VZCZCXRO0285
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #1721/01 2550539
ZNR UUUUU ZZH
R 110539Z SEP 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 3244
INFO RUCNCIS/CIS COLLECTIVE 0631
RUEHAST/USOFFICE ALMATY 0716

UNCLAS SECTION 01 OF 02 ASTANA 001721 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV EAID KZ
SUBJECT:  KAZAKHSTAN - IMPACT OF THE GLOBAL CREDIT CRUNCH ON THE 
MICROCREDIT INDUSTRY 
 
ASTANA 00001721  001.2 OF 002 
 
 
Summary 
-------- 
 
¶1. Even in resource-rich Kazakhstan, the global credit crunch is 
having a major impact.  This impact is being felt throughout the 
financial system; however, the microcredit industry has been 
surprisingly resilient.  Long a partner in fostering microcredit 
industry growth, USAID support has spanned the spectrum from legal 
reform, to capital investments, training and advocacy, and technical 
assistance to state-established development institutions, including 
the $300 million Enterprise Development Fund (DAMU).  Support has 
helped to lay strong foundations which have enabled micro 
entrepreneurs to contribute to economic diversification.  On 
September 18, the USAID Mission Director will speak at a conference 
in Astana highlighting these gains and future challenges.  End 
Summary. 
 
Creation and Expansion of the Microcredit Industry 
--------------------------------------------- ----- 
 
¶2. USAID has always seen microfinance as a means of providing 
economic opportunities to the poor through sustainable financial 
services.  Since the mid-1990s in Kazakhstan, it has played a 
pivotal role in the establishment and expansion of the microcredit 
industry.  Initial support included providing capital and technical 
assistance for the establishment of microcredit institutions, 
including KazMicroFinance, the Asia Credit Fund, and the Farmer's 
Fund.  All of these organizations have since matured into profitable 
institutions, with KazMicroFinance alone garnering more than 26,000 
clients and holding an outstanding loan portfolio of $40 million. 
KazMicroFinance was even listed as the 37th best microfinance 
institution in the world by Forbes magazine and is in the process of 
converting to a commercial bank by late 2009. 
 
¶3. Initially unrecognized by the Kazakhstani government, the 
industry received a boost when the government passed the 
USAID-supported "Law on Microcredit Organizations" in 2003.  The law 
outlined the basic legal framework of the industry by defining two 
types of microfinance institutions: (1) limited liability, 
for-profit partnerships and (2) non-profit, public funds.  The 
microfinance law allows a maximum loan amount of 8 million 
Kazakhstani Tenge (approximately $67,000 USD), though actual loan 
sizes average approximately $2,500. 
 
¶4. The industry received a second boost when it was successfully 
argued that the industry contributed to the Kazakhstani government's 
policy of economic diversification.  The government has long 
recognized the need to diversify its economy and as early as 1997 
established an $83 million Small Enterprise Fund (SMEF), which was 
tasked with expanding financing to micro, small and medium 
enterprises. In 2005, SMEF began lending to microcredit 
organizations directly and until 2008 its annual financing was 
approximately $15.5 million per annum. 
 
¶5. In 2004, USAID established the Association of Microfinance 
Organizations of Kazakhstan (AMFOK) which has since garnered 
significant recognition from the government.  AMFOK has played a key 
role in the development and expansion of a number of microcredit 
organizations through training and technical assistance and in 
initiating and passing amendments to the original micro-lending law. 
AMFOK has since grown to comprise more than 70 members with 51,267 
clients and active portfolios totaling $161 million.  It is well on 
its way to complete operational and financial sustainability. 
 
¶6. In 2003, USAID also set up a regional wholesale lending 
institution, Frontiers, that lends to microfinance organizations to 
increase their liquidity and loan capital.  Frontiers has since 
become fully sustainable (ROE 13%) and maintains an outstanding loan 
portfolio of over $10 million. 
 
The Global Credit Crunch 
------------------------ 
 
¶7. The onset of the global credit crunch has had a major impact on 
the economy of Kazakhstan. From 2001 to 2007, real GDP growth 
averaged 10 percent annually.  Based on oil sector development that 
was matched by generally prudent macroeconomic policies, structural 
reforms, and increased access to global financial markets, real per 
capita income had doubled since 2000 and social indicators improved. 
 The banking sector played a key role in this rapid growth.  Most 
banks, which account for 80 percent of total financial system 
assets, are still locally and privately owned, although foreign 
participation has increased. The sector is highly concentrated, with 
the five largest banks accounting for 78 percent of market share. 
Banks have been very reliant on external financing, with external 
liabilities making up about 45 percent of their aggregate balance 
sheets. 
 
¶8. From January 2005 until August 2007, easy access to external 
funding had fueled very rapid domestic credit growth -- an annual 
average growth rate of 70 percent had brought credit to around 75 
 
ASTANA 00001721  002.2 OF 002 
 
 
percent of GDP. Lending was mainly to the household, trade, and 
construction sectors, while the energy sector does not rely on 
domestic Kazakhstan banks for financing.  Speculative behavior in 
the real estate market was fueled by relatively cheap credit, which 
also fostered the introduction of new financial products.  As in 
other over-inflated property markets, the credit crunch has led to a 
significant decline in construction and property market activity 
which has not only left banks and individuals with overpriced assets 
and dried-up credit lines, but stifled growth, cut employment and 
reduced purchasing power. 
 
¶9.  The credit crunch also negatively impacted the growth of the 
microcredit industry, with individual micro credit organizations 
facing liquidity crises and with microcredit clients facing the loss 
of profitable opportunities.  Particularly hard hit were the 
numerous small and young microfinance organizations which had 
limited capacity.  Some of these smaller organizations had been 
supported by the Kazakhstani government's credit program, which was 
accused of mismanagement and corruption.  Towards the end of 2007 
there we roughly 1,086 registered microcredit organizations in 
Kazakhstan but approximately half were not active. 
 
Surprisingly Resilient Sector 
----------------------------- 
 
¶10. Despite the recent challenges faced by the microcredit industry, 
the loan portfolios of AMFOK's members in the first quarter of 2008 
increased by 5.4% compared to a year earlier. 
 
¶11. Amidst accusations of management and corruption, at the end of 
2006 a new chairman, Amrin Gosman was appointed to head SMEF, which 
was renamed the Enterprise Development Fund (DAMU).  In 2007, DAMU 
was recapitalized at $366 million.  After Gosman participated in a 
USAID tour to study public and private SME support networks in 
Poland (he would also later visit Hungary and the U.S. for this 
purpose), he requested additional technical assistance in assessing 
DAMU's capacity and operations as a government owned, non-banking 
financial institution.  The silver lining of the crisis and 
mismanagement has been the government's recognition that it can not 
pick winners and that it needed to improve operations.  USAID's 
study tours and technical recommendations focused on outsourcing 
direct SME lending to commercial banks and micro-credit 
organizations and on risk management. 
 
¶12. The openness of DAMU to donor and industry advice, and another 
major plus-up to DAMU capital will result in the outsourcing of $2.2 
billion in SME credit lines via seven intermediary banks for a 
period of between five to seven years.  With respect to microcredit, 
Damu intends to lend between $16-20 million per annum to 
micro-credit organizations during the same period.  In mid 2008 DAMU 
received 45 applications from micro-credit organizations and 
approved half of them.  USAID technical support to DAMU in both the 
areas of financial and business development services will continue 
through a number of USAID activities. 
 
Challenges and Future Direction 
------------------------------- 
 
¶13. The Microcredit industry still has a long way to go in 
Kazakhstan. Further consolidation, financial products for rural 
areas, and legislation which enables balanced regulation for limited 
savings mobilization are but some of the challenges the industry 
faces.  Despite these challenges the future looks bright.  As USAID 
winds up its support to the sector in 2009, it is leaving behind a 
strong advocacy group (AMFOK), a more professional and market-based 
government counterpart (DAMU), and a second-tier lending institution 
(Frontiers) which will be used to establish a $100 million regional 
agricultural development fund, enabling it to continue to provide 
liquidity far into the future. 
 
¶14. Through 2009, USAID will provide support to build the capacity 
of AMFOK to ensure its operational and fiscal sustainability.  AMFOK 
will provide ongoing advice and support in maintaining high industry 
standards and in improving the policy, legal, and regulatory 
environment for the microfinance sector.  A joint AMFOK and DAMU 
microfinance conference on September 18 is an indicator of the 
stature that AMFOK has achieved.  Such workshops which bring 
together leading microfinance practitioners, association executives, 
and government regulators and policymakers to analyze the state of 
the industry and share information and best practices are 
invaluable. 
 
ORDWAY 
 
 
 
5