Uzbekistan: Second Small and Microfinance Development Project

Finance / Inclusive finance - Small and medium enterprise finance and leasing

The Project facilitates access to credit by micro and small enterprises (MSEs) across Uzbekistan. It supports the generation of employment and sustains about 30,000 jobs for men

and women. It contributes to inclusive economic growth. ADBs proposed intervention comprises (i) a loan of $50 million to be channeled through three participating commercial banks (PCBs) for onlending to viable MSEs; and (ii) a TA grant of $600,000 to improve PCBs MSE finance capacity and their subborrowers' entrepreneurial skills.

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.

As of December 2013:

Access to capital eased and job creation stimulated in both rural and urban areas across Uzbekistan; to date, 20,700 jobs created, with women accounting for 38%.

Delivery of training to improve entrepreneurial capacity of subborrowers, including women and MCOs

Increase in microfinance loans to financially viable subborrowers (men and women)

As of December 2013:

(i) 14,312 microfinance loan accounts have been opened under the project by low-income households, and micro and small businesses in urban and rural areas, with women accounted for 36%.

(ii) 10,372 sub-borrowers, with women accounting for 38%, trained for enhanced entrepreneurial capacity.

(iii) 590 loan officers at participating commercial banks trained for improved microfinance loan appraisal skills, safeguards awareness, and gender equality.

Loan Review Missions will continue to consult with stakeholders to determine the loan's intended outcome's efficacy

Project design parameters will be monitored closely during implementation. Particulary, information will be sought regarding:

a) Amount lent to MSEs (it is envisaged that subloans up to $10,000 will be 50% of the total loan amounts disbursed)

b) Projects financed and assets created in the MSE sector

c) Total incremental employment created

d) Number of bank staff trained on enhancement of their appraisal skills of MSEs

e) Number of women provided with subloans

f) Regional distribution of subloans in Uzbekistan's 13 regions

g) Overall social and economic benefit that will accrue to Uzbekistan

h) Future areas and issues of development specially related to microfinance and MSEs

Information obtained will be placed on the 3 PCBs' websites and shall be included in the PCBs' reports to ADB.

ADB will also communicate with MOF and PCBs through written documents. MSE subborrowers would provide monthly information at the time of repayment through personal interactions. PCBs will communicate to ADB through quarterly and annual written reports. PCBs will communicate to their staff through training programs, sensitization programs and workshops and to borrowers through awareness programs.

The information related to this project would be provided by ADB, PCBs, MOF, microfinance and small enterprise borrowers, and public at large comprising researchers, evaluators, commentators and representatives of media.

The frequency, at which communication on this project will be quarterly from MSE borrowers to PCBs, from PCBs to ADB. ADB will thereafter disclose such information on its website. There will be periodic review by ADB and communication to the public by experts.