Development priorities: small to medium-sized enterprise and agriculture

AT THE CENTER OF ATTENTION

GULNARA SHAMSHIEVA: The priority focus areas of development are small and medium business, agriculture

The General Manager of “Bai-Tushum and Partners” Microfinance Bank GULNARA SHAMSHIEVA told about the unique experience of transforming an NGO into microfinance institution, and further on into one of the largest microfinance banks of Kyrgyzstan, with a clear vision of the future, orientation on small and medium businesses, as well as a successful corporate governance experience.

THE FIRST IN KYRGYZSTAN

– Can you give an example of such experience of transforming microfinance institution into bank?

– This is the third case on the CIS territory. In Mongolia, one of the banks was established in a similar way. The idea of creating a large microfinance bank from “Bai-Tushum and Partners” appeared a long time ago. But in the 2000’s it was a very challenging task to accomplish given the previous policy pursued by the state.

As a reminder, MFIs are entitled to disburse loans in the national currency, though they receive funds in foreign currency. That’s why we must exchange currency in commercial banks. Following the unrest in April 2010, microfinance institutions were about to lose their funds due to the situation with “AsiaUniversalBank”. At that time we were really facing a serious risk. As a result we decided to obtain a banking license.

– Have you considered the possibility of purchasing one of the local operating institutions or bankrupt banks?

– Yes. We have evaluated all the risks. However, we have decided to follow a revolutionary way and enter the market with clean reputation rather than assuming the image risks of operating or bankrupt banks.

– What challenges did you have to overcome on the way of transformation?

– The main point is that we’ve been the first microfinance institution in Central Asia to be transformed into the bank. We are glad that we succeeded in building constructive dialogue with the National Bank. I am certain that it will be easier for other microfinance companies to obtain banking licenses. It was more difficult to prepare the company’s staff to changes in the activities. First of all, we expanded the range of services, and the experts have had to learn a lot. Second, over a year the corporate culture has been changing. Third, the staff had to get used to working to with each other, as a year ago we had 400 employees, and now we have 575.

– What position have you occupied in the national banking sector?

– Prior to the transformation into bank, we were among the three largest microfinance institutions. But we cooperated with the five largest Kyrgyz banks, which could provide us services subject to our scope of operations. Now “Bai-Tushum” microfinance bank in the banking sector occupies the fifth place in terms of its capital, and the sixth place in terms of assets, loan portfolio and attracted funds.

– Please tell us about your product range? Do you offer such service as mortgage?

– So far we offer a standard complex of services: loans, deposits and settlement and cash service. As for loans, we offer funding for the development of agriculture, trade and services, we disburse consumer loans, and provide mortgage.

With KfW German Development Bank, which cooperates with the Ministry of Finance and provides preferential credit line, we have built a partnership in housing lending program for the population with low income. We hope that next year the population in regions and new housing developments will be able to purchase or reconstruct houses with more beneficial rates. Other than “Bai-Tushum and Partners” bank, two more financial institutions participated in the program. Commercial institutions assume all the risks. The expected interest rate is 19 percent. We understand that it is expensive. But the loans going through the Ministry of Finance are bound to the inflation level, which in Kyrgyzstan on average constitutes 10 percent annually.

One of the main focus areas of development for our services is to provide loans in foreign currency. Also we are going to introduce new leasing programs.

– You usually work with regions. Do you plan to somehow change this policy?

– No. We will continue expanding our presence in the regions. It is important that in order to optimize administrative costs, we are going to introduce Branch Less Network – a system enabling to work without additional offices opened. The bank’s specialists will be able to travel to remote regions with special equipment (something like POS-terminals) and effectuate all the operations.

We give special attention to introducing up-to-date service delivery channels: other than Branch Less Network, it encompasses banking cards, internet banking. Such plans are already in the process of implementation. I hope that the next year, the services are available for our clients. As for the introduction of mobile banking, we are going to start negotiations with mobile operators in the nearest future.

– Surely you were provided additional investments when transforming the company into bank. What was the exact purpose and what was the amount?

– Indeed, in 2011 we have increased the charter capital up to KGS 615 mln. through the participation of new international investors – Bamboo Finance and responsAbility (Global Microfinance Fund) .

– How many branches and offices do you currently have?

– The bank has the total of 62 offices functioning, but after the banking license has been obtained, all offices have to be re-registered. Thus, currently we have re-registered 7 branches and 27 cash outlets are in the process of registration. Additionally, we are going to open 17 new offices.

The Head office, city branch and four offices are located in Bishkek – at the major markets of our capital: “Dordoi”, Alamedin, Osh and Orto-Sai markets. Other offices are presented in all the regions of Kyrgyzstan, other than Chon-Alai and Toguz-Toro. But the most remote areas of our republic will be reached by our specialists having up-to-date delivery channels.

LENDING AS A BUSINESS BASIS

– Other than cash and settlement service, at what levels was your cooperation with banks?

– Prior to obtaining license we were simply a corporate client. But an important area of cooperation was hedging operations aimed at “turning US dollars into Kyrgyz soms”, as MFIs, another reminder, are entitled to disburse loans only in the national currency. This product has been very profitable for the banking sector for the past eight years.

– Passive lending of business is exactly the reason why domestic banks are criticized. They are quite successful in exchange operations, as well as risk-free trade with state securities. Many people note that that is the reason why MFIs have assumed lending to SME as a main function. Might it be that you “relax” after becoming a bank?

– No. Even in our name we have retained the word “microfinance”. Vice-versa, we will only expand credit range and develop up-to-date financial services. Having a base of 30 thousand clients, we are able to accomplish it. The support of small and medium business will become a priority focus area, as this sector is fundamental for Kyrgyz economy.

Also we will continue to actively fund agriculture and processing industry. One more important area of our development is leasing, which is crucial for domestic entrepreneurs. We are certain that we will be carrying out lending activities even more efficiently and under more attractive rates, as we provide borrowed funds both in Kyrgyz soms and in US dollars.

– As for interest rates … It’s not a secret that microfinance institutions provide loans under the rates that are significantly higher than banks. How your policy is going to change?

– First of all we would like to note that “Bai-Tushum and Partners” relies on market principles. That is why interest rates depend on the situation in financial sector and macroeconomic situation. Exchange of dollars into soms for one year in commercial banks costs about 10-11 percent. Besides that, we pay 9 percent to our creditors due to country risks. As a result, only credit resources for a microfinance company cost 19 percent. Plus administrative costs.

Thanks to the efficient corporate governance, which we built for many years (and are very proud of it) in our bank, we have an excellent level of operating costs– 10-12 percent, although in other institutions it exceeds 20 percent. As a result the margin of “Bai-Tushum and Partners” bank constitutes one percent. But we operate for a rather long time in the market which is why we have learned how to remain profitable.

Interest rates are going to decrease, as we won’t be dependent on banks and spending money to exchange currencies. Besides that, we will be able to extend loans in US dollars.

– How twill he ability to take deposits affect interest rates?

– Our company is the only one and the first among microfinance institutions to become able to take deposits. Given that “Bai-Tushum and Partners” became a participant of deposit protection system when we obtained banking license, it will result in the increased trust in us. That is why we, certainly, expect the deposit base to grow. Of course, decrease interest rates of our loans.

I understand that the matter of cost of credit resources in Kyrgyzstan is very essential. This is the problem of financial literacy of population, political speculations, and regulator’s policy. Microfinance organizations sector needs in legislative regulation and it should be noted that the National Bank has already started this work. The legislation of the Kyrgyz republic concerning the microfinance sector is too liberal, this is the reason why so many money lenders have too high rates. This cannot be allowed.

 Success story

“Bai-Tushum and Partners” was established in 2000 by ACDI/VOCA, an American international development organization with the support of US Department of Agriculture, the United States Agency for International Development (USAID) and CARITAS, Swiss Agency for Support and Cooperation. 12 years of operation resulted in the organization becoming one of the largest microfinance institutions in the Kyrgyz Republic with the total assets of USD 100 mln. Nowadays “Bai-Tushum and Partners” Microfinance Bank is among the six largest banks of the Kyrgyz Republic that services more than 30 thousand clients.

Interview by Dinara BORBUGULOVA.