Kazakhstan: Small and Medium Enterprises Investment Program - Tranche 2

Sovereign Project | 44060-024 Status: Approved

Summary

ADB is helping Kazakhstan provide affordable financing to small and medium-sized enterprises (SMEs). The second tranche of the multitranche financing facility will help state-owned Damu Entrepreneurship Development Fund provide medium-term financing to SMEs through local banks. It will also help promote greater access to credit for women entrepreneurs.

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Project Name Small and Medium Enterprises Investment Program - Tranche 2
Project Number 44060-024
Country Kazakhstan
Project Status Approved
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan 3093-KAZ: Small and Medium Enterprises Investment Program - Tranche 2
Ordinary capital resources US$ 122.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Private sector development
Sector / Subsector

Finance - Small and medium enterprise finance and leasing

Gender Equity and Mainstreaming Effective gender mainstreaming
Description

This is the second Tranche of a Multitranche financing facility (of up to $500 million) to support SME lending. For Tranche 2, Damu has requested a loan of up to $150 million equivalent in local currency (tenge) from ADB's ordinary capital resources. The loan will be guaranteed by RoK. Tranche 2 will help Damu continue with the implementation of the government's Action Plan to increase access to medium term finance for SMEs. The medium term tenge fixed interest rate wholesale funding will increase competition and scope for SME lending.

Tranche 2 will have two outpus: (i) medium term financing to SMEs, and (ii) improved financial sector outreach with a focus on women entrepreneurs. The funds will be disbursed by qualified financial intermediaries, and used for market-based investment and working capital loans, leases and other financing products to SMEs.

Project Rationale and Linkage to Country/Regional Strategy

The banking subsector does not have access to medium-term tenge funding. This is mainly because (i) savers prefer to hold US dollars because of concerns about another tenge devaluation; (ii) term depositor regulations allow early repayment without significant charges, making such deposits effectively on demand; (iii) the local bond market is illiquid, with demand dominated by the pension funds who normally buy and hold securities; and (iv) uncertainty regarding the likely impact of the government's consolidation in August 2013 of the country's 11 pension funds into one unified fund under the control of the NBK. As a result, banks are unable to mobilize sufficient term funds for the SME investment loans required for business growth.

The government recognizes that a prosperous SME sector is a major creator of employment and innovation. SMEs in Kazakhstan are more responsive and adaptable than larger enterprises and are ultimately a key to the country's long-term economic growth and poverty reduction. A number of government initiatives have been taken to address the barriers faced by SMEs. The state Roadmap for Business 2020 and the Accelerated Industrial-Innovative Development of Kazakhstan 2010 -2015 provide the general policy framework. With a narrowly based economy concentrated on extractive industries, the goal is to diversify the production base and give prominence to development of the SME sector, in particular its expansion and diversification.

Limited SME access to finance is a key constraint identified in the 2050 Development Strategy adopted by the government. The strategy supports an increased role for the SME sector in economic diversification. Damu was established in 1997 by the government to stimulate SME development. To do this, Damu adopted an "Action Plan to Increase Access to Finance for SMEs" (Action Plan) and took steps to provide sustained access to medium term finance for SMEs. Damu provides subsidized and market-based wholesale funding credit lines and (to a far lesser extent) guarantees to commercial banks, so banks have the liquidity and risk taking capacity to lend to SMEs.

Impact Sustained job creation and economic growth
Project Outcome
Description of Outcome SMEs have increased access to medium term credit on a sustainable basis
Progress Toward Outcome Many of the assumptions are not being fulfilled. The economy has suffered external shocks (ruble depreciation, slowdown in Russia, lower oil prices), which has slowed economic growth. Bank lending growth has decelerated. Tight liquidity is weakening bank profitability and exerting downward pressure on capital adequacy. There is an increase in dollarization of deposits. Despite this, the National Statistics Office reports an increase in number of SMEs of 28,000 from 2013 to 2014 and an increase in SME output of 60% over the same period. The mission notes that a new definition of SME entered into force in September 2014, widening the definition for medium-sized enterprise, which could be having a statistical effect on this data. Damu and the PFIs reported that demand for SME lending is high. As per NBK data, the volume of SME lending increased by 39% during 2014.
Implementation Progress
Description of Project Outputs

1. Medium-term financing to SMEs

2. Improved financial sector outreach, with a focus on women entrepreneurs

Status of Implementation Progress (Outputs, Activities, and Issues)

This indicator is not on track and was discussed with the PFIs. Data for April and May (still not recorded in Damu s system) and prospects for the following months show an improvement.

As of 1 April 2015 KZT 2.7 billion had been disbursed to SMEs. This indicator is not on track, but improving in recent months, as indicating above.

This indicator is not on track and the mission discussed ways to improve these results, in line with the activities included under the Gender Action Plan for the project.

Damu and the PFIs had problems understanding and collecting data for this indicator. Figures will be provided in next reporting period.

Geographical Location Kazakhstan
Safeguard Categories
Environment FI
Involuntary Resettlement FI-C
Indigenous Peoples FI-C
Summary of Environmental and Social Aspects
Environmental Aspects The project has been categorized as FI in accordance with ADB s Safeguard Policy Statement (2009). Safeguards due diligence has been conducted to assess potential environmental and social risks and impacts associated with qualified PFI s likely future portfolios, along with their commitment and capacity for environmental management. Tranche 2 under the MFF will be treated as Category B for environment safeguard components based on ADB s Safeguard Policy Statement (SPS), 2009. Damu and each of the PFIs will have in place or establish an ESMS to be maintained as part of its overall management system to meet Kazakhstan national laws and norms and ADB s safeguards requirements. Each PFI that receives proceeds of a loan under the Facility is required to submit to ADB: (i) a copy of its ESMS to be used in implementing this loan for ADB approval prior to submitting its first withdrawal application; and (ii) asemi-annual report on its compliance with its ESMS. The PFIs will prepare and submit semi-annual environmental monitoring reports on the implementation status of their ESMS to ADB.
Involuntary Resettlement For involuntary resettlement, tranche 2 is treated as C, unlikely to generage impacts on involuntary land acquisition, and resettlement.
Indigenous Peoples Tranche 2 is treated as C, unlikely to generate impacts on indigenous peoples.
Stakeholder Communication, Participation, and Consultation
During Project Design The European Bank for Reconstruction and Development, International Finance Corporation, United States Agency for International Development and the World Bank have supported SME development in Kazakhstan through (i) capacity building to improve operations, enter new markets and access finance; (ii) training to nongovernment organization business service providers; (iii) technical assistance to help banks introduce credit scoring and improve SME lending policies; and (iv) FILs to and equity investments in banks that provide loans to SMEs. ADB has worked closely with these partners, mindful of lessons on the need to mitigate foreign exchange and tenor mismatch risk, the importance of developing the local bond markets, and issues related to PFI ownership and control.
During Project Implementation During the project implementation ADB will keep close consultation with the active development partners (EBRD, USAID, World Bank etc.) to keep abreast on the development of Kazakhstan's financial and SME sectors, local bond markets, and on issues related to PFI ownership and control.
Business Opportunities
Consulting Services There is no procurement of services under Tranche 2
Procurement There is no procurement of goods and works under Tranche 2
Responsible ADB Officer Inmaculada Martinez Martin
Responsible ADB Department Central and West Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, CWRD
Executing Agencies
DAMU Entrepreneurship Development Fund
BMUKUSHEV@FUND.KZ
Gogol St., 111, Almaty
Kazakhstan
Timetable
Concept Clearance -
Fact Finding -
MRM 18 Oct 2013
Approval 13 Dec 2013
Last Review Mission -
Last PDS Update 16 Sep 2015

Loan 3093-KAZ

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
13 Dec 2013 29 Oct 2014 25 Nov 2014 28 Dec 2015 28 Jun 2016 -
Financing Plan Loan Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 122.00 Cumulative Contract Awards
ADB 122.00 13 Dec 2013 0.00 0.00 0%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 0.00 13 Dec 2013 122.00 0.00 100%

Safeguard Documents

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Evaluation Documents

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