Kazakhstan : MFF: Small and Medium Enterprise Investment Program - Tranche 1

Project Name

MFF: Small and Medium Enterprise Investment Program - Tranche 1

Project Number

44060-023

Country / Economy

• Kazakhstan

Project Status

Closed

Project Type / Modality of Assistance

• Loan
• Technical Assistance

Source of Funding / Amount

Loan 2689-KAZ: MFF: Small and Medium Enterprise Investment Program - Tranche 1

Source	Amount
Ordinary capital resources	US$ 150.00 million

TA 7634-KAZ: MFF: Small and Medium Enterprise Investment Program - Tranche 1

Source	Amount
Technical Assistance Special Fund	US$ 650,000.00

Strategic Agendas

• Inclusive economic growth

Drivers of Change

• Gender Equity and Mainstreaming
• Governance and capacity development
• Private sector development

Sector / Subsector

• Finance / Small and medium enterprise finance and leasing

Gender

Effective gender mainstreaming

Description

This is the first tranche of a $500 million multitranche financing facility (MFF) to the Damu Entrepreneurship Development Fund (Damu), guaranteed by the Republic of Kazakhstan, for the Small and Medium Enterprise Investment Program. The MFF is proposed to help Damu--through participating financial institutions (PFIs)--address the unmet demand for longer-term, fixed-rate, local currency denominated credit by small and medium-sized enterprises (SMEs), and thereby address a key constraint to the development of SMEs.

The first tranche amounts to the local currency equivalent of $150 million.

Project Rationale and Linkage to Country/Regional Strategy

Because of the poor health of the banking sector, it is difficult for ADB to provide traditional nonsovereign credit line and guarantee operations to support SMEs in Kazakhstan. ADB, however, remains committed to providing such support. For example, ADB's 2009 Countercyclical Support Program helped the government to fund post-crisis SME credit support operations. At the request of the government, ADB looked at a number of options to provide continued support over the medium term through its sovereign operations. The government requested flexibility in lending products as the health of the finance sector improves, and asked that these products help to mitigate currency, interest, and tenor mismatch issues. Damu also requested assistance in improving its efficiency and effectiveness to enable it to raise external financing over the longer term.

In response, ADB developed the investment program, which is consistent with ADB's overall strategy for Kazakhstan and reflects lessons learned. The investment program is designed as an MFF, under which a series of local currency loans and other financing products will be provided over the medium term. The MFF enables flexibility as it will allow ADB to provide different forms of support (direct loans or guarantees) to Damu to help it fund its lending to PFIs. The MFF also enables ADB to enter into a multiyear partnership with Damu (and possible cofinancing partners) while creating stability and credibility at the level of the financing plan. To reflect lessons learned, the investment program envisions a series of medium-term, fixed-rate, local currency loans to Damu that will be used to fund back-to-back subloans to PFIs for onlending to SMEs. By providing such loans, ADB will directly address currency, interest rate, and tenor mismatch risks. Experience has shown that these financial risks have been a significant cause of stress for SMEs and their banks.

For the tranche 1 loan, ADB raised local currency through cross-currency swaps with international bank counterparties. ADB has been able to leverage its relationships with international banks and utilize its AAA rating to extend the tenor and lower the pricing of cross-currency swaps. For subsequent tranches, ADB will work with MOE and Damu on the issuance of local currency bonds (LCBs) by ADB or, with an ADB guarantee, by Damu. Issuance of LCBs will help develop the local capital market by providing local investors with the opportunity to diversify their investment portfolios; introduce international best practice standards; help develop a local corporate bond yield curve and establish pricing benchmarks for other issuers; and advance the process of mobilizing and channeling domestic savings into longer-term investments.

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

By the closing date of the loan, September 2013, the PFIs had provided on a cumulative basis T32.3 billion of SME loans, of which 27% funded new investments, 57% financed working capital, and 16% refinanced existing loans.

In total, Damu channeled 750 billion Tenge to SMEs (as per revision in July 2013, new MFF baseline is 388 billion in 2009).

Implementation Progress

Description of Project Outputs

1. Medium-term financing to SMEs

2. Improved capacity of Damu to provide sustainable access to finance for SMEs

3. Financial sector outreach with a focus on women entrepreneurs

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

As of September 2013, a total of 2,337 loans were disbursed by PFIs to 734 SME borrowers, using ADB proceeds. (for inconsistencies with Data indicators interpretation, refer to changes made to MFF DMF). The average amount lent to each SME borrower was T44 million ($290,000) and the average loan was T14 million ($90,000). Women were 30.5% of total SME borrowers.

Between 2012 and 2013 Damu approved 8 changes to its internal risk management processes and 6 changes to improve its corporate governance.

By the closing date of the loan, end September 2013, 30.5% of borrowers of Damu programs were women.

Geographical Location

Nation-wide

Safeguard Categories

Environment

FI

Involuntary Resettlement

FI

Indigenous Peoples

FI

Summary of Environmental and Social Aspects

Environmental Aspects

To ensure compliance with ADB's safeguard policy on environment, the selection criteria for PFIs include its internal environment and safeguard procedures. Any PFI not meeting these criteria will not be eligible to participate. Eligibility criteria for onlending will be limited to low risk SMEs whose environmental impacts are expected to be negligible and for which no environmental evaluation will be required. The Mission Team's assessment concludes that the financial intermediary's business activities have minimal or no adverse environmental and social impacts or risks, and are unlikely to generate involuntary resettlement impacts and impacts on Indigenous People, and therefore the Project is treated as a category C project. There will be no adverse impact on involuntary resettlement and no involuntary land acquisition in any of the Project financed under this facility and in all the tranches. Lessons learned on environmental management from ADB's experience with credit line through the private sector operations will be built into the Project design.

Involuntary Resettlement

No social safeguards are triggered by the project. No activities are planned in disputed areas. The Project will not finance any investments involving land acquisition or involuntary resettlement of people anywhere in Kazakhstan. The loan covenants covering all tranches for this MFF loan will ensure that projects that will be financed will have no adverse impact on indigenous peoples and no involuntary land acquisition and resettlement. This FI loan is treated as category C.

Indigenous Peoples

The loan covenants covering all tranches for this MFF loan will ensure that projects that will be financed will have no adverse impact on indigenous peoples and no involuntary land acquisition and resettlement. Therefore, this FI loan is treated as category C.

Stakeholder Communication, Participation, and Consultation

During Project Design

The European Bank for Reconstruction and Development (EBRD) actively supports SMEs in Kazakhstan. EBRD programs fund international advisers who provide capacity building and training for SMEs and support to rural SMEs to improve their operations, enter new markets, and gain access to financing. The United States Agency for International Development has supported programs that have provided extensive training on business and consulting essentials to mostly start-up entrepreneurs and nongovernment organization business service providers. EBRD has extended several credit lines to commercial banks to fund lending to SMEs. Their projects are sometimes supported by technical assistance (TA) to help banks introduce a credit scoring methodology and improve their SME lending policies. The World Bank has provided Kazakhstan with the Second Agricultural Post-Privatization Project ($96.1 million), which has a component for promoting sustainable rural microfinance. The International Finance Corporation promotes SME development through its debt and equity investments in banks that provide loans to SMEs. ADB coordinated closely with other development partners in preparing the investment program and MFF.

During Project Implementation

Consultation with business associations and development partners (EBRD, WB, IFC) takes place as part of the review missions.

Business Opportunities

Consulting Services

Under TA 7634-KAZ: Improving Capacity to Support SME Development, ADB engaged a qualified team of consultants in accordance with its Guidelines on Use of Consultants by ADB and Its Borrowers (2013, as amended from time to time). Seven individual experts and 1 consulting firm were recruited to implement the TA. A firm was hired to conduct a survey to clarify ongoing constraints to SME development and help define measures that Damu can implement to more effectively address such constraints. The TA commenced on 17 November 2011 and was completed on 31 December 2013.

Procurement

As this is a financial intermediation loan, there is no procurement involved in this project, other than consulting services.

Contact

Responsible ADB Officer

Martinez, Inmaculada

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

Timetable

Concept Clearance

02 Jul 2010

Fact Finding

19 Jul 2010 to 30 Jul 2010

MRM

-

Approval

04 Nov 2010

Last Review Mission

-

Last PDS Update

16 Sep 2015

Funding

Loan 2689-KAZ

TA 7634-KAZ