Kyrgyzstan: Microcredit Lending Encounters Success in Central Asia

Though much maligned of late for backsliding on democratization, Kyrgyzstan has developed into an economic innovator in Central Asia. The country is presently a leader in extending microcredits to would-be entrepreneurs.

With about 40 percent of Kyrgyzstan's roughly 5 million people living either under or near the poverty line, the country is considered a prime area for microcredits, in which loans of usually no more than several hundred dollars are extended to small groups, many of which seek to launch small businesses.

International financial organizations and non-profit groups, such as USAID, the European Bank for Reconstruction and Development and MercyCorps, instituted microcredit lending practices in Kyrgyzstan in the mid-1990s, shortly after it had gained independence and while the country still enjoyed a reputation as an "island of democracy" in Central Asia. [For background see the Eurasia Insight archive].

Since then, the gloss has come off the country's democratic image. In its latest annual report on democratization, titled Freedom of the World 2008, the international watchdog group Freedom House expressed particular disappointment with Kyrgyzstan, writing that the country had experienced an "excessive strengthening of executive power and a reduction in political pluralism." If President Kurmanbek Bakiyev's administration did not drastically improve its performance, the country risked falling in the "not-free" category from its present "partly free" designation.

Despite the political troubles, the microcredit phenomenon in Kyrgyzstan continues to spread. The practice has proven so successful that for-profit entities are getting more involved. With over a decade long-track record in Kyrgyzstan, microcredit lending has stimulated economic activity while offering steady returns for lenders.

The experience of one local micro-lending organization, Mol Bulak Finance, underscores the growth potential of the sector. Mol Bulak began with a few thousand dollars of capital in 2005, and, since then, has seen its client list grow exponentially. As of April, it had 3,000 active clients. The lender's chief executive officer, Babur Tolbayev, projects that the company's clientèle could reach 15,000 within a year.

Over 90 percent of Mol Bulak's clients are women. Conventional wisdom holds that women with families tend to be more socially responsible for paying off their loans and usually request smaller sums. Mol Bulak has instituted simple procedures that enable successful applicants to obtain money within one to three days after submitting applications.

"For most who need a loan, there is nothing [to offer as collateral], and commercial banks ignore such clients," Tolbayev said. The main guarantee of microcredits is social pressure, as most loans are given to groups of about four- to-six people, under terms that make each member of the group responsible for repaying the entire sum. The average credit is $500-600 per person, lent at 3 percent monthly interest, usually with the expectation that the loan will be repaid within eight months.

Credits are mostly used to generate income activity, merchandising, and launch small businesses. About 40 percent of clients diversify their business depending on the season. Microcreditors also provide basic financial advice on cash management and the structure of loans. Mol Bulak and other micro-lenders hope to build a consultancy component in the future that can offer clients more comprehensive information on business administration.

Some microcreditors have already launched outreach operations, striving to drum up new business. They tend to tailor their presentations to each particular region. In Issyk-Kul, for example, local loan recipients are encouraged to grow fruits, while in Naryn Oblast they are directed to invest in cattle.

Tolbayev believes that the success of microcredit lending to date is spurring a virtuous economic and social cycle: people seeking microcredits consolidate into groups and that has the effect of building stronger communities. As social bonds grow, clients experience stronger pressure to repay credits. And disciplined clients are able to receive additional credits on easier terms, and thus can expand economic opportunities. Tolbayev indicated that only a small percentage of loans end up in default.

If it continues to grow as projected, microcrediting could help stem an undesirable trend in which the Kyrgyz economy has become increasingly dependent on remittances sent back to the country by labor migrants. [For background see the Eurasia Insight archive].

So far, microcredit lending has proven much more popular in northern Kyrgyzstan than in southern areas of the country. The south has a large concentration of ethnic Uzbeks, who tend to be more religiously pious than the Kyrgyz. "It is more difficult to persuade a [believer in Islam] to pay interest rates", says one employee from Mol Bulak. But the employee added that religious and socially conservative communities are better bets to repay loans.

While microcredits have experienced success in other regions of the formerly Communist world, such as in the South Caucasus and the Balkans, Kyrgyzstan's success remains an outlier in Central Asia. Kazakhstan's rapid rise to prosperity, driven by its energy exports, has allowed the country to largely bypass the microcredit phase of development. Turkmenistan and Uzbekistan, which are ruled by some of the most repressive governments on earth, do not offer a sound enough legal foundation to make micro-lending feasible. Only in Tajikistan do conditions seem ripe for an expansion of micro-lending. Mol Bulak's Tolbayev indicated that he hopes to expand his group's activity into Tajikistan soon.