Microenterprise in Kazakstan: Starting Out

by Ben Steinberg, Lilah Bagautdinova and Judith Kaufman & photo courtesy of ACDI/VOCA

In the fall of 1996 the Kazakstan Community Loan Fund (KCLF), a new USAID and Soros Foundation funded microenterprise program manged by ACDI/VOCA, held its first information meeting in Taldykorgan, Kazakstan. Over 50 people interested in learning about the possibility of starting or expanding their family-owned business through our small lending program attended the discussion. The lively back and forth discussion ended when the sun set and not even the dim flashlight beam provided by a Peace Corps Volunteer could illuminate the notes or the chalkboard any longer. Taldykorgan's energy crisis meant that this city of 120,000 people had no electricity, despite the chilly winter fast approaching.

All the main industries in Taldykorgan have shut down, including an automobile battery plant and four large sugar beet processing plants. Earlier this year, the Taldykorgan oblast was incorporated into the Almaty oblast, further downgrading the status and resources of the city. These difficulties have made it even harder for residents and businesses to pay their utility bills, resulting in prolonged power, heating and gas outages. During winter's long nights, Taldykorgan becomes a city of kerosene lamps and candle light.

The downward spiral of the economy as industry after industry closed in Taldykorgan has resulted in major constraints on the growth of small business. However, the plant closures and small salaries have pushed some of the most skilled, capable and well educated people to open small businesses. It is precisely under these conditions that microenterprise programs thrive.

People take microlending programs extremely seriously, in part because they realize that they are living without a social safety net and they have no other alternatives. Participants have a great determination to make their businesses succeed. "I want to be independent and free from corruption," said one woman who runs a small hairdressing stand. "In my last job [in Soviet times], I was more secure, but on the other hand it had its limits. Now, the harder I work and the more clients I have, the more I will be paid. This makes me feel that I can reach my full potential. We never tried to realize our full capacities in the old regime." The fact that family businesses can be passed on to the next generations is also highly motivating.

The Constraints: Policy Environment and Regulation

Although the KCLF's first business loan groups formed in March 1996, until recently Kazakstani law and banking regulations had prevented the KCLF from making its first loans. The Law on Banks and Banking Activity in the Republic of Kazakstan stipulates that lending organizations must obtain a license from the National Bank of Kazakstan before distributing funds. While many microenterprise programs worldwide do not comply with such requirements, the in-country program management for ACDI/VOCA decided that it was important to make the program legal and to acquire all the necessary permits and licenses.

As only one statute on the books was applicable to microlending, the KCLF's licsensing procedure required the drafting and passage of new regulations. The task of educating government officials and gaining their support became critical. The USAID mission helped to expedite this process, and with the coordination and cooperation of donors and local institutions, the neccesary legislation passed.

The KCLF also had to win governmental support to complete a three-step licensing procedure. Fortunately, key government officials at the National Bank of Kazakstan took an interest in the KCLF and cooperated with us to launch the program. Indeed, the whole process was remarkably quick; some commercial banks have waited for over three years to get just their license from the National Bank.

The Model and Methodology

The KCLF program targets poor women for its lending, seeking to develop small business like bakeries, hair salons, backyard poultry production and small scale trading. Like other microenterprise programs, the KCLF is based on peer lending, where between five to ten individual business owners form a loan group and act as their own credit review committee. The three pilot groups, representing 21 members, formed in March 1996, although the first loans were not issued until November 1997 due to the legal restrictions. Since the KCLF is a character-based lender, no collateral is required for loans and the business loan group guarantees repayment for each member with an approved business plan. As long as each member in the group is current on their loan repayments, the business owners are eligible to receive further credit. In Taldykorgan, where a secretary might earn $25 per month, these small, short-term loans of $100 to $3,000 are truly significant.

The KCLF does not provide low-interest or subsidized loans and the interest rate charged to KCLF borrowers approximates the rate assessed by commercial lending institutions. We feel that by charging market rates, the program becomes sustainable more quickly, better prepares its borrowers to graduate from our program and borrow from traditional lenders, and discourages businesses that are not serious or strong. Current businesses receiving loans include a catering service, a bakery and a vegetable stall at the local market.

Loan group members meet regularly on their own initiative to promote their business ideas and develop their skills. While the KCLF provides training in leadership skills and democratic decision making, the groups are encouraged to identify their own training needs and take advantage of local resources to address them. For example, one business loan group invited a successful kiosk owner to come to a group meeting to talk about business management, a meeting that lasted for five hours due to the interest of the participants. Borrowers are aware that for their business to be successful, they need to add to their business skills.

By working together in a close-knit group, borrowers have developed a better understanding of the fundamentals of democratic decision making and how democracy works on a small-scale. The lessons were grasped surprisingly quickly by members of a society that has a long history of hierarchical management. "I think one of the strongest aspects of the program is that it is contributing to the 'social capital' in the community. It helps to establish trusting relationships and networks, and it teaches decision-making skills to level the playing field for new entrepreneurs," adds Judith Kaufman, the US project director.

A side benefit is the identity that loan groups provide to members, something that has been missing for many people over the past few years. The collapse of many associations, jobs, work units and other entities that people belonged to in the old centralized system have left many people feeling isolated. Group members offer each other support and networking opportunities. One borrower commented, "I never would have considered lending money to other people in my business loan group, but now we are close, working together, and relying on each other. I trust these people with loans. They are like my family." As group members rely increasingly on each other and develop strong group identification, they have stronger incentives to make their loan repayments. We were pleased to hear that the groups named themselves "Hope," "Swallows" (a symbol that marks the return of spring), and "Zhetisu" ("the land of seven rivers," a sign of prosperity in a country of arid steppes).

As state industries collapse in Taldykorgan, private entrepreneurs have the opportunity to fill the gap. In order to get their businesses started, entrepreneurs need basic business management skills, some working capital and the encouragement to take a risk. By providing these elements, the KCLF is sowing the seeds for a strong small business environment in Taldykorgan.

Ben Steinberg is the former Country Representative for ACDI/VOCA in Kazakstan; Lilah Bagautdinova is the KCLF Regional Director; and Judith Kaufman is the US Project Director for the KCLF program. ACDI/VOCA, 50 F Street, N.W., Suite 1075, Washington, D.C. 20001; phone: (202) 383-4967; fax: (202) 783-7204