Kazakhstan: Developing Rural Financial Intermediation

Agriculture, natural resources and rural development / Agro-industry, marketing, and trade

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

Strategic context. The proposed knowledge and support technical assistance (KSTA) will support Agrarian Credit Corporation (ACC) to improve access to finance for agriculture sector entities (ASEs) and households in rural and remote areas. ACC is the key rural financial intermediation institution in Kazakhstan and is a subsidiary of KazAgro National Management Holding Joint Stock Company (JSC) (KazAgro).

The TA will assist ACC to implement its recently adopted long-term development strategy for 2017 2026 through (i) developing a comprehensive and actionable business plan, (ii) improving corporate governance, (iii) strengthening the institutional capacity, (iv) developing its environmental and social management system, and (v) providing expertise for strengthening credit unions and financial organizations in rural areas. The TA will review ACC's key business activities to prepare its business plan, including a comprehensive financial model with 5-year projections and a cost-benefit analysis, which will determine the company's vision and strategy in terms of operational focus areas, target clients, geographical outreach, product focus, and funding requirements. The TA will strengthen ACC's capacity to mobilize external finance, and to develop into a wholesale financial intermediary. The TA will also review the ongoing lending programs of some of the second-tier banks and provide recommendations on how to meet ASEs' needs for finance.

The Asian Development Bank (ADB) country partnership strategy (CPS), 2017 2021, for Kazakhstan prioritizes, among others, a nexus of access to finance and inclusive growth addressing the availability of finance in rural and remote areas under its interconnected strategic pillars. The TA is included in ADB country operations business plan, 2019 2021 for Kazakhstan.

Rationale. Limited access to finance is one of the major challenges faced by companies in the country. A key constraint to credit is an underperforming financial sector that insufficiently responds to the needs of the private sector, especially of the agriculture sector outside Almaty and Astana cities. Furthermore, an increasing vulnerability of the financial sector complicates the access to finance. Major issues include: (i) insufficient bank lending mainly caused by a large stock of non-performing loans, (ii) absence of basic financial services in remote areas, (iii) ASEs' poor financial condition and inability to provide movable collateral, (iv) poor financial literacy and information asymmetry across the industry, and (v) outdated information and communication technology and inadequate level of digitalization of the banking sector.

Most ASEs are in remote rural areas, which are heavily vulnerable to external shocks. Micro, small and medium sized agribusiness entities are major source of income for local entrepreneurs and households, including women entrepreneurs. To date, credit unions (CUs) are the only existing source of finance for local agribusiness entities in remote areas, indicating the ASEs' limited access to finance. At the same time, ACC is the only source of lending for approximately 200 agriculture CUs.

However, the current business model of CUs is suboptimal due to: (i) sole dependence on the ACC funding that depletes quickly, given existing demand and its inflexibility associated with bureaucratic procedures and improper timing when needed by recipients; (ii) inability of re-allocation of funds among those CUs that require immediate financing; and (iii) limited ability of CUs to establish their own funding basis through cash/savings operations, accepting deposits and additional contributions from CUs' members, as these activities require corresponding licenses from the National Bank of Kazakhstan, which is difficult and time-consuming.

Consultations with the Ministry of Agriculture (MoA), KazAgro and ACC all confirmed the importance of expanded rural financial intermediation and support to credit unions as key development objectives, reflected in ACC's development strategy for 2017 2026. In this regard, the MoA is a policy regulator committed to improving agricultural sector performance; KazAgro is a national company responsible for implementing policy and state support to the sector; and ACC is financial intermediation arm of KazAgro, working directly with ASEs.