Microfinance: bigger than Borat?

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Central Asia has it all: endless steppe, 7000-meter peaks, warm and hospitable people - and an exciting and very dynamic microfinance industry. Around the world, microfinance has been growing even faster than the Chinese economy, with a compound average annual growth rate of 13%. While that may be no mean achievement, try to imagine the growth of microfinance institutions in Central Asia: it's a whopping 43% per annum! Not bad for a region that – perhaps with the exception of Kazakhstan – is not yet known for robust economic development.

Commercial Banks have become very active players. The Kyrgyz Republic is host to the largest institutions in terms of outreach, or numbers of clients. In the Kyrgyz Republic, micro and small business loans make up 60% of the loan portfolios of some banks!

The micro, small and medium enterprise (MSME) portfolio of the leading banks in Kazakhstan amounts to almost $700 million. And in Tajikistan, the First Microfinance Bank (started by the Aga Khan Foundation) has undergone rapid growth.

Each country - the Kyrgyz Republic, Kazakhstan, and Tajikistan - now has an active industry association, and microfinance
has popped up on the radar screens of both regulators and policy makers
(I am happy to report that, at least in the three countries mentioned,
the effect has largely been benign, although there are some dark clouds
on the horizon). And, before I forget, Central Asian microfinance
institutions generally have excellent portfolio quality.

After the jump, my observations on challenges to microfinance following a recent trip to the region.

Our little group, comprised of representatives from the Central Asian Microfinance Center (a joint venture with the Microfinance Centre for Eastern Europe and the NIS), the Microfinance Information Exchange (MIX), and CGAP, had an opportunity to meet with almost 200 stakeholders and microfinance players in the Kyrgyz Republic, Kazakhstan, and Tajikistan.

What are the challenges we witnessed?

  • Costs: Clients are remote, and Central Asian MFIs have some of the highest costs (and consequently lowest efficiency ratios) in the world.
  • Size: Despite rapid growth of the industry, many organizations are tiny and need to consolidate. That's a difficult order in an environment dominated by NGOs and cooperatives.
  • Systems: Like in many other regions, MFIs in Central Asia suffer from inadequate MIS and banking software.

Still, the overall picture is bright: Microfinance in Central Asia has made a quantum leap during the past few years, and I dare to predict further dynamic development.

If I managed to rouse your curiosity, I suggest that you take a look at the MIX's excellent benchmarking report on microfinance in Central Asia.

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