To strengthen the government support to and boost the development of small business the President of the Republic of Kazakhstan issued a decree establishing Small Entrepreneurship Development Fund JSC in March 1997.
In pursuance of the aforesaid Decree the Government issued the Resolution «On Establishment of the Small Entrepreneurship Development Fund».
Small Entrepreneurship Development Fund JSC commenced its operation on August 18, 1997. The main purpose underlying the establishment of the Fund was to encourage the emergence and economic growth of small business entities (hereinafter referred to as SBEs) in Kazakhstan and to make the use of government funds spent towards small business support more efficient.
In 2006, Kazyna Sustainable Development Fund became a shareholder of the Fund . Until November 2007 the Small Entrepreneurship Development Fund sought to achieve its main goals by pursuing the following functions and objectives:
· development of project financing: direct lending to small business entities in priority sectors for small business diversification purposes based on the specific socio-economic situation in certain regions;
· development of financial leasing;
· development of a network of microcredit organizations;
· development of a system of guaranteeing small business entities' liabilities to second-tier banks;
· consulting small business entities under the Fund's programmes.
Since the end of 2007, the Fund has been undergoing the following conceptual changes:
The Fund's status has changed from Small Entrepreneurship Development Fund JSC to Damu Entrepreneurship Development Fund JSC and, as consequence, its mandate has been expanded to cover support to small and medium business (hereinafter referred to as SMB); from a financial institution the Fund has turned into an assets manager for government allocations: new activities targeting financial support to SMB entities as well as research, information and consultative support to SMB entities have been developed and are under way. The Fund's corporate identity has changed.
In October 2008, Kazyna Sustainable Development Fund JSC and Kazakhstan Holding for Management of State Assets Samruk were merged into Samruk-Kazyna National Welfare Fund. The new Fund was designated as the national managing holding with a mandate to manage share holdings, stakes in national development institutes, national companies and other legal entities it owns.
At present Damu Fund is a national development institute and a wholly-owned subsidiary of Samruk-Kazyna National Welfare Fund.
The mission of Damu Fund is to facilitate the quality development of Kazakh SMBs and microfinance institutions as an integrator and operator of financial and consulting services.
DEVELOPMENT AND OPERATION STAGES
The Fund was established on the basis of the Law of the Republic of Kazakhstan «On P rotection of and Support to Private Entrepreneurship» dd. July 4, 1992, and a number of the following resolutions of the President of the Republic of Kazakhstan:
· dd. May 5, 1992 «On the State Programme of Support and Development of Entrepreneurship in the Republic of Kazakhstan for 1992-1994»; and
· dd. June 10, 1994 «On the State Programme of Support and Development of Entrepreneurship in the Republic of Kazakhstan for 1994-1996».
STAGE I
1997-2001
The first stage relates to the establishment of the Fund back in 1997. At that time, state authorities adopted a series of laws, decrees and resolutions targeting small business support and development.
· 1997 – RK President's Decree # 3398 dd. March 6, 1997 «On Measures to Strengthen Government Support to and Boost Development of Small Business».
· RK Government Resolution # 665 dd. April 26, 1997 «On Establishment of the Small Entrepreneurship Development Fund» .
· RK Law # 131-1 dd. June 19, 1997 «On State Support to Small Business».
· RK Law # 135-1 dd. June 19, 1997 «On Individual Entrepreneurship».
· 1999 – RK President's Decree # 4189 dd. December 31, 1998 «On the State Programme to Develop and Support Small Business in the Republic of Kazakhstan for 1999-2000».
· 2001 – RK President's Decree # 597 dd. May 7, 2001 «On the State Programme to Develop and Support Small Business in the Republic of Kazakhstan for 2001-2002».
During that period the Fund functioned as an agent keeping records of and controlling the use of state budget funds under the Programme of Measures to Support Domestic Producers as well as the credit lines of:
- the European Bank for Reconstruction and Development; and
- the Asian Development Bank.
Credit Line of the European Bank for Reconstruction and Development – Kazakhstan Small Business Programme
The European Bank for Reconstruction and Development (EBRD) was established in 1991 on the basis of an international agreement for the purpose of facilitation of economic reforms in Central and Eastern European countries. One of EBRD's most successful projects was the Kazakhstan Small Business Programme run together with the Fund since 1998.
In line with the goals of the EBRD and the Government of the Republic of Kazakhstan, with the latter being the initiator of the project, the objective of the Kazakhstan Small Business Programme was to provide small businesses throughout the country with access to loans through development of necessary institutional settings and implementation of the lending technique.
A U.S.$77,500,000 10-year loan agreement was entered into with the EBRD under the Kazakhstan Small Business Programme. Within this programme lending is provided through authorized second-tier banks, which determine lending conditions for their borrowers themselves. Enterprises operating in all economic sectors are eligible for funding under this programme.
The main goal of the programme is to provide lending to enterprises, which previously had no access to official funding sources.
A total of 237,000 projects worth 2,216.10 mln. USD were financed by all participating banks from May 1998 to May 2007, of which 25.63% (180,253 projects worth 568.09 mln. USD) are microcredits and 74.37% (56,747 projects worth 1,648.01 mln. USD) are small loans.
Within the Kazakhstan Small Business Programme the partner banks assisted by an international firm, IPC (Internationale Projekt Consult), set up small business lending sectors using a technique specifically developed to allow prompt review by banks of a large number of loans to small enterprises.
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Technical aid was provided to authorized banks from the EBRD Programme loan proceeds. Participation in the Programme allowed the leading commercial banks to:
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learn about techniques of financial analysis of small business enterprises; Programme of Measures to Support Domestic Producers
Within the Programme of Measures to Support Domestic Producers the Fund has transferred 22,716.1 K USD to 6 second-tier banks.
This Programme supported large projects manufacturing tractors, cement, fertilizers, cotton and sunflower oil, dairy products, packing materials, etc.
The Government of Kazakhstan has approved financing of a total of 14 domestic producers’ investment projects with 5,537 jobs created and retained over the programme's life.
This Programme has been closed, and the funds repaid by borrowers are used towards increasing the Fund's authorized capital for subsequent direct lending to SBEs.
Second Tranche of the Agriculture Sector Programme Loan of the Asian Development Bank
Proceeds of the Programme Loan of the Asian Development Bank (ADB ) are to be used towards loans for purchasing equipment to manufacture and process agricultural products and machinery for machine and technological stations, launching wholesale food markets and other market infrastructures for selling agricultural output and financing of required working capital.
From the start of the programme, loans have been provided to ultimate borrowers through authorized second-tier banks. 12 second-tier banks and Astana Finance JSC took part in the disbursement of the second tranche of the ADB loan.
In December 2004 the RK Ministry of Finance and the Fund signed a loan agreement entitling the Fund to finance, on its own, projects using the remainder of the second tranche of the Programme Loan.
From the start of the programme until October 1, 2007, the Fund had financed 95 projects totalling 54,675.4 K USD with 4,719 jobs created and retained under the Programme.
STAGE II
2002-2004
An economic boom in 2001-2002 and an average annual GDP growth of up to 11.6% (9.3 % in 2003-2004) enabled Kazakhstan's Government to provide significant support to small business.
This period saw a number of decrees:
2003 – RK President's Decree # 1096 dd. May 17, 2003 «On the Strategy of Industrial and Innovative Development of the Republic of Kazakhstan for 2003-2015».
2004 – RK President's Decree # 1268 dd. December 29, 2003 «On the State Programme to Develop and Support Small Business in the Republic of Kazakhstan for 2004-2006».
The state entrepreneurship support policies received a new impetus following the approval of the Strategy of Industrial and Innovative Development of the Republic of Kazakhstan for 2003-2015 (hereinafter referred to as the Strategy) in 2003.
The Strategy's main goals are to cultivate business-friendly environment; establish institutional settings to stimulate private sector; improve comparative advantages; strive for greater value added; promote establishment of science-intensive high-tech export-oriented enterprises; diversify the export potential of the country in favour of high value-added products and services; implement world standards of quality; enhance integration into the global economy by joining the global scientific, technical and innovative processes.
During that period the Fund completed its branch network. Now entrepreneurs can obtain support not only in republican status cities, but also in rural areas.
Since 2002 the Fund has been using its own resources to provide lending to small businesses at an interest rate of 12% p.a. and a tenor of up to 5 years, with the interest rate dropping to 10% p.a. starting from June 2004.
During the period in question loans to small business entities were provided through second-tier banks using the Fund's own resources.
The following new programmes were implemented:
- Programme of lending to SBEs from the republican budget funds; and
- Small town development programme for 2004-2006.
Programme of lending to small business entities (including female business) from the budget of the Republic of Kazakhstan
The goal of this programme is to encourage establishment and economic growth of SBEs including the development of female business based on Kazakhstan's economic development priorities; and to facilitate creation of new jobs in the area of small business and self-employment.
When the Programme of Lending to SBEs (including female business) from the republican budget was commenced, the Agency for Regulation of Natural Monopolies, Protection of Competition and Support of Small Business and the Fund prepared and approved credit limits for Kazakhstan's oblasts with a list of priorities for funded projects identified.
Implementation of the programme started in June 2002 and is to end in 2008. By October 1, 2007, the Fund had financed 301 projects totalling 793.8 mln. KZT (including 97 female business projects totalling 250.2 mln. KZT) from the republican budget. About 2,000 jobs were created and retained under this programme.
At present, the programme finances using repayable funds.
Small Town Development Programme for 2004-2006
Kazakhstan has 60 small towns, i.e. towns with a population under 50,000. 41 of them, or 68% of all small towns and 25% of regions, are administrative centres of corresponding rural regions.
Small towns’ industrial production displays pronounced concentration on one or two sectors. Other sectors are developed only insignificantly or there are no industrial enterprises at all. A decrease in the output or suspension of towns' mainstay enterprises entails an overall deterioration of the town's socio-economic situation.
To set the stage for socio-economic development of small towns the Government of the Republic of Kazakhstan issued a resolution adopting the Small Town Development Programme for 2004-2006 aimed at identifying main areas of development of small towns in line with their functional classification and building the industrial and social infrastructure and boosting employment in small towns.
To enable lending to investment projects in small towns and development of small business 1,500 mln. KZT was allocated to the Fund from the republican budget towards an increase in the authorized capital.
To ensure the implementation of the programme the Fund conducted information and consulting workshops for SBEs in all towns identified by the programme with the significant assistance on the part of respective Akimats.
As at January 1, 2007, a total of 281 projects worth 1,484.4 mln. KZT were funded under this programme with 2,935 jobs created and retained. In 2006, the programme was completed and closed.
STAGE III
2005-2007
This stage is marked by adoption of laws, decrees and resolutions significantly affecting the Fund's operations.
2005 – RK Government Resolution # 450 dd. May 12, 2005 «On Approval of the Accelerated Action Plan to Develop Small and Medium Business in the Republic of Kazakhstan for 2005-2007» .
2006 – RK Law # 124-III dd. January 31, 2006 «On Private Entrepreneurship».
2006 – RK President's Decree «On the Concept of Transition of the Republic of Kazakhstan to Sustainable Development for 2007-2024».
In May 2005 the Government of the Republic of Kazakhstan adopted the Accelerated Action Plan to Develop Small and Medium Business for 2005-2007. The aforesaid plan proposed improvement of small and medium business legislation, establishment of viable infrastructure settings, strengthening of the Fund's role as a systemic element of state support to small business, increased lending to SBEs, etc .
In pursuance of this plan, the Fund received 29 bln. KZT of republican budget funds in 2005-2007 for capitalization purposes in order to support small business.
Stabilization of the socio-economic situation in the republic, a growing support of the Fund's operations on the part of the state, experience of financial support to SBEs gained by the Fund, achieved staff and technical potential and the Fund's strong branch network in the republic laid a solid basis for the Fund’s strengthening as a state institute of development of the country's small business and provided an impetus to new SBE financial support programmes:
l project financing and leasing;
l Kazakhstan microcredit development program;
l guaranteeing SBE loans provided by second-tier banks;
l provision of training, research, information and consulting support to SBEs through business support centres.
Project Financing and Leasing
Project financing became one of main small business support programmes aiming at provision of financial support to SBE projects in priority areas of state small business policies and at ensuring SBEs' access to credit in regions where banks have no presence.
To mitigate the Fund's risks and train SBEs in loan management skills the Fund implemented phased financing of project elements (on a tranche-by-tranche basis following a successful disbursement of the previous amount), free consultations in the course of development of business plans and implementation of the project.
The Fund's project financing and financial leasing services were the only way to implement projects, in particular industrial ones, f or SBEs in remote areas and small towns, for new participants of business support infrastructure and other SBEs with production projects on their hands, which experienced such challenges as insufficient collateral, STBs' high interest rates, low value of SBEs' assets and banks' unwillingness to fund start-up businesses.
As of October 1, 2007, on the back of larger republican budget allocations towards the Fund’s authorized capital increase for SBE lending purposes, the Fund had financed over 2,000 projects worth over 21,800.0 mln. KZT from its own resources through project financing and leasing, thus helping to retain and create over 20,000 jobs.
1,700 projects worth over 19,000.0 mln. KZT and more than 200 projects worth over 2,500.0 mln. KZT were financed within the project financing and financial leasing framework respectively .
Financial Leasing
In 2004, the Fund started its financial leasing programme. The aim of financing of the SBE financial leasing projects is to develop the country's new hi-tech and competitive industrial facilities, give SBEs real opportunities to purchase up-to-date equipment, new technologies, enhance output competitiveness and decrease operating costs.
The vitality of this kind of the Fund's services was reinforced by the fact that large leasing companies do not finance small start-up business projects. Leasing was a way to solve one of main challenges faced by small business enterprises, i.e. insufficiency or lack of collateral.
Project financing and financial leasing had a single borrower limit of up to 120,000 MCIs, an interest rate of 10% p.a. and a grace period for the principal of up to 12 months.
Kazakhstan Microcredit Development Programme
Microfinance is internationally recognized as one of major tools to alleviate poverty, improve the standard of living and enhance the prosperity.
Kazakhstan’s financial service market is now developing at a fast pace. At the same time, gaining access to credit remains a challenge for small business. It is particularly true for regions where entrepreneurs’ assets are the only collateral for financial institutions’ loans are of rather low market value compared to assets located in cities.
The Microcredit Programme facilitates the development of a third tier of the credit system, access of economically active population to funding, boosts employment and self-employment of population and enhances entrepreneurial initiatives and activity.
Before starting the Microcredit Programme the Fund had explored international microlending experiences in different countries and the ability to apply microfinance practices in Kazakhstan’s context and took into account recommendations of the UNDP and CGAP, a consultative group within the World Bank elaborating microfinance development recommendations.
The microcredit programme was implemented by the Fund in two areas.
1. Setting Up Microcredit Organizations with the Fund’s equity stake
By January 1, 2007, 28 MCOs, in which the Fund took an equity stake, were set up within the Programme with the Fund investing a total of 94.9 mln. KZT into their authorized capital.
2. Lending to Ongoing Microcredit Organizations
Within this programme, the Fund provides concessional financing to existing MCOs to replenish their credit resources. By January 1, 2007, the Fund had financed 174 projects worth over 5,500.0 mln. KZT within the microcredit sector development programme.
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Partners and Advisors under Kazakhstan Microcredit Development Programme United Nations Development Programme in Kazakhstan (UNDP in Kazakhstan); Consultative Group to Assist the Poor (CGAP, USA) ; Microfinance Centre (MFC, Warsaw); Central Asian Microfinance Alliance (CAMFA, Uzbekistan); Russian Microfinance Centre (RMC, Russia); Kazakhstan Credit Fund (KCF, Kazakhstan); Asian Credit Fund (ACF, Kazakhstan); Association of Microfinance Organizations of Kazakhstan (AMFOK). |
Guaranteeing SBE loans obtained from second-tier banks
The Fund provides guarantees under second-tier banks’ SBE loans and takes out insurance on the guarantees. It is a new product for Kazakhstan’s market.
The Fund’s guaranteeing mechanism implies insurance of credit risks, which lays the basis for building financial relations between a bank, an entrepreneur and an insurance company. The Fund and insurance companies enter into agreements to insure issued guarantees in order to mitigate risks associated with second-tier banks’ loans to small businesses.
At the initial stage of the guaranteeing programme the Fund faced challenges that had to do with the fact that the guaranteeing mechanism had virtually not been put in place in Kazakhstan, just like in all other CIS countries.
Such product as a guarantee for SBE loans is available only where second-tier banks are present, as the Fund provides guarantees for SBE projects that are financed by STBs. Furthermore, the Fund’s guarantees should be insured by insurance companies, which have yet to start handling risks of SBEs in remote areas. Thus, the use by SBEs of this product is challenging for remote areas and small towns.
Halyk Bank and Bank TuranAlem have developed and implemented banking products (Business-SuperLights and CREDITPRO, respectively) specifically for the Fund’s guarantee programme .
By now, a total of 39 SBE loans worth 900.0 mln. KZT have been granted by second-tier banks under the Fund’s guarantee.
STAGE IV
2008-2012
Implementation of the Strategy of Development of Kazakhstan till 2030, Kazakhstan's Strategy of Joining the World's Fifty Most Competitive Countries and the Strategy of Industrial and Innovative Development of Kazakhstan till 2015 implies economic diversification, technological breakthroughs and development of the entrepreneurial sector as the foundation of market relations and competitive economy.
The Fund is now the only state development institute used by the Kazakh government for pursuing small business support and development policies. With 10 years of existence under its belt, the Fund has developed a new small and medium business development concept this year, which is to be launched next year, in 2008.
The main goal of the new small and medium business support concept and policies is to promote enhanced competitiveness of small and medium business in Kazakhstan, its quality breakthrough and higher productivity and competitiveness.
During this period Damu Fund will have the following strategic goals:
Ensuring Availability of National Financing to All Creditworthy SMB Entities
The Fund plans to achieve the above-stated goal by addressing the following objectives :
- enhancing availability and prompt provision of credit to SMB entities by involving the institutional capacity of systemic second-tier banks and financial organizations in entrepreneurship financing;
- expanding the coverage of potential SMB borrowers and ensuring a reasonably even distribution of credit throughout the country;
- reducing the cost of credit for SMB entities.
The Fund will address the set objectives through conditional placement of funds from republican and local budgets, international financial organizations and other sources with second-tier banks and other organizations entitled to perform certain lending operations for subsequent onlending to SMB entities.
Facilitating Economic Diversification in the Area of Small and Medium Business
The Fund had developed a new Small and Medium Business Direct Financing Programme entitled “Damu-Koldau” and had it approved by the Fund’s Board of Directors on August 1, 2008.
This programme stipulates:
- clear-cut identification of priority sectors for SMB financing ;
- low interest rates – at a level of the refinancing rate (10.5%);
- using the bulk of resources towards expansion and upgrade of SMBs’ fixed assets.
“Damu-Koldau” Small and Medium Business Direct Financing Programme is expected to:
- improve the quality of the quantitative structure of SMB entities , i.e. there will be more small businesses incorporated as legal entities and more medium businesses due to expansion of a part of small businesses as a result of an increase in assets and staff;
- enhance the competitiveness and export capacity of SMBs;
- strengthen the role of SMBs in diversification of Kazakhstan’s economy;
- help create and retain jobs.
Enhancing Financial and Non-Financial Support to the Country’s Microfinance Sector
In order to develop the non-banking financial sector and in pursuance of the Address of the President of the Republic of Kazakhstan to the People «Growth of Welfare of Kazakhstan’s Citizens is the Primary Goal of State Policies» the Fund has developed and is implementing the Action Plan to Develop Microcredit Organizations for 2008-2012 aiming at f acilitating the quality development of the microfinance sector as a third tier of the country's credit system through financial and non-financial support to microcredit organizations ( hereinafter referred to as MCOs).
Development of SMB Business Environment Infrastructure in Regions through Establishment of Business Development Centres
The Fund plans to achieve the above-stated goal by addressing the following objectives :
- ensuring the development of a set of focused high-quality consulting, research and information services for SMB entities in all regions of Kazakhstan , which would allow the conditions of organizing and doing business to be eased and related operating costs to be reduced;
- ensuring the development of entrepreneurship support infrastructure and related information and consulting technologies due to all support infrastructure entities joining their efforts and standardizing their services as well as due to centralized borrowing and replication of successful international experience in all regions of Kazakhstan.
