Action Programme

of Small Entrepreneurship Development Fund JSC

t o Develop Microcredit Organizations in the Republic of Kazakhstan

for 2008 – 2012

Programme Profile

Programme Title	Action Programme of Small Entrepreneurship Development Fund JSC to Develop Microcredit Organizations for 2008-2012
Programme Development Basis	Financial Sector Development Concept of the Republic of Kazakhstan approved by the Government Resolution of the Republic of Kazakhstan # 1284 dated December 25, 2006 Strategy of Development of Kazakhstan till 2030, Kazakhstan's Strategy of Joining the World's Fifty Most Competitive Countries, 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» dated February 6, 2008
Developing Entity	Small Entrepreneurship Development Fund JSC
Programme Goal	Facilitating qualitative development of the microfinance sector as a third tier of the country's credit system through financial and non-financial support to MCOs
Programme Objectives	- enhanced access of ongoing MCOs to affordable loans on a competitive basis; - assisting in setting the stage for improvement of the MCOs’ competitive environment by making a system of incentives for MCOs to improve the quality and transparency of their operations a criterion of competitive selection. - provision of technical support to MCOs (software); - improvement of microcredit market data collection and analysis; - development and implementation of microcredit standards; - development of MCO s' performance assessment technology and parameters; - training and enhancing the skills of microcredit system actors.
Implementation Period	Years 2008 – 2012
Funding Amounts and Sources .	2008 – 5,1 bln. KZT from Fund’s own resources. 2009 – 6 bln. KZT 2010 – 7 bln. KZT 2011 – 8 bln. KZT from annual republican budget allocations for specified purposes and other sources not prohibited by the laws of the Republic of Kazakhstan 2012 – 9.5 bln. KZT from the Fund’s resources subject to repayment.
Expected Outcomes	Implementation of this Programme will have the following economic outcomes: - the Fund will meet over 10% of MCOs’ funding needs each year from 2008 to 2012; - the number of clients gaining access to financing will grow, with at least 287,000 microcredits to be provided as a result of implementation of this Programme alone. social outcomes: - given that a typical MCO customer will be a business-minded individual, at least 140,000 jobs will be created and maintained. institutional strengthening of the microcredit sector through: - IT development in microcredit organizations; - training programs; - implementation of up-to-date MCO performance standards. Thus, implementation of this Programme shall ensure the emergence of a stable and sustainable microcredit system covering all regions of Kazakhstan, which will: - expand access of economically active population to funding; - help drive the income of the population up due to development of small and medium businesses, increase self-employment, create new jobs and promote the development of competition in the financial market.

Introduction

This Programme is set to continue government actions targeting institutional development of the microcredit system in the Republic of Kazakhstan for 2008-2012 and aims to identify priority activities of Small Entrepreneurship Development Fund JSC (hereinafter referred to as the Fund) in support ing and develop ing the country’s microfinance sector as a third tier of the financial system and to elaborate appropriate actions to implement them.

Microcredit development priorities set out herein have been identified in accordance with the Law of the Republic of Kazakhstan # 392-II dated March 6, 2003 “On Microcredit Organizations ”, Financial Sector Development Concept of the Republic of Kazakhstan approved by the Government Resolution of the Republic of Kazakhstan # 1284 dated 25 December 2006, Strategy of Development of Kazakhstan till 2030, Kazakhstan's Strategy of Joining the World's Fifty Most Competitive Countries and 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» dated 6 February 2008.

Microlending is an effective tool to raise the standards of living through provision of funding to low-income population, small and start-up businesses, i.e. a part of customers with no access to bank services. Just like in transit economies, the priority goal of microlending in Kazakhstan shall be to support entrepreneurial initiatives of economically active population rather than to fight poverty.

Therefore , it is important to raise the competitiveness of Kazakhstan’s microcredit sector by setting the stage for its functioning, improving its stability, expanding the coverage of small businesses and population with financial services.

Section 1. Current Status and Problems of Microcredit Organizations in the Republic of Kazakhstan

1.1. Analysis of External Environment

The Kazakh microcredit system has emerged quite recently, in the mid-1990ies, with n on-profit organization s set up within international projects and transformed into public funds being the first microfinance institution s . They provided microcredits to certain target groups within a limited area using international donors’ sources and targeted poverty reduction and employment support for the population of project sites.

The Law of the Republic of Kazakhstan dated March 6, 2003 “On Microcredit Organizations ” was adopted to develop small business and shift microfinance institutions away from the shadow economy . Its main goal was to provide funding to persons wishing to engage in entrepreneurship, as the first version of the Law stipulated that microcredit borrowers were to be small business entities. By now, these restrictive requirements have been statutorily removed.

According to the RK Statistics Agency 1,086 microcredit organizations (hereinafter referred to as MCOs) we re registered as at 01 January 2008 including 948 (87,3%) ongoing and 497 (45,8%) active ones. The number of registered MCOs has almost doubled, which demonstrates an expanding role of MCOs, understanding of greater microcredit opportunities both for businesses and population including low-income groups. Geographic distribution of microcredit market actors is uneven, with the majority concentrated in South Kazakhstan Oblast ( 233, or 22% of all MCOs ) , 147 (14%) and 98 (9%) registered in Almaty city and Karaganda Oblast respectively. The smallest number is registered in Atyrau ( 16, or 1% of all MCOs) and Mangistau Oblasts (23, or 2%). This trend has to do with the population density, level of entrepreneurship activity and demand for microcredits in the region.

Analysis of MCOs' activities reveals the following development trends:

1) individuals are a main target segment for MCOs (accounting for 97% in 2004, 96% in 2005 , 96.4% in 2006 and 98.9% in the third quarter of 2007 of all microcredits granted) .

2) the goal of microcredits is to develop entrepreneurship: in 2003 and 2004 microcredits were obtained by individuals primarily for entrepreneurship purposes, whereas over the past 3 years the microcredit pattern has changed as follows :

retail microcredit s for entrepreneurship purposes: 72.4% in 2003 , 69.7% in 2004, 51% in 2005 and 64.5% in 2006;

retail microcredit s for consumer purposes: 19.3% in 2003, 27.2% in 2004, 43.1% in 2005 and 31.3% in 2006;

the share of legal entities taking out microcredits primarily for replenishing working capital never exceeded 10% of all microcredits, with this share steadily going down and dropping to 2.1% in the third quarter of 2007.

3) an average microcredit amount of 74.3 K KZT in 2004, 70.5 K KZT in 2005 and 108.8 K KZT in 2006 has to do with a large share of microcredits for consumer purposes , with an average amount of a retail microcredit being 72.1 K KZT in 2004, 66.6 K KZT in 2005 and 105.5 K KZT in 2006 and that of a corporate microcredit being 1,519 K KZT, 1,201 K KZT and 845.6 K KZT respectively.

4) Generally, MCOs provide secured loans, over a half of which are collateralized by consumer goods and valuables. From 2004 to 2006 t he share of real estate as collateral remained at a level of 6%. The share of unsecured loans was 2% in 2004, 5% in 2005 and 8.6% in 2006, whereas the share of guarantees or sureties provided as collateral was 21.5% in 2004, 16.2% in 2005 and 20.6% in 2006. An increase in the share of unsecured loans and use of guarantees and sureties is indirect evidence of development of group microcredits.

5) MCOs are profit able, having posted a cumulative loss in 2003 only, with MCOs' profitability that year being minus 5.2%, 5.8% in 2004 and 6.8% in 2005. A steady pattern appears to be prevailing here, with over 60% profitable and about 30 to 40% unprofitable MCOs.

6) consistent capitalization of MCOs has been going on since 2004, with the share of MCOs' proprietary capital in total resources going up from 15% in 2004 to 39% in 2006.

7) microcredits are peculiar in that they tend to be small and, accordingly, bear high interest. An average interest rate for microcredits depends on their tenor and purpose and ranges from 30 to 40% p.a. and more.

According to the Global Association of Microfinance Institutions microfinance organizations account for 20-40% of the total portfolio in emerging markets, whereas in Kazakhstan they account for 1% of the total loan portfolio at the moment.

What is peculiar about the development of MCOs is that they have established a professional public organization, with 57 MCOs forming the Association of Microfinance Organizations of Kazakhstan (AMFOK), which was established in 2004.

AMFOK experts estimate the total microcredit sector investments in 2006 as follows: 98% – international funding, 2% – domestic funding sources (including the Fund, second-tier banks, Fund for Financial Support of Agriculture , the latter being a part of KAZAGRO National Holding JSC (hereinafter referred to as the FFSA )) . Thus, Kazakh MCOs are primarily funded from international sources (international financial institutions, quasi-commercial capital suppliers). A majority of investments is provided to mature and profitable low-risk MCOs with a vast operating experience.

According to the RK Statistics Agency total loans raised by MCOs exceeded 23 bln. KZT in 2007, of which:

- 9% (2 bln. KZT) came from the Fund ,

- 40% (9 bln. KZT) came from STBs,

- 46% (10.5 bln. KZT) came from non-banking organizations ; and

- 2% were MCOs ' own resources.

In order to support the MCO sector and impact on the interest rate for the end borrower the Fund needs to provide at least 25%, or 6 bln. KZT a year (without taking into account capital -raising growth ) . Analysis of international MCO funding experience suggests that the government’s supply of at least 10% of all funds raised enables efficient government microcredit sector support.

Findings of a comparative microfinance sector analysis in Central Asia made back in 2006 by the Consultative Group to Assist the Poor (CGAP-World Bank) demonstrate low efficiency of Kazakh MCOs compared to those from other Central Asian countries. Kazakh MCOs serve the smallest number of borrowers and have a low coverage of population, whereas their operating costs are among the highest in the region. Thus, an MCO serves an average of 47 clients in Kazakhstan compared to 251 in Kyrgyzstan, 771 in Tajikistan and 2,428 in Uzbekistan.

Many challenges preventing the microcredit sector from qualitative development remain unresolved to a large extent , for example :

- Lack and high cost of borrowing for MCOs;

- Insufficiency of MCOs' own resources;

- Lack of qualified staff;

- Lack of methodologies and training programs for the microcredit system actors;

- Poor technical facilities;

- Poor community awareness of microcredit opportunities and conditions.

Therefore, in his recent Address «Growth of Welfare of Kazakhstan’s Citizens is the Primary Goal of State Policies» the President of Kazakhstan emphasized a need to further support MCOs including using the government funds towards this end and focused on measures to make microcredit s accessible both in order to address employment problems and to support citizens’ entrepreneurship initiatives.

These factors necessitate development of a new action plan for further development of the microcredit system in the Republic of Kazakhstan.

1.2. Analysis of Internal Environment

The Accelerated Action Plan to Develop Small and Medium Business in the Republic of Kazakhstan for 2005-2007 approved by RK Government Resolution # 450 dated 12 May 2005 and Government Resolution # 210 dated 05 March 2005 «On a N etwork Schedule of Implementation of the National Action Plan to Enforce the Address of the President to the People of Kazakhstan dated February 18, 2005» laid the basis for adopting the Fund Development Concept for 2005-2007 (approved by RK Government Resolution # 514 dated 26 May 2005) and the Action Plan to Implement the Fund Development Concept for 2005-2007 (approved by RK Government Resolution # 862 dated 22 August 2005), which provided for allocation of 11.0 bln. KZT to the Fund from the republican budget towards development of the microcredit system in 2005-2007.

These resources were disbursed by the Fund through its Microcredit System Development Programme. This Programme was implemented by the Fund in the following areas:

1. Setting up MCOs with the Fund 's stake.

As at 01 January 2008, 28 MCOs, in which the Fund took a stake, were set up as a part of implementation of the Programme. The Fund’s invested a total of 94.9 mln. KZT into their authorized capitals. In 2007, the Fund did not take stakes in MCOs due to lack of respective requests .

2. Lending to Ongoing MCOs.

By January 1, 2008, the Fund had financed 199 projects totalling 6,051.83 M KZT including one hundred 1,963.07 M KZT worth projects in 2007 under the Microcredit Development Programme.

Thus, the Fund h as financed 199 MCOs for a total amount of 6,051.83 bln. KZT within the Microcredit System Development Programme, thus covering 40.04% of all active MCOs in Kazakhstan and providing a significant contribution to financial support for MCOs.

As demonstrated by the Microfinance Information Exchange’s report entitled “Microfinance Institutions in Central Asia: Comparative Analysis’ 2005” one MCO in Kazakhstan has an average of 47 customers, which prevents this sector from earning profits and developing further . Therefore, the Fund will divert from its practice of establishing new MCOs and taking a stake in their authorized capital. It takes several years for new MCOs to reach a break-even point and, as demonstrated by practice, the Fund 's involvement in to the establishment of a number of MCOs is inefficient. Furthermore, being an implementer of the Concept of Microcredit Development for Agricultural Producers in Kazakhstan, FFSA works to establish new MCOs with the FFSA’s stake in the countryside.

Section 2. Programme Goal and Objectives

The main goal of the Programme is to facilitate qualitative development of the microfinance sector as a third tier of the country's credit system through financial and non-financial support to MCOs .

The Fund plans to achieve the above-stated goal by addressing the following objectives:

- enhanced access of ongoing MCOs to affordable loans on a competitive basis;

- assisting in setting the stage for improvement of the MCOs’ competitive environment by making a system of incentives for MCOs to improve the quality and transparency of their operations a criterion of competitive selection.

- provision of technical support to MCOs (software);

- improvement of microcredit market data collection and analysis;

- development and implementation of microcredit standards;

- development of MCO performance assessment technology and parameters;

- training and enhancing the skills of microcredit system actors.

Section 3. Programme Implementation Areas and Mechanism

The following support will be provided to MCOs:

3.1. Financial support;

3.2. Non-financial support.

3.1. Financial support to MCOs

Financial support will be provided through loans to be granted to active MCOs on a competitive basis, for which purpose the Fund will devise an appropriate funding mechanism.

It is planned to increase lending to existing MCOs in order to develop competition in the microcredit market and expand coverage of domestic businesses with funding .

Based on MCO s' fund-raising growth from 2005 to 2007, the growth trend will look as follows:

Years	2005 actual	2006 actual	2007 estimated	2008 projected	2009 projected	2010 projected	2011 projected	2012 projected
Funds raised by MCOs in RK, in bln. KZT	3.7	9.3	25	44.7	57.5	70.2	82.9	95.6
Including funds raised from the Fund, in bln. KZT	1.4	2.5	2

The Fund's average market share must exceed 10%. Based on this assumption, the following MCO funding is projected:

Years	2008	2009	2010	2011	2012
Fund’s Lending, in bln. KZT	5.1 ( undisbursed remainder )	6	7	8	9.5

Loans to active MCOs shall be provided on a competitive basis, be repayable at specified maturity, bear interest and be collateralized. The main competitive selection criteria to be applied in review of applications shall be as follows:

- obligation to limit the end interest rate;

- number of provided microcredits;

- presence of dedicated software, strategic development plans, credit analysis techniques, etc.;

- average weighted amount of provided microcredits;

- average interest rate for provided microcredits;

- MCO's loan portfolio at the reporting date;

- share of MCO's active portfolio in its total loan portfolio;

- MCO’s current financial situation;

- MCO's capitalization level;

- MCO's staff potential;

- how long MCO has been operating.

A pressing issue faced by the Fund is the support of regions with a poor financial infrastructure in remote areas and small towns (where second-tier banks are not present due to high operating costs).

In these circumstances, MCOs are the most mobile in terms of provision of funding to citizens and businesses including doing so in remote areas. Microcredit is aimed at funding entrepreneurs with no access to conventional bank loans. Thus, development of microcredit in regions with low presence of financial services will help boost entrepreneurship in depressed regions.

As at 01 January 2007, 80% of all registered MCOs were based in urban areas. This trend has to do with more developed entrepreneurship initiatives in cities and rural population's insufficient awareness of microcredit opportunities.

At the moment, the microcredit market has a number of ongoing MCO players with advanced governance systems, methodologies and credit processes as well as rolled-out branch networks in regions.

To encourage the above-named MCOs to expand their microcredit activities and open branches in regions with a poor financial infrastructure the presence of an MCO branch network will be included as an eligibility requirement for large MCOs’ admission to competition .

3.2. Non-Financial Support to MCOs

3.2.1. Improvement of Performance Data Collection and Analysis

All non-financial support tools will be applied in collaboration with he Association of Microfinance Organizations of Kazakhstan. At the moment there are no research materials on microfinance in Kazakhstan. As a rule, information provided by MCOs to statistics bodies is of generalized nature and does not take into account microcredit peculiarities. A number of actions need to be taken in order to form a single database of ongoing MCOs.

The Fund shall implement a developed reporting collection system, which will include information on MCOs the Fund lends money to. The reporting form will include MCOs' main growth indicators such as loan portfolio growth rates, growth of assets and revenues, number of clients and indicators allowing for assessment of MCOs' impact on the region's social parameters (income levels of micro-entrepreneurs, households (MCOs' ultimate borrower), development of the region's entrepreneurship level, poverty level, etc.). The reporting form will be developed on the basis of standards of the international microfinance portal (similar to MIX Market). MCO data will be included into a uniform database, which will provide the Fund with current information on MCOs' performance and help it carry out remote monitoring and assess the social impact of microcredit and the Fund's programs on development of entrepreneurship.

To improve MCOs' activity and ensure effective control on the part of the Fund software needs to be developed, which will combine operating accounts (bookkeeping) and the credit component analyzing, accounting for and monitoring loans.

Software should meet the following requirements:

- contain information on MCOs' lending operations (total amount and number of loans provided during the reporting period, number and amount of loans outstanding as at the end of the reporting period, average remaining receivables with respect to issued loans, overdue payments, remaining receivables with respect to overdue loans, loans written off during the reporting period, a report on the amount of time the payments are overdue and information on loan maturities, managers, etc.);

- have a capacity to generate reports on MCOs' operations in various formats on a monthly basis or otherwise;

- enable data consolidation and tracing of MCOs' development as well as control over the intended use of monies;

- be developed in line with international practices, which will allow users, MCO, to complete reporting forms in the global microfinance platform, MIX Market.

A uniform information system will enable high-quality real-time monitoring of MCOs' operations, tracing of MCOs' development trends, obtaining up-to-date information on the impact of the Fund's microcredit program on the sector as a whole and generation of required reports. Presence of software will be a condition for MCOs to borrow from the Fund, since MCOs will achieve higher efficiency and thus reduce costs if they invest into a high-quality information system and technologies. Finally, it will help decrease interest rates for borrowers.

The MIX Market platform customized for local conditions needs will allow MCOs to strengthen information exchange, raise additional funds, improve transparency and microcredit standards. As a whole, development and implementation of better reporting forms and software will have a positive impact on the sector development, ensuring a higher level of transparency and implementation of international standards of MCOs' activities.

3.2.2. Development and Implementation of Microcredit Standards

At the moment the country has no uniform financial reporting standards for microfinance institutions. Financial indicators, MCOs' performance assessment parameters are treated by market players in a different way.

As the microcredit sector keeps developing in Kazakhstan, analysis of MCOs' operations should be performed on the basis of main common standards, which will allow the implementation efficiency of microcredit programs to be assessed, performance of various organizations to be compared and indicators and factors to be classified .

To address this objective, efforts should be taken to:

- develop uniform performance standards for microfinance institutions based on international ones;

- prepare a glossary of standard microfinance terms, indicators and amendments;

- ensure its introduction within MCOs and distribution among market players;

- conduct training seminars for all MCOs borrowing from the Fund in order to reach uniform understanding of performance standards.

3.2.3. Development of MCOs' Performance Assessment Technology and Parameters

To improve the financial transparency of the sector and the MCO assessment quality the Fund will develop an MCO rating system in collaboration with the Association of Microfinance Organizations of Kazakhstan (AMFOK). This will call for development of MCOs' performance assessment technologies and parameters for rating purposes and development and implementation of a rating scale.

The fact that MCOs are audited and/or rated will enable raising additional funds, assessing their risks and development prospects and influencing the approach to evaluation of MCOs' collateral.

3.2.4. Training and Enhancement of Skills of Microcredit System Actors and Raising Awareness of Microcredit Opportunities

Lack of specialized microfinance training centres and a low human potential deter the sector development. At the moment, microfinance training is not provided anywhere in Kazakhstan and a lack of skills and experience prevents many MCOs from operating in a sustainable manner. To enhance the skills of microcredit system actors, the Fund plans to do as follow s .

Main microfinance centres, which train and consult on microcredit issues, improve skills and spread best microcredit practices among Central and Eastern European countries and the CIS are the Microfinance Centre (MFC, Warsaw), Russian Microfinance Centre (RMC, Russia), Central Asian Microfinance Alliance (CAMFA, Bishkek) (hereinafter referred to as Centres). The Centres hold (open and corporate) training courses for MCO staff and train trainers in microcredit techniques.

To set up the training component the Fund together with AMFOK shall select a trainer team to be trained in the aforementioned Centres and develop a number of training workshops for Kazakh MCOs with training elements to be mandatorily implemented within MCO borrowers.

Section 4. Expected Outcomes

The implementation of the Programme will set the stage for an independent and efficient MCO system with the mission to ensure continuous funding for entrepreneurs and expanded access of the community to financial resources.

Implementation of this Programme will have the following:

Economic outcomes:

- the Fund will meet over 10% of MCOs’ funding needs each year from 2008 to 2012;

- the number of clients gaining access to financing will grow, with at least 287,000 microcredits to be provided as a result of implementation of this Programme alone.

Social outcomes:

- given that a typical MCO customer will be a business-minded individual, at least 140,000 jobs will be created and maintained.

Institutional strengthening of the microcredit sector through:

- IT development in microcredit organizations;

- training programs;

- implementation of up-to-date performance standards of MCOs.

Thus, implementation of this Programme shall ensure the emergence of a stable and sustainable microcredit system covering all regions of Kazakhstan, which will:

- expand access of economically active population to funding;

- help drive the incomes of the population up due to development of small and medium businesses, increase self-employment, create new jobs and promote the development of competition in the financial market.

To address the objectives set herein, the Fund needs to take a number of priority steps such as:

- establishing, within the Fund, a unit to ensure implementation of the objectives set herein: arrangement of competitive lending to MCOs, application review, project monitoring, analysis of the microfinance sector;

- development of rules for financing of MCOs on a competitive basis.