|Project Rationale and Linkage to Country/Regional Strategy
Despite increased bank lending in recent years, demand by MSEs remains unmet at present. According to the Central Bank of Uzbekistan, total loans granted by commercial banks to MSEs reached $898 million (SUM1.25 trillion) in 2008 and $1.2 billion (SUM1.85 trillion) in 2009. The amount allocated to microcredit by commercial banks increased by about 100% in 2009 over 2008 and was targeted to increase by another 30% in 2010. According to a World Bank survey, only 7.8% of business financing is met by loans the lowest percentage in the region (where the average is 23.3%). ADBs past credit lines to Uzbekistan indicate high demand from micro, small, and medium-sized business operating in all sectors, particularly agriculture and agroprocessing.
MSEs access to credit is constrained by the nature and characteristics of the financial sector in Uzbekistan, which is subject to various distortions. For instance, directed lending at subsidized interest rates leads to misallocation of resources. For depositors, practical difficulties in cash withdrawals from bank accounts have created a premium for cash and a trust gap for banks in terms of their ability to mobilize customer deposits. This is manifested by a low (individual and household customer) bank deposits'GDP ratio of 6.6% in 2009. The government has put in place measures to increase public confidence in the banking system which are expected to raise deposits mobilization.
The proposed intervention will meet a share of the MSE credit demand while addressing financial sector distortions. This will be achieved through working with participating commercial banks (PCBs) committed to sustainable MSE financing that meet the following criteria: (i) financial soundness (solvency, liquidity, profitability, efficiency, and prudence); (ii) extensive rural retail network; (iii) a proven track record and efficiency in non-subsidized microfinance intermediation; (iv) ability and willingness to manage the foreign exchange risk prudently; and (v) transparent corporate, financial, and management governance practices. Based on these criteria, ADB selected three PCBs: Agrobank, Hamkorbank, and Ipak Yuli Bank (IYB). Hamkorbank and IYB are privately owned, while Agrobank is majority government owned.
The selected PCBs business models and client profile correspond well with the proposed project objectives. Their business models aim at (i) increasing their retail presence geographically, (ii) diversifying operations into various sectors, (iii) offering new products to meet customer needs and increase profitability, and (iv) better outreach to viable but unbanked and under-banked potential clients. Their client base is diverse: Agrobank has a strong presence in the agriculture and agro-processing sectors, while Hamkorbank and IYB are more focused in the trade finance sector (IYB also has significant exposure to light manufacturing). Micro and small business loans constitute close to one-third of Hamkorbank's and one-fourth of IYB's loan portfolios; for Agrobank, they constitute one-tenth (given the much larger size of its overall portfolio). For their loans up to $20,000, the average loan size is $4,000, with an average repayment period of 18 months. These loans finance both investment and working capital.
The project complies with ADBs country partnership strategy, which supports sustainable economic growth, poverty reduction, gender and development, and its Microfinance Strategy. For rural nonfarm enterprise development, ADBs country partnership strategy encourages forward and backward linkages with the agricultural sector. These linkages absorb surplus labor released from agriculture. The loan will carry forward this principle to other sectors as well. It also supports the development of rural financial services and promotes more efficient intermediation functions by commercial banks. It seeks (by allowing subborrowers to draw down their sum subloans in cash if they so choose) to abolish the distinction between cash and noncash market transactions.