funding small business in Asia - Uzbakistan as example


1.1 SMEs’ Role in the Economy
Uzbekistan is the most densely populated country in the Central Asian region, with
one third of the population under the age of 29 and half residing in rural areas. As
800,000 people under the age of 29 join the labor market every year, job generation is
an urgent and challenging priority.1
The development of private micro and small enterprises (MSEs) and entrepreneurship
has often been declared as a priority by the Uzbek president currently. It is recognized
now that small business is a driving force for economic growth, an increase in GDP
and the primary solution to acute social problems such as unemployment, poverty
− especially among women and youth − and poor quality of life.
Small businesses in Uzbekistan include individual entrepreneurs and micro and small
enterprises2. The size of an enterprise is defined by the number of employees, without
considering a revenue component or the ownership structure. The threshold number of
employees varies by sector 

There is no legal definition for medium-sized enterprises in the legislation. However,
according to the draft President Resolution, 4 the government intends to propose
amendments to legislation and expand the scope of prerequisites required to qualify
for being treated as a small business, effective from 1 January 2019. According to
draft proposals, the following entities will be classified as small and medium-sized
 individual entrepreneur;
 micro-firms with an average annual number of employees of not more than 25;

 small enterprises with an average annual number of employees of not more than


 medium-sized enterprises with an average annual number of employees of not

more than 250.

The criteria for defining small business and private entrepreneurship do not entirely

match international practice. In international practice, the definition of SME, aside

from the criterion staff size,” includes annual turnover/ sales or industry specific.

Preservation of the industry-specific differences is necessary subject to certain tax (e.g.,

stimulation of individual industries) or statistical (e.g., comparison of labor productivity)

tasks set by the state.

Using SME definition for tax purposes in Uzbekistan hinders jobs creation and growth.

In addition, the definition of SMEs by number of employees has become difficult

due to part-time work, casual work or temporary work becoming more widely used

by employers.

Figure 1 illustrates the poverty rate decrease from 33.6 % in 2001 to 12.3 % in 2016,

which in many ways can be attributed to a rise of small and medium-size businesses,

albeit, in the informal sector

The importance of SMEs in the economy is determined by four commonly used
indicators: (i) the number of enterprises; (ii) employment; (iii) domestic output; and
(iv) exports.6
Uzbekistan SMEs have contributed significantly to job creation and economic
well-being since 2000. This trend has further accelerated since 2010, following a new
set of presidential decrees and government programs initiated after the financial crisis.

SMEs’ contribution to GDP increased to 54.9% in 2017 from 38.2% in 2005, which
indicates that SMEs play a significant role in the country’s economy. The value added by
SMEs in total value added by enterprises rose to SUM120,351.6 billion compared with
SUM5,437 billion in 2005. Figure 2. The added value of SMEs in Uzbekistan is less than
half than in emerging countries ($113,000 vs. $394,000).

The share of SMEs’ exports in total country export performance increased to 27.2% in

2017 from 6% in 2005. SMEs’ imports accounted for 50% of total imports in 2017. The

SMEs’ share in investment rose from 13.4% in 2001 to 34.8% in 2017. While value

figures show positive net exports, the vast majority of SMEs are import oriented

(particularly in trade and manufacturing sectors). Figure 2.

As of January 1, 2018, over 229,600 small business entities are registered in Uzbekistan,

which constitutes 90% of all registered and functioning legal entities. Taking into account

the shadow economy, the number of SMEs may be higher: the share of the shadow

economy is estimated to be 50%, which reduces reported GDP by up to $16 billion–$17


Within the SME sector, micro-enterprises make up 91.8% of all registered businesses,

and small firms around 8.2% (18,900 units). Between 2010 and 2018, the total number

of SME increased by 51% (see Figure 3). The SME development is predominately driven

by micro-enterprises. Micro-enterprises employ eight people, on average, and represent

an important share of the working population.

A low growth of small enterprises during these years may indicate that SMEs face

difficulties in terms of an unfavorable business environment and access to finance. In

addition, a significant share of small businesses works under a simplified taxation

scheme, which on the one hand facilitates business, but on the other discourages

business growth (due to limits on the number of workers).

Uzbekistan has a high rate of unemployment – around 7% in 2017 with an estimated one

in ten people aged 20 to 24 not looking for a job because they do not believe

they can find one. Unemployment rates for youth are about 18%, twice the overall rate.10

Low employment prospects have led to high levels of outmigration, with one in

five males becoming an international migrant and this rate is even higher among

young men.

According to official data, SMEs are the biggest source of employment, as they

now provide 78% of jobs, compared to 50% in 2000. Nearly three out of every

four employed persons in Uzbekistan work in small businesses and more than 60% of

those jobs are in rural areas. 11 More than 62% of those employed are individual

entrepreneurs, and small businesses and micro firms employ only about 16%. Uzbek

migrants are included into sectoral employment data, mainly into the employment in

agriculture and other sectors. Most of the migrants (around 70−75%) come from rural

areas, and, in some cases, they are counted as employed in the agricultural sector

and the migrants from urban areas are accounted in the statistics on “employment in

other sectors.”

However, official statistics do not provide all necessary data to provide a more or less

credible picture. Therefore, the official data should be assessed critically. For example,

a number of individual entrepreneurs are not available, and the State Statistics

Committee only collected data on SMEs with legal entity status. Analysis of the open

sources did not reveal any data on the number of individual entrepreneurs.

Uzbekistan has a low density of 7.1 SMEs per 1,000 people, lagging behind

developed countries 44 SMEs per 1,000 people and developing countries 17 SME per

1,000 people

Figure 4 illustrates that approximately 28% of SMEs are engaged in retail and wholesale
trade, followed by manufacturing (20.3%), construction (11%) and transport (9%) and
9% in agriculture. The modest figure of 9% in agriculture is rather controversial, since
about 80% of the agricultural sector’s contribution to GDP is accounted for by small-scale
entrepreneurships, suggesting that a significant portion of 160,000 collective and dehkan
farms are potential small and micro-finance borrowers. Considering individual, small and
micro-enterprises and small-scale agriculture
the total number of potential borrowers is in the range of 800,000. With fewer than
300,000 borrowers currently served, there is clearly an enormous unmet demand for
small and micro-credit financing. The sectoral analysis of small business demonstrates
that a long-term trend of reducing SMEs in trade and agriculture is associated with a
poor regulatory environment and the impact of economic factors. One of such factors is
the ongoing government’s monopoly in the agricultural sector. Since there is still no
private ownership of land, so that farmers cannot own agricultural land, nor are they
entitled to make their own choices of what to grow, there are not many SMEs involved in
this sector. However, if the agricultural sector indeed liberalizes and diversifies, shifting
from cotton and wheat monocultures to more diverse agricultural produce, coupled with
legal guarantees for private ownership for land, the number of SMEs and value chains
in agriculture will soar significantly.
There is an increase in the share of large retail chains, which displace small businesses
in retail trade. On the other hand, government regulation gradually limits the list of
activities for individual entrepreneurship to conduct trade in construction goods. The
share of SMEs in construction has increased significantly in recent years due to the
implementation of the State Program of Affordable Housing.
SMEs are also active in the services sector (retail and catering). In foreign trade, the
small business share was below 10% in 2007−08, and currently only 4.7% of small
businesses participate in foreign trade activities.

 1.2 SME Sources of Finance
There is a limited choice for SMEs in terms of variety of sources of finance. Sources
of SMEs’ finance in Uzbekistan are classified as informal and formal. Informal sources
of financing include personal savings, friends, relatives, business partners and
unregistered moneylenders. Primary sources of finance are self-financing, such as
the profit of the enterprise, reserve financing and capital increase by the founders’
Evidence from enterprise-level surveys suggests there is more room for growth
to extend financial services to smaller enterprises. According to a World
Bank/International Finance Corporation Survey conducted in Uzbekistan in 2018,13 64%
of surveyed firms in Uzbekistan reported using bank financing and 8% – having family
and friends’ support. Nevertheless, a large proportion of Uzbek SMEs finance their
growth internally – 64% report self-financing. See Figure 6.
Among micro and small businesses there are low levels of financial leveraging: Almost
two thirds of businesses do not attract financing. Banks constitute almost exclusively the
only formal source of financing in Uzbekistan. The majority of respondents who
participated in the in-depth interview claimed that they would register their informal
business in order to take a bank loan, which provides the opportunity to develop
this segment.

Twenty-one percent of the respondents stated that the biggest reason for choosing family
and friends was that no collateral was needed and the money was available in cash (19%
of total respondents), 37% of the respondents noted, that they had no other choice than
to go to the banks. Respondents noted that only banks can provide
the requested amounts. Sixty-seven percent of the respondents used microfinance
institutions (MFIs) services because they are fast and easy to deal with, and 33% of the
respondents noted there is no choice except an MFI loan. For trade and services, the
most important item that was quoted was availability in cash. For agriculture producers,
no collateral required and low interest rates are the most important (governmentsupported programs available).

SME finance is principally performed by two types of financial institutions being
channeled through 28 commercial banks, including the specialized Mikrocreditbank and
37 microcredit organizations.
The banking sector’s limited capacity for financial intermediation remains a key barrier
to the development of the private sector, and in particular to SMEs. Banking continues
to be dominated by a handful of state-owned banks (86% of the assets), and
lacks competition and transparency. Government-controlled banks still support the
government’s economic priorities through subsidized loans offered to specific sectors
and investment purposes. Total bank loans as the percentage of GDP increased from
26.4% in 2016 to 44.4% in 2017. Overall, more than 75% of total sector loans account

to state-owned banks, focusing on state-owned large corporates and strategically
important industries. These banks are controlled and regulated by the state, mainly
through the Ministry of Finance, the Central Bank of Uzbekistan (CBU) and the
Uzbekistan Fund for Reconstruction and Development (UFRD).
The penetration of banking services is gradually increasing due to the development of
infrastructure, but a substantial part of the population is still not provided with basic
banking products.
The low level of penetration of banking services in general hinders the development
of the banking sector due to the lack of sources of cheap liabilities − the deposits of
the population. Currently, only SUM0.55 of deposits of individuals fall on SUM1 of cash.14
Although there are 36 branch outlets per 100,000 adults, 15 that exceeds the
Commonwealth of Independent States (CIS) countries; however, as a ratio to GDP, the
level of deposits in Uzbekistan is half that of the Russian Federation or Georgia.
Figure 10 shows that Uzbekistan’s financial depth indicators have not improved in
2004−2016, and are very low compared to countries at similar levels of development.
Credit to GDP ratio remained intact in 2004−2016. Deposits slowly increased over the
same period, and accounted for 22.1% of GDP in 2016 compared to 10.4% in 2004.
By comparison with other countries in the region, the level of deposit penetration in
Uzbekistan is low. 

Small business loans and microcredits as a percentage of GDP slightly declined from
8.0% to 7.9% and from 1.7% to 1.6%, respectively. The decline was related to the
reduction of shares of the loans for small business and microcredits in total bank loans.
The share of small businesses in the loan portfolio is growing due to a decline in the
corporate segment and currently accounts for 18% (see Figure 11). The share of small
businesses in the loan portfolio is growing due to a decline in the corporate segment and
currently accounts for 18%

The shares of small business loans and microcredits in total bank lending declined
in 2017 from 30.2% to 17.7% and from 6.3% to 3.6%, respectively. See Table 2. The
decrease was related to a sharp increase in the sum value of loans to large state
companies because of revaluation, and the callback of loan applications by small
businesses after the sum devaluation in September 2017, due to their business plans
having been based on half the FX rate.

 Despite total loan portfolios soaring between 2016 and 2017 by more than double, the
increase in the amount of loans for small business and microcredits for that period was
less than moderate. Microcredits constitute a significant portion of loans (about 20%),
which evidences the impossibility of receiving traditional bank loans.
The hike in the growth rates of small business loans and microcredits was in 2014 at
39.6% and 31.2%, respectively. Then the growth rates plummeted and fell to the levels
of 20.7% and 23.3% in 2017 due to the large state banks’ increased corporate lending
portfolios over that period

Out of $13.4 billion in bank loans only $0.89 billion were allocated in the form
of microloans, covering less than one third of an existing demand from micro and
small businesses. Based on the survey, the potential market for micro and small
business finance can be estimated at $5.5 billion (see Table 9). This is consistent
with the IFC-McKinsey MSME survey, estimating the current MSME financing gap of
Uzbekistan at $11.8 billion

 Microkreditbank. Mikrokreditbank was established in 2006 by a special Presidential
Decree16 with the purpose of “further expanding the provision of financial resources for
the development of small business, private entrepreneurship and farming, the creation
of new jobs by spurring individual labor activity, family business and home-based
business, and the provision of access to microfinance services to broad strata of
the population, especially in rural areas.” Due to its large network (85 branches and 110
point of services), the bank was able to increase the total number of customers to
341,607 in 2017.
A new regulation issued in 2018 17 provides for extending Mikrokreditbank’s tax
exemption until 1 January 2023 (together with Halq Bank), increasing the
Mikrokreditbank’s charter capital in 2018−2019 by SUM600 billion ($73 million), as well
as mandating a number of other exemptions and privileges—for example, free
advertisement of Mikrokreditbank’s and Halq Bank’s socially oriented financial products
by mass media and 50% discount on the advertisement of commercial products.
Interest rates are very competitive as the bank is mandated by the government to provide
preferential loans to SMEs. This has resulted in interest rates averaging 5% per annum,
which are well below the inflation rate of 14.4% in 2017, meaning that the bank lends not
only below costs but also in negative real terms (see Table 6).
The losses are assumed eventually by state because the government is an ultimate
beneficial owner (State Assets Management Agency). By the end of 2017 the number of
outstanding loans amounted to SUM1.3 trillion ($180 million) of which only SUM 313.8
billion was concessional (microfinance) lending, demonstrating that despite
specialization, the vast majority of business is not directed at SMEs.
Microkreditbank takes various types of collateral, but does not include future cash-flow
considerations. The bank offers a narrow range of credit products to SMEs like other
commercial banks. Equity finance, factoring, and longer-tenure loans are not offered.
Due to the bank’s collateral requirements, SMEs may be denied credit despite having
sufficient cash flow or purchase orders, or may be limited only to short-term credit
facilities and not the type of financial products they need.
Microcredit organizations. Microcredit organizations are regulated mainly by two laws,
such as the Law “On Micro-finance” and the Law on “On Micro-credit Organizations”,
which were adopted in September 2006. The framework law “On microfinance” 18
provides key definitions and outlines basic rules for the provision of microfinance
services. In particular, it allows the provision of microfinance services
to both banks and non-banks: the latter include microcredit organizations (MCOs)
and pawnshops

In 2017, there were 76 non-banking financial institutions including 30 micro credit
organizations (MCOs) and 46 pawnshops operating in the country. 20 Microcredit
organizations cannot take deposits, and they are allowed to offer three microfinance
products namely, microcredit, microloan and microleasing. The differences between
these types of services relate to the size of the products and their purpose, as well
as microfinance product recipients and a few other conditions; they are summarized
in Table 7.
A recent World Bank study of opportunities for enterprise competitiveness in Uzbekistan
suggests that smaller enterprises and unbanked markets are finding value from
microcredit institution services.

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