|Project Rationale and Linkage to Country/Regional Strategy
The economic significance of small businesses in providing jobs and driving growth is high in Uzbekistan. The contribution of small businesses to gross domestic product (GDP) increased from 35.0% in 2003 to 54.6% in 2012. Small businesses are mainly active in agriculture (98.0% of the sector output). Other important sectors include construction (70.7% of the sector output), retail trade (45.3%), and services (44.7%). In 2012, about 9.3 million people worked in small businesses or 75.2% of the total number of persons employed. At the same time, 37.2% of total investments in 2012 went to small businesses.
In Uzbekistan, 48.8% of the 30.0 million population live and work in rural areas. Low-income earners in Uzbekistan accounted for 27.5% of the population in 2001: 30.5% rural and 22.5% urban. The indicator for low income earners declined to 17.5% in 2011. Small businesses contribute more than 60.0% of gross regional product in 9 of 14 regions, with Syrdarya region being the highest (80.0%). The largest share of the total number of employed persons is in agriculture and forestry, accounting for 48.3% of employed women and 51.7% of employed men. However, the contribution of agriculture to GDP decreased from 30.0% in 2000 to about 18.0% in 2011. Of the micro and small enterprises registered in 2012, 84.5% were outside the city of Tashkent, as were 81.5% of all individual entrepreneurs in 2011. Male entrepreneurship in rural areas is high in Namangan, accounting for 71.0% of total registration, followed by the Navoi, Fergana, and Bukhara regions (footnote 5).
The financial sector is dominated by banks: the banking subsector's assets accounted for 37.0% of GDP in 2012. Eight banks with state ownership accounted for 76.1% of total banking assets in 2012. The total banking loan portfolio accounted for 21.1% of GDP and deposits accounted for 23.6% of GDP in 2012. Lending to small businesses comprised 26.3% of banks' outstanding loans in 2012 and microcredit loans comprised 5.7% of banks' total outstanding loans. While small business lending has doubled since 2006 and the microcredit loan portfolio has grown nearly fourfold in that period, lending to women was less than 15.0% of total bank lending in 2012.
Financial services and delivery mechanisms do not meet the needs of small businesses, particularly outside the city of Tashkent. The branch network is limited and rural areas have few points of service terminals, creating constraints for existing and potential bank clients. Cost of transportation and time spent accessing financial services are other limiting factors. Small businesses have limited access to business development services that contribute to the efficiency, profitability, and expansion of their activities. Focus group discussions suggest that small businesses lack access to information on government programs, market opportunities, suppliers, competitors, technology, and banking products. Weak financial literacy, especially among women's small businesses and low-income groups, limits their access to financial services and constrains their entrepreneurial capacity. Very limited financial services and products are adapted to the needs of rural small businesses, which are largely dependent on agricultural cycles. Access to electronic banking (e-banking) is low. While debit cards are the most developed payment channel, about 70.0% of households do not have such cards, making cash their only payment option.
Limited access to bank credit and the high cost of borrowing are among the largest impediments to small businesses. The lack of liquidity and availability of capital, coupled with high perceived risks and high administrative costs when lending to small businesses, compel banks to charge high interest rates. Bank loans usually have short maturities, restraining small businesses from expanding and modernizing. Only one-third of the total microcredit loan portfolio of banks is for more than 3 years; the rest has maturities between 6 and 24 months. Weak bank risk management capacity restricts their lending, preventing engagement with small businesses that have little or no collateral. Insufficient collateral also limits the size of loans, thus restricting small businesses from borrowing more for their business expansion and capital investments. Collateral requirements for small businesses (146.0% of the loan size) are higher than for large enterprises (128.0% of the loan size). In stakeholder and focus group discussions, insufficient collateral was cited as the single greatest impediment to borrowing. Common forms of collateral include cars, jewelry, and real estate. Banks offer third-party guarantors, but they are difficult to find for first-time borrowers as they are often considered high risk.
The proposed Asian Development Bank (ADB) loan aims to improve the ability of women's small businesses and rural small businesses to operate and expand. It will help these entrepreneurs build productive enterprises in profitable sectors, operate to scale, access finance, and benefit from economic opportunities. The PCBs will benefit from increased long-term finance and stronger institutional capacity, which will enable them to better meet the financial services demand of women's small businesses and rural small businesses. It will also enable PCBs to (i) provide short- and medium-term subloans in either sum or US dollars to small businesses; (ii) diversify income sources; (iii) spread risk; and (iv) increase the delivery of financial services and products such as e-banking, online loan applications, and services to support business development. The attached TA will support project implementation by improving the capacity of PCBs, their client small businesses, and the Central Bank of Uzbekistan (CBU).