Empowering Micro, Small and Medium-Sized Enterprises in Kazakhstan

Many small businesses in Kazakhstan struggle to get basic financing. Photo: ADB
Many small businesses in Kazakhstan struggle to get basic financing. Photo: ADB

By Pamela Bracey, Elmira Izmaganova

Micro, Small and Medium-Sized Enterprises in Kazakhstan need increased financing coupled with targeted, innovative solutions to continue driving the economy and creating jobs.

 Microfinance organizations play a crucial role in supporting entrepreneurs who are underserved by banks, especially in rural and remote areas. This is particularly true in Kazakhstan, where vast territory and the remoteness of its provinces mean that in some cases microfinance organizations are the only providers of financial services.

Limited access to finance remains a key issue hampering the growth of these businesses. In Kazakhstan, only 17.2% of micro, small and medium-sized enterprises have an outstanding loan or a credit line, while in comparable economies of Europe and Central Asia the average indicator is 37.5%. This may imply that there is a gap between the potential demand and actual supply of financing.

At the same time, the rate of loan rejection by banks of micro, small and medium-sized enterprises is high at 22.5%, especially amongst small businesses (36.6%), while the average rejection rate by financial institutions in the provinces is only 9.3%.

Banks are more focused on serving medium-sized businesses. When applying for a loan, entrepreneurs must comply with the strict requirements of banks on collateral, financial reporting, and creditworthiness. The smaller the business, the less prepared it is to meet such requirements as it is less formalized and capitalized and has poorer financial accounting discipline. In addition, assets in remote provinces that can be used as collateral typically have low market values.

Due to these reasons, micro, small and medium-sized enterprises often opt for quick loans from microfinance organizations, which although are more expensive, do not require collateral and confirmation of business profitability. This is evidenced by the growth of microfinance organization portfolios, while non-performing loans of the sector have been low. The National Bank of Kazakhstan indicates access to finance ratio at 3.3 commercial bank branches per 100,000 adults, with microfinance organizations the ratio increases to 23.

 As micro, small and medium-sized enterprises employ 36.2% of Kazakhstan’s economically active population, they play a significant role in job creation. While these businesses drive the country’s economic growth and diversification, many of them, especially those owned or led by women, find it hard to access long-term finance facing higher collateral requirements and loan rejection rates. Women in Kazakhstan, particularly residing in rural areas, are overly represented in self-employed and informal sectors, such as agriculture, trade and services. For many of them, owning a small business might be the only source of income.

The rate of loan rejection by banks of micro, small and medium-sized enterprises is high.

In 2019, women-led micro, small and medium-sized enterprises in Kazakhstan accounted for 42% of all enterprises. Women entrepreneurs in rural areas represent a typical client profile of microfinance organizations. It comes as no surprise that women borrowers account for 63.6% of the portfolios of larger microfinance organizations engaged in classic microlending for business. In 2021, Kazakhstan was ranked 80th out of 156 countries in the World Economic Forum’s gender index.  Microfinance organizations support gender equality by offering a range of financial services and training tailored to women’s needs and circumstances, to help them build financial and business skills as well as facilitate their access to finance.

Financial inclusion in Kazakhstan has accelerated over the past few years mainly due to a large share of mobile phone users, expansion of internet coverage and digital financial services. However, access to financial services is not evenly distributed among different groups of the population, depending on their location, employment status, income levels etc.  The microfinance organizations in Kazakhstan have a great potential in servicing more micro, small and medium-sized enterprises, including the informal sector and rural areas.

Many of them need affordable funding, the introduction of technologies like scoring software and mobile applications in the development of modern digital services, and the professional training of personnel, such as credit risk assessment for loan officers and financial literacy for clients. The growth of maturity, professionalism, sustainable development of participants in the microfinance sector will consequently lead to their greater contribution to financial services for micro, small and medium-sized enterprises.

Since 2021 microfinance organizations are permitted to offer new services and to raise funds by placing bonds on the organized stock exchange. The expansion of the range of services coupled with access to cheaper funding, will enable them to realize their huge potential to address the issue of access to finance.

A decrease in the sector’s concentration while increasing its size is possible by attracting more players. This can be facilitated by the further development of legislation and regulation, the creation of attractive conditions for investors to the sector, increased market transparency, and higher performance standards.

These improvements will let entrepreneurs get access to finance, generate income for their families, and play an important role in the development of their villages, provinces, and the whole country.