTZ, 2003

Bosnia & Herzegovina - The Region�s First Spe-cialized Microlending Law Set to Undergo Changes,Timothy R. Lyman, Berry & Howard FoundationMihret Dizdar, Foundation for Sustainable Devel-opment

Microlending Organizations in Kazakhstan. Regu-lation and Supervision Issues, Bryan D. Stirewalt

Taking Care of The Mission Means Taking Care ofThe Client, Ximena Arteaga, Regulation and Pol-icy Specialist, FINCA International

Overview of the New Basel Capital Accord, Bankof International Settlements, Basel, 2003

Microfinance Banks and Policy Dialogue, Char-lotte Grey, EBRD

Planning for Taxes, Craig Gibian, Shearman &Sterling and Deborah Burand, FINCA International

UNCDF Strategy for Policy Impact and Replica-tion in Local Governance and Microfinance

A Diagnostic Kit for Analyzing the Legal andRegulatory Environment for Microfinance Institu-tions in Countries and Regions in Central andEastern Europe, Kathryn Funk and Timothy R.Lyman, The World Bank, Washington D.C.

Innovations in Microfinance: Technical Notes, Series1-7; This series highlights innovative practices andservices from the Mali February 2000 conference�Advancing Microfinance in Rural West Africa�that Weidemann Associates implemented. Thetechnical notes are a collaborative effort betweenWeidemann Associates, Inc./MicroServe and DAI,Inc/Microenterprise Best Practices Project, USAID-funded contracts.

Resources on microfinance impact studies:

Barnes, Caroline, Gary Gaile, and Richard Kim-bombo. Impact of Three Microfinance Programsin Uganda. USAID-AIMS Paper. Washington, D.C.:Management of Systems International, 2001.

Barnes, Carolyn. Microfinance Program Clientsand Impact: An Assessment of Zambuko Trust,Zimbabwe. USAID-AIMS Paper. Washington, D.C.:2001.

Chen, Martha A., and Donald Snodgrass. Manag-ing Resources, Activities, and Risk in Urban In-dia: The Impact of SEWA Bank. Washington,D.C.: AIMS, 2001.

Cheston, Susy, and Lisa Kuhn. Empowering Womenthrough Microfinance. New York: UNIFEM, 2002.

Chowdhury, A.M.R., and A. Bhuiya. �Do PovertyAlleviation Programmes Reduce Inequity in Health:Lessons from Bangladesh.� In Poverty Inequity

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and Health, ed. D. Leon and G. Walt. Oxford:Oxford University Press, 2001.

Hashemi, Syed, Sidney Schuler, and Ann Riley.�Rural Credit Programs and Women�s Empower-ment in Bangladesh.� World Development 24, no.4 (1996): 635-53.

Hossain, M. Credit for the Alleviation of RuralPoverty: The Grameen Bank in Bangladesh. ResearchReport No. 55. Washington, D.C.: IFPRI, 1988.

Kabeer, Naila. �Money Can�t Buy Me Love�: Re-evaluating Gender, Credit, and Empowerment inRural Bangladesh. IDS Discussion Paper No. 363.Brighton, UK: Institute of Development Studies,University of Sussex, 1998.

Khandker, Shahidur. Fighting Poverty with Micro-credit: Experience in Bangladesh. New York: OxfordUniversity Press, Inc., 1998.

Lal, Abhishek. An Overview of Microfinance andEnvironmen tal Management. Green MicrofinanceWorking Paper, July 2001.

Marcus, R. Porter, B. and Harler, C. Money Mat-ters: Understanding Microfinance. UK: Save theChildren 1999

MkNelly, Barbara, and Christopher Dunford. Im-pact of Credit with Education on Mothers andTheir Young Children�s Nutrition: Lower Pra RuralBank Credit with Education in Ghana. Freedomfrom Hunger Research Paper No. 4. Davis: Calif.

Freedom from Hunger, 1998. As reported in Mor-duch, Jonathan, and Barbara Haley. Analysis ofthe Effects of Microfinance on Poverty Reduction.Prepared by RESULTS Canada for the CanadianInternational Development Agency, November 2001.

MkNelly, Barbara, and Christopher Dunford. Im-pact of Credit with Education on Mothers andTheir Young Children�s Nutrition: CRECER Creditwith Education Program in Bolivia. Freedom fromHunger Research Paper No. 5. Davis, Calif.: Free-dom from Hunger, 1999.

Morduch, Johnathan. Analysis of the effects ofMicrofinance on Poverty Reduction.

NYU Wagner Working Paper No. 1014 Series.New York: New York Univeristy, 2002.

Mustafa, S.I. Ara, et al. Beacon of Hope: AnImpact Assessment of BRAC�s Rural DevelopmentProgramme. Dhaka, Bangladesh: BRAC, 1996.

Pallen, Dean. Environmental Sourcebook for Mi-cro-Finance Insitutions. Canadian InternatoinalDevelopment Agency, 1997

Panjaitan-Drioadisuryo, D.M. Rositan, and KathleenCloud. �Gender, Self-Employment, and MicrocreditPrograms: An Indonesian Case Study� QuarterlyReview of Economics and Finance 39 (1999).

Pitt, Mark M., Shahidur R. Khandker, Omar Haid-er Chowdhury, and Daniel Millimet. �Credit Pro-grams for the Poor and the Health Status ofChildren in Rural Bangladesh,� International Eco-nomic Review. Forthcoming.

Remenyi, Joe, and Benjamin Quinones Jr., eds.Microfinance and Poverty Alleviation: Case Stud-ies from Asia and the Pacific. New York: PinterPublishers, Ltd., June 2000: 79, 131-34; 253-64.

Simonwitz, Anton. Appraising the Poverty Out-reach of Microfinance: A Review of the CGAPPoverty Assessment Tool (PAT). Brighton, UK: Imp-Act, Institute of Development Studies, 2002.

Varley, Robert C.G. Financial Services and Envi-ronmental Health: Household Credit for Waterand Sanitation. Environmental Health ProtectionAgency Applied Study.

Zaman, Hassan. Assessing the Poverty and Vul-nerability Impact of Micro-Credit in Bangladesh:A Case Study of BRAC. Washington, D.C.: WorldBank, 2000.

Resources and tools for microfinance Manage-ment Information Systems

Grameen Bank, Bangladeshhttp://www.grameen-info.org/grameen/gc/softdep.htmhttp://www.tech.gfusa.org

Accounting software selection/evaluation tools(Commercial site)http://excelco.com/

Comprehensive listing of hardware drivers avail-able for free downloadhttp://www.drivershq.com/

Overview of Current Micro-Finance SoftwareProgramshttp://www.verkoyen.org/mfsoftw.html

Research engine for commercial accountingpackageshttp://www.findaccountingsoftware.com/

Information about ISO 9000 and internationalstandards for software developmenthttp://www.iso.ch/iso/en/ISOOnline.frontpage

Computer Society, a professional organizationadvocating standards in software design and de-velopmenthttp://www.computer.org/

MIS Quarterly website, a peer reviewed scholar-ly journal, MIS Quarterly publishes researchconcerning �both the management of informa-tion technology and the use of informationtechnology for managerial and organizationalpurposes.�http://www.misq.org/

ANNEX 2 General review of microfinance literature

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Page 78: Microfinance in Kazakhstan: An Inclusive Financial Sector for All

Authors Group

Raushan M. Aymanbetova Microcrediting Center Director, JSC "Small

Entrepreneurship Development Fund"

Madina Baynietova Microcrediting Center Chief Specialist, JSC "Small

Entrepreneurship Development Fund"

Massimiliano Riva Programme Associate, UNDP Kazakhstan

UNDP Consultative Board including the Coordination Group

Yuriko Shoji UN Resident Coordinator/UNDP Resident Representative

Gordon Johnson Deputy Resident Representative, UNDP Kazakhstan

Malin Herwig Chief of Poverty Reduction Team Chief, UNDP

Kazakhstan

Zhanar Sagimbayeva Chief of Good Governance and Sustainable Development

Team, UNDP Kazakhstan

Irina Buchinskaya Programme Assistant, UNDP Kazakhstan

Selima Salamova former Programme Assistant, UNDP Kazakhstan

Gaukhar Mukhatzhanova former Media and Outreach Specialist, UNDP Kazakhstan

Alma Buirakulova Research Assistant, UNDP Kazakhstan

Aliya Ilyassova Project Expert, UNDP Kazakhstan

Maral Sheshembekova Project Expert, UNDP Kazakhstan

Technical Support

Translation into English Alla Kalinina

English Proof-reading Kishori Kedlaya

Chamith Fernando

Translation into Russian Botagoz Katenova

Translation into Kazakh Farida Isakova

Cover design Adil Bekishev

Layout Gulmira Nurakhimova

Photographs Christopher Herwig

With financial assistance from

JSC Citibank Kazakhstan

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