When the Kyrgyz Republic became a member of ADB in 1994, the country’s financial landscape was bleak. The stateowned agricultural bank, Agroprom, had inherited a large portfolio of nonperforming loans from the dissolving state farm sector and was shutting down. Newly formed commercial banks provided only the most rudimentary services. Microfinance was virtually unknown outside the capital Bishkek where some nongovernment organizations were beginning to experiment with microlending.
ADB supported the establishment of three pilot savings and credit unions (SCUs) in 1996. Building on this experience, ADB's Rural Financial Institutions Project set out in 1997 to create a network of community-based, member-owned financial institutions that would serve all rural areas with the support of a central institution. This was an ambitious—and largely unprecedented—undertaking. The project is a good example of donor coordination. ADB provided funds mainly for onlending while the Government of Germany funded capacity building of SCUs through grants.
There were 303 licensed SCUs operating in the Kyrgyz Republic as of July 2004, with 27,181 active members. SCUs are in every region of the country and together account for a substantial amount of total credit to agriculture and agribusiness. They are microlenders: the average loan size is Som19,241, or about $450. The average number of members per SCU is 93, and the average asset size is Som1.5 million (about $34,300). The SCUs had an outstanding loan portfolio (net) of $9.4 million. Their return on assets was 8.9%.
The project has confronted a number of challenges some of which arose from the unique conditions of a country in transition to a market economy. Many of the other challenges faced by the project were similar to difficulties that have occurred in the development of credit unions in other countries. Supervision is a key area of concern. The National Bank of the Kyrgyz Republic has now assumed responsibility for supervising the SCUs and is harmonizing this effort with its growing supervisory role over microfinance institutions. Initially the national bank adopted a very conservative attitude toward the SCUs accepting deposits. This stance was understandable in light of the fragility of the country’s financial system but was softened beginning in 2003 when the first group of 10 SCUs was allowed to accept deposits on a pilot basis. With assistance from Germany, the pilot will be expanded in 2005.
The SCUs have also grown stronger since 1996 and now have more capital, experience, and loyal member bases upon which to build. The key challenge is to develop more financial products and services, starting with deposit and payment services. At the same time, it is important to further develop and integrate the network which means developing effective liquidity management. In addition, SCU managers and staff must continue to enhance their technical skills, to promote transparency, and to strengthen governance.