Seyitbek Usmanov and Robert Genkin of MGN Capital -
The microfinance industry in the Kyrgyz Republic has undergone tremendous changes over the last decade. Many companies have joined the industry, both local and foreign. In 1995, there was one microfinance organization, FINCA; in 1997, Kyrgyz Village Finance Corporation opened - which was later reorganized into Ayil (Village) Bank; and today, the market is liberally littered with 233 microfinance organisations. Gradually, the market has moved from monopoly to oligopoly to free-market competition.
The unique rise of the microfinance industry in Kyrgyzstan can be largely attributed to the adoption of a Law on Credit Unions (1999) and a Law on Microfinance Organizations (2002), both of which were the first of their kind in Central Asia. Prior to the laws, microfinance companies operated as temporary projects of international donor organizations. These new laws, though, provide microfinance companies with significant autonomy and independence from the National Bank of Kyrgyzstan, unlike that afforded to commercial banks, since they are non-depositary financial institutions - they provide loans purely from their own and borrowed money.
By mid-2007, the growing success of Kyrgyzstan's liberal microfinance policies was becoming apparent. The portfolio of non-financial organizations as a percentage of GDP was 3.2% of GDP, while the average among the three neighbouring countries was 1.0%: 0.3% in Tajikistan, 1.8% in Kazakhstan and 0.9% in Uzbekistan.
The microfinance companies are growing at a google-like pace. According to the Association of Microfinance Organizations, whose members account for 95% of the microfinance companies' credit portfolio, such companies have so far served 838,000 clients who have received an accumulated $598m in loans.
The credit portfolio of Kyrgyzstan's microfinance organizations has grown from $53m in 2003 to $175m in 2008, a compound average growth rate of 38%. By far the lion's share of credits is directed at the Chui and Bishkek regions, the most prosperous parts of the country. That is largely because most of the country's trade is concentrated around Bishkek at Dordoy Bazaar, which employs roughly 30,000 people. According to the State Statistical Committee, 45% of the credits disbursed in 2008 went to trade. Indeed, microfinance companies are contributing a decent amount toward Kyrgyzstan assuming the title "Dubai of Central Asia," as trade becomes a pillar of the country's economy and pride.
Loan portfolio growth retains an incredible momentum. Even aggressive terms aren't curbing popular demand - a typical loan is at 36% annual interest, while in rural areas the average interest rate is between 120% and 180% per annum. A reason for the high interest rates is the denomination of the loans in Kyrgyz som and the high inflation rate in Kyrgyzstan in the last two years - 22.5% in 2008 and 25% in 2007. However, the International Monetary Fund forecasts a 7.5% inflation rate for 2009.
These severe loan terms present excellent opportunities for an investor to take advantage of. With interest rates of about 120% in rural areas, near-zero default rates and low capital expenses, investing in the microfinance sector of Kyrgyzstan offers an irresistible bonanza.
The loan portfolio of microfinance companies as of March was about $142m, a quarter the size of the banking sector's loan portfolio. While banking is primarily an urban-based business catering to the needs of the middle and upper classes, microfinance companies mostly disburse small loans (half of the borrowing is for less than $500) to the rural populace. FINCA, especially, is pushing hard to reach out to the untapped market segment - the more mountainous and distant populations.
In April, FINCA Kyrgyzstan became the second programme in FINCA's 21-country global network to pass the 100,000-client milestone. In fact, FINCA Kyrgyzstan is a global success story. It started in 1995 with a $6.2m grant from USAID, making it the first microfinance company in the country. By 1998, it achieved self-sufficiency, a rare case for a microfinance company so early after inception. Most microfinance companies aren't self-sufficient and depend on subsidies, including the Grameen Bank.
FINCA Kyrgyzstan achieved high rural penetration and saw astronomical growth in its credit portfolio. Indeed, it's one of the most successful projects within the FINCA network in the CIS.
The Kyrgyz clothing industry has developed largely without government support or foreign investment, using purely local resources. Much like the gold industry, this is an export-oriented industry - some 90% of production is destined for the mid-tier clothing markets of Siberia. In some of Russia's regions, "Made in KG" clothing is a near monopoly, as in Uralsk.
The "Made in KG" clothing brand is purportedly increasingly well received in Russia. It stands for quality and design, and it's not uncommon to see it in boutique stores. The sophistication and growth of the industry was recognized at a recent International Trade show of Light Industry in Moscow - Kyrgyzstan came second, after Russia.
Since many clothing factories are small enterprises and operate in the grey sector, it is hard to estimate the true volume and dimensions of the market. However, according to estimates provided by the Association of Light Industry, around 160,000 people and over 35,000 companies are involved in the cuntry's apparel production industry. This makes the sector the largest employer in the economy after trade.
An estimated 40m pieces of clothing were made in 2008 worth about $120m. Some $110m of that was exported, the second largest export item after gold. The red line signifies year-on-year growth. It is evident that 2005 was the turning point for the industry, although growth was curbed somewhat by the financial crisis in 2007 and 2008.
The textile and clothing industry made its national debut in 2005. Saparbek Asanov, executive director of the Association of Light Industry Companies, attributes the industry's success that year to the introduction of a tax "patent" administrative system. Under this system, a sewing company pays its tax expenses for a set fee at the beginning of the month. This shelters the company from tax inspection for the duration of the patent; and limits its taxes to the price of the patent. Therefore, companies have an incentive to grow and its tax expenses are not proportionate to their revenue or profits.
When the patent system was introduced about four years ago, Kyrgyzstan's clothing industry was exporting to Russia about 7m pieces of clothing and paid about $200,000 in taxes. By 2009, these figures had rocketed to 40m pieces of clothing and $800,000, respectively.
Kyrgyzstan's textile industry can't remain solely centred on the market of Siberia. Already, preliminary shipments are going to Moscow, Eastern Europe and North America. Success in those regions can't be assured, but few saw Kyrgyzstan's textile market dominating in Siberia either.
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