2. STATUS OF FINANCIAL INCLUSION FOR SMES
Financial inclusion is crucial to enabling the Uzbekistan population of all backgrounds to
have equitable and affordable access to vital credit and savings. However, the financial
inclusion sector in Uzbekistan is nascent and remains in the very early stages of
progress, with numerous constraints impeding the expansion of access to financial
services, particularly amongst households. In September 2018 Uzbekistan joined the
Alliance for Financial Inclusion—a global network of financial sector regulators from more
than 90 countries.
Strong progress has been made on financial sector development, especially between
2011 and 2014 32 but there is still room for development. The Global Findex 2017
demonstrates the low level of access and usage of financial services in Uzbekistan
compared to the lower-middle-income countries and Europe and the Central Asia
region33 (see Table 11). It should be noted that 37.1% of the population have a bank
account; in reality, they are holders of payroll debit cards. Importantly, the list of
transactions conducted by these cards is limited. Inclusion indicators clearly show a lag
compared to neighboring countries. Uzbekistan scores significantly lower in crediting,
savings, accounts held by the poorest 40%, account remittances and receiving private
sector wages. Digital payments have been spurred by distribution of payment cards for
government wages; 17% of adults with an account, opened their first account to collect
public sector wages. There has been substantial growth in access to credit by SMEs in
the past years, approaching the regional average indicators, but demand-side analysis
shows that most enterprises in this segment still operate without credit and, according to
survey results, only around one quarter of SMEs have a bank loan and more than 80%
finance their investments through internally generated funds, a share that is significantly
higher than in other countries in Central Asia.34
Lack of public trust in the financial system poses a real threat to its deepening and
broadening, as it deprives the system of the funding support required for its development.
As the WB/IFC survey35 stated, 72% of micro and small entrepreneurs avoid keeping
their savings in a bank, with the main reasons for not using the deposit services of the
banks being cited as having no trust in banks (28%) and an inability to draw cash 22%
(225). The majority of entrepreneurs stated that they would rather personally monitor
their savings than keep savings in banks.
According to the MSME Finance Gap Report 2017, 36 credit-constrained firms are
classified in two categories: fully credit constrained and partially credit constrained.
Thirteen percent of surveyed microenterprises and 10% of surveyed SMEs are defined
as fully credit-constrained firms, i.e. those that have no source of external financing. The
latter include both those whose applications for loans were rejected and those
that were discouraged from applying either because of unfavorable terms and conditions,
or because they had no confidence their applications would be approved (see Figures
21 and 22). The terms and conditions that discourage firms include, among others,
complex application procedures, unfavorable interest rates, high collateral requirements
and insufficient loan and maturity size.
Two percent of SMEs surveyed are determined as partially credit-constrained firms, e.g.,
those that have external financing, but were discouraged from applying for a loan from a
financial institution and firms that applied for a loan that was then partially approved or
rejected. Nearly 87% of surveyed Uzbekistan MSMEs indicated that they do not have
any difficulties accessing credit or do not need credit since they have sufficient capital
either on their own or from other sources. This also includes firms that applied for loans
that were approved in full.
those that have external financing, but were discouraged from applying for a loan from a
financial institution and firms that applied for a loan that was then partially approved or
rejected. Nearly 87% of surveyed Uzbekistan MSMEs indicated that they do not have
any difficulties accessing credit or do not need credit since they have sufficient capital
either on their own or from other sources. This also includes firms that applied for loans
that were approved in full.
3. FINANCIAL KNOWLEDGE AND SKILLS
OF SME ENTREPRENEURS
There has been no study conducted so far on assessing financial literacy in Uzbekistan.
The only evidence comes from Standard & Poor’s 2014 Global Financial Literacy Survey,
which shows that Uzbekistan has a much lower financial literacy rate (21% of the adult
population are financially literate) compared to other economies
in transition.37
There is no comprehensive financial education program led by a government agency.
However, the government has addressed the problem of inadequate financial literacy
in some political documents, such as the Welfare Improvement Strategy 2013−201538
and Strategy for Action 2017−2021.
There have been several initiatives supported by the international organizations
to enhance the financial literacy of various groups of the population jointly with nongovernmental organizations and commercial banks. These initiatives included a variety
of programs at the national level while also targeting specific groups, including students
and youth, women, migrant families, small-farm holders, communities in remote areas,
and vulnerable groups of the population. However, there is no data, how the project
outcomes affected financial behavior of the project beneficiaries and the economy.
During the International Conference “Financial inclusion and financial literacy as a pillar
of sustainable economic development,” which was held on 23 November 2018, it was
announced that the new project is launched with the support of the AFI and World Bank
aimed at supporting the Central Bank of Uzbekistan on drafting the financial inclusion
strategy, including the national strategy on financial literacy.39
Recently, a new program was launched by the Chamber of Commerce and Youth
Foundation for promotion entrepreneurship among business-minded youth. 40 The
program includes training, coaching, and mentoring, as well as consulting services for
youth business startups in business plan development and preparing the loan
documentation required by the banks.
The funding provided by the National Project Management Agency to the amount of
SUM50 billion ($6 million) will be channeled through four banks.
OF SME ENTREPRENEURS
There has been no study conducted so far on assessing financial literacy in Uzbekistan.
The only evidence comes from Standard & Poor’s 2014 Global Financial Literacy Survey,
which shows that Uzbekistan has a much lower financial literacy rate (21% of the adult
population are financially literate) compared to other economies
in transition.37
There is no comprehensive financial education program led by a government agency.
However, the government has addressed the problem of inadequate financial literacy
in some political documents, such as the Welfare Improvement Strategy 2013−201538
and Strategy for Action 2017−2021.
There have been several initiatives supported by the international organizations
to enhance the financial literacy of various groups of the population jointly with nongovernmental organizations and commercial banks. These initiatives included a variety
of programs at the national level while also targeting specific groups, including students
and youth, women, migrant families, small-farm holders, communities in remote areas,
and vulnerable groups of the population. However, there is no data, how the project
outcomes affected financial behavior of the project beneficiaries and the economy.
During the International Conference “Financial inclusion and financial literacy as a pillar
of sustainable economic development,” which was held on 23 November 2018, it was
announced that the new project is launched with the support of the AFI and World Bank
aimed at supporting the Central Bank of Uzbekistan on drafting the financial inclusion
strategy, including the national strategy on financial literacy.39
Recently, a new program was launched by the Chamber of Commerce and Youth
Foundation for promotion entrepreneurship among business-minded youth. 40 The
program includes training, coaching, and mentoring, as well as consulting services for
youth business startups in business plan development and preparing the loan
documentation required by the banks.
The funding provided by the National Project Management Agency to the amount of
SUM50 billion ($6 million) will be channeled through four banks.
4. BARRIERS TO SME FINANCE
Despite ongoing reforms, the Uzbekistan economy is still viewed as the most restricted
economy, and ranks 152nd among 178 countries, according to the Heritage Foundation
Index of Economic Freedom 2018. 41 Uzbekistan is ranked 37th among
43 countries in the Asia and Pacific region, and its overall score is below the regional
and world averages.
One of the lowest ranks on investment freedom can be explained by insufficient property
rights stipulated by obsolete provisions of primary legislation (Constitution, Civil Code,
Land Code, etc.) and inadequate regulatory framework for commercial activity. The high
corruption42 (ranks 154th) and very low rule of law and regulatory quality indicators43
significantly determine the investment climate. Rule of law is a necessary condition to
improving financial inclusion and underpins many of the more granular concerns detailed
later on. Public trust in an impartial judicial system is crucial to a business environment.
As Figure 23 illustrates, financial freedom is very low due to heavy government
intervention in Uzbekistan’s financial sector. Large state-owned banks (10 out of 28) hold
nearly 85% of industry assets (with the largest state-owned bank holding
a 25% share). Until recently, state-owned banks operated mainly as agents of
government programs, and disproportionately lend to state-owned enterprises
(over 50% of their portfolios).
The Central Bank of Uzbekistan actively regulates the interest rates on loans and
“recommends” interest rates on deposits. As a result, bank interest rates are often below
real inflation
Another example of government intervention is supporting economically insolvent
enterprises by securing financial recovery from commercial banks.44
A number of factors affecting the development of small businesses were highlighted by
the SME in Fergana Valley during the focus group discussions in July 2018. Such factors
can be summarized as high transaction costs, both formal and informal; lack of financial
literacy; difficulties in accessing start-up capital; high cost of banking services; and
stringent conditions for loans.
Banks are limited to a narrow range of credit products to SMEs, with many enterprises
not seeing banks as relevant to their financing needs. Due to collateral requirements by
banks, SMEs may be denied credit despite having sufficient cash flow or purchase
orders, or SMEs may be able to access only short-term credit facilities and not the type
of financial products they need. For instance, such standard banking services as equity
finance, factoring or longer-tenure loans are not offered.45
It should be noted that, due to the absence of nationwide data collection and analysis of
SME financing needs, the level of government awareness of SME financing needs is
quite low. The absence of impartial and professional research/studies of SME financing
needs inevitably leads to an untargeted and inadequately allocated state support.
Supply-side constraints affect the willingness to lend to SMEs, the suitability of
products and services to meet the needs of SMEs, and the sources of finance in the
market. The contributing factors to these constraints are presented below, based on
focus group discussions with SMEs.
(i) High cost of bank credit
Eighty percent of the total number of the entrepreneurs interviewed indicated a high
lending rate as the main problem for SME development. The market rates of credit for
small businesses are in nominal and real terms high, due to high administrative costs of
originating loans resulting from overly regulatory requirements for documentation of
loans and high credit risk. But given the high deposit rates and the weak currency,
nominal rates for small loans in local currency between 28 and 36% are justified.
The Central Bank refinancing rate is 16%. There are high rates for foreign currency loans
(12%−16%). The interest rates are not affordable for any medium- or long-term
production investment.
(ii) Delivery mechanism
The channels for financial service delivery do not meet the needs of small businesses,
particularly outside the city of Tashkent. Along with high costs of financing, the banking
sector has limited capacity for developing alternative channels for service delivery. The
focus group discussions led to an overall view that SMEs would prefer to do most
of their banking through online and mobile platforms. During individual interviews, SMEs
reported they would like to get loans online, rather than making a trip to a bank branch.
Costs of transportation and time spent accessing financial services are additional limiting
factors, especially for women entrepreneurs. Due to the lack of ICT infrastructure,46 the
banks are not able to provide distance services.
enterprises by securing financial recovery from commercial banks.44
A number of factors affecting the development of small businesses were highlighted by
the SME in Fergana Valley during the focus group discussions in July 2018. Such factors
can be summarized as high transaction costs, both formal and informal; lack of financial
literacy; difficulties in accessing start-up capital; high cost of banking services; and
stringent conditions for loans.
Banks are limited to a narrow range of credit products to SMEs, with many enterprises
not seeing banks as relevant to their financing needs. Due to collateral requirements by
banks, SMEs may be denied credit despite having sufficient cash flow or purchase
orders, or SMEs may be able to access only short-term credit facilities and not the type
of financial products they need. For instance, such standard banking services as equity
finance, factoring or longer-tenure loans are not offered.45
It should be noted that, due to the absence of nationwide data collection and analysis of
SME financing needs, the level of government awareness of SME financing needs is
quite low. The absence of impartial and professional research/studies of SME financing
needs inevitably leads to an untargeted and inadequately allocated state support.
Supply-side constraints affect the willingness to lend to SMEs, the suitability of
products and services to meet the needs of SMEs, and the sources of finance in the
market. The contributing factors to these constraints are presented below, based on
focus group discussions with SMEs.
(i) High cost of bank credit
Eighty percent of the total number of the entrepreneurs interviewed indicated a high
lending rate as the main problem for SME development. The market rates of credit for
small businesses are in nominal and real terms high, due to high administrative costs of
originating loans resulting from overly regulatory requirements for documentation of
loans and high credit risk. But given the high deposit rates and the weak currency,
nominal rates for small loans in local currency between 28 and 36% are justified.
The Central Bank refinancing rate is 16%. There are high rates for foreign currency loans
(12%−16%). The interest rates are not affordable for any medium- or long-term
production investment.
(ii) Delivery mechanism
The channels for financial service delivery do not meet the needs of small businesses,
particularly outside the city of Tashkent. Along with high costs of financing, the banking
sector has limited capacity for developing alternative channels for service delivery. The
focus group discussions led to an overall view that SMEs would prefer to do most
of their banking through online and mobile platforms. During individual interviews, SMEs
reported they would like to get loans online, rather than making a trip to a bank branch.
Costs of transportation and time spent accessing financial services are additional limiting
factors, especially for women entrepreneurs. Due to the lack of ICT infrastructure,46 the
banks are not able to provide distance services.
(iii) High collateral requirements and cost to collateral registration
Data from the Collateral Registry suggests that over 98% of all loans issued since 2015
have been secured by hard collateral (real estate, fixed assets – 94% of all loans)
or cash deposit (4%). Other forms of loan security have not been widely used. This
is especially problematic for microfinance borrowers who do not have acceptable
collateral.
According to global statistics47 collateral was required in an average of 78.9% of all loans,
and in Uzbekistan, collateral was required in 96.5% of loans (international practice is
80% of loans), with an average of 175% loan to value ratio compared with 128% for large
companies.48
As demonstrated in Figure 24, banks are using the limited range of collateral to secure
a loan, which increases the impact of the high collateral requirements on an SME’s
eligibility to borrow, and the overall process remains time-consuming for the borrower.
The process of registering collateral is comparatively hard; for example, the client has to
personally register movable collateral, and then leave the original receipt with a notary.
Immovable securities need to be notarized, with some notaries requesting proof of
insurance and requiring the client to arrange and pay for an evaluation of the collateral’s
value by a third party
Data from the Collateral Registry suggests that over 98% of all loans issued since 2015
have been secured by hard collateral (real estate, fixed assets – 94% of all loans)
or cash deposit (4%). Other forms of loan security have not been widely used. This
is especially problematic for microfinance borrowers who do not have acceptable
collateral.
According to global statistics47 collateral was required in an average of 78.9% of all loans,
and in Uzbekistan, collateral was required in 96.5% of loans (international practice is
80% of loans), with an average of 175% loan to value ratio compared with 128% for large
companies.48
As demonstrated in Figure 24, banks are using the limited range of collateral to secure
a loan, which increases the impact of the high collateral requirements on an SME’s
eligibility to borrow, and the overall process remains time-consuming for the borrower.
The process of registering collateral is comparatively hard; for example, the client has to
personally register movable collateral, and then leave the original receipt with a notary.
Immovable securities need to be notarized, with some notaries requesting proof of
insurance and requiring the client to arrange and pay for an evaluation of the collateral’s
value by a third party
Banks offer third-party guarantors, but they are difficult to find for first-time borrowers as
they are often considered high risk. Insufficient collateral limits the size of loans
and constrains entrepreneurs’ access to larger loans for business expansion and capital
investments
they are often considered high risk. Insufficient collateral limits the size of loans
and constrains entrepreneurs’ access to larger loans for business expansion and capital
investments
Alternative sources of collateral and security, such as future cash flows, business
reputation, third parties, or group guarantees, are rarely considered acceptable. In
stakeholder and focus group discussions, insufficient collateral was cited as the single
greatest impediment to borrowing.
(iv) The lack of alternative sources of SME financing
This is a significant factor affecting the credit situation for SMEs. Banks are not able or
willing to meet the full demand for enterprise finance and SMEs need different types
of finance. A lack of and imperfect legislative and regulatory environment hinder
alternative sources of SME finance and the development of the non-bank financial
institutions, venture funds, crowd funding, capital markets and inter-firm financing
mechanisms. All these institutions could play a larger role in SME financing than they do,
operating in underserved areas and filling in important financing gaps based on proximity
and flexible operations. The major constraint on these services developing
is an excessive government intervention in banks’ activities and an overregulated
banking system.
(v) Overregulated financial sector
Uzbekistan’s banking system is highly regulated through an opaque and complex series
of regulations. Many of these regulations are formal legislation from the legislative body,
but others are guidance from the executive branch in the form of decrees and
proclamations. As a result, loan and credit extension is highly regulated and there is no
possibility of financial innovation. Existing regulations and the
banknote shortage place legal and practical restrictions on cash transactions while
SMEs—mainly individual entrepreneurs engaged in trade—need cash loans or at least
loans that can be used for payments at card terminals. Only allowing direct transfers from
the bank to the lender’s supplier is very inflexible, especially for inventory finance.
(vi) Product and services segmentation is weak
Very limited financial services and products are adapted to different stages of SME
growth (e.g., newly established, young and growing, maturing or mature, etc.). SMEs
that are using similar products notwithstanding their financing needs are often different.
Apart from the fact that start-up financing is extremely limited, so start-ups usually apply
to microcredit organizations for microloans or private moneylenders lending at higher
interest rates. It can be difficult for SMEs to mature into competitive, growth-focused
businesses because financial markets are not particularly well organized to offer a
continuum of financing options (e.g., trade credit, factoring, leasing, equity, etc.) that
firms can use to develop their business.
(vii) Lack of SME financing expertise
Many state-owned banks have inadequate expertise in analyzing undocumented cash
flows of businesses, so their lending processes and products are not adapted for the
pattern of those cash flows. The supply side is not the only source of constraints limiting
access to finance, and there is no lack of negative sentiment in the SME community
about the lack of financing.
reputation, third parties, or group guarantees, are rarely considered acceptable. In
stakeholder and focus group discussions, insufficient collateral was cited as the single
greatest impediment to borrowing.
(iv) The lack of alternative sources of SME financing
This is a significant factor affecting the credit situation for SMEs. Banks are not able or
willing to meet the full demand for enterprise finance and SMEs need different types
of finance. A lack of and imperfect legislative and regulatory environment hinder
alternative sources of SME finance and the development of the non-bank financial
institutions, venture funds, crowd funding, capital markets and inter-firm financing
mechanisms. All these institutions could play a larger role in SME financing than they do,
operating in underserved areas and filling in important financing gaps based on proximity
and flexible operations. The major constraint on these services developing
is an excessive government intervention in banks’ activities and an overregulated
banking system.
(v) Overregulated financial sector
Uzbekistan’s banking system is highly regulated through an opaque and complex series
of regulations. Many of these regulations are formal legislation from the legislative body,
but others are guidance from the executive branch in the form of decrees and
proclamations. As a result, loan and credit extension is highly regulated and there is no
possibility of financial innovation. Existing regulations and the
banknote shortage place legal and practical restrictions on cash transactions while
SMEs—mainly individual entrepreneurs engaged in trade—need cash loans or at least
loans that can be used for payments at card terminals. Only allowing direct transfers from
the bank to the lender’s supplier is very inflexible, especially for inventory finance.
(vi) Product and services segmentation is weak
Very limited financial services and products are adapted to different stages of SME
growth (e.g., newly established, young and growing, maturing or mature, etc.). SMEs
that are using similar products notwithstanding their financing needs are often different.
Apart from the fact that start-up financing is extremely limited, so start-ups usually apply
to microcredit organizations for microloans or private moneylenders lending at higher
interest rates. It can be difficult for SMEs to mature into competitive, growth-focused
businesses because financial markets are not particularly well organized to offer a
continuum of financing options (e.g., trade credit, factoring, leasing, equity, etc.) that
firms can use to develop their business.
(vii) Lack of SME financing expertise
Many state-owned banks have inadequate expertise in analyzing undocumented cash
flows of businesses, so their lending processes and products are not adapted for the
pattern of those cash flows. The supply side is not the only source of constraints limiting
access to finance, and there is no lack of negative sentiment in the SME community
about the lack of financing.
4.1 Demand-side Constraints
(i) Low financial literacy and business skills
SMEs lack adequate training, knowledge and skills for effective business management,
preparation of realistic business plans and debt management. This leads to weak
business risks management, an increase in the cost of doing business, and limits access
to bank loans. Small businesses have limited access to business development services
that contribute to the efficiency, profitability, and expansion of their activities. Weak
financial literacy, especially among women’s small businesses and low-income groups,
limits their access to financial services and constrains their entrepreneurial capacity.
(ii) Limited knowledge of the availability and impact of business development
services (BDS).
Around 60% of surveyed SMEs in Uzbekistan could not name any private BDS provider
and almost none were aware of the existence of third-party providers, such as NGOs or
business associations.49 This is especially true for SMEs operating in the regions, where
70% of SMEs do not know any private BDS providers. Public−private dialogue, and
especially the role of business associations in promoting BDS, remains limited.
Moreover, the perception of an overall poor quality of services offered by certified BDS
providers, as well as of poor capacity of government-related bodies, leads to a limited
use of such providers.
(iii) Lack of knowledge on financial products, markets, technology and legislation
This affects the efficiency of SME businesses and limits their access to finance.
Misperceptions about the banks, and the financial system in general, appear to have led
to a lot of negative sentiment about banks among SMEs. SMEs often lack market
information, such as on prices and trading volumes, which limits their ability to prepare
reliable business plans and forecast cash flows. This challenge is very significant due to
the absence of an online portal for SMEs on new legislative changes or incentives
provided by the government.
4.2 Gender Constraints
While access to finance remains a business constraint for both men and women,
evidence seems to suggest that women face higher hurdles, particularly for those
who own micro and small enterprises. According to the ADB Uzbekistan Gender
Assessment Update,50 besides existing constraints, women-owned SMEs face a mix of
other challenges that combine to make the situation even more aggravated for them.
These include gender bias, socioeconomic constraints, and lack of access to business
networks. For example, women can have trouble posting adequate collateral because of
the way in which their marital property (collateral) is often registered—e.g., as joint
property or in their spouse’s name alone. They can face negative prejudice from lenders
about their capacity and commitment to succeed in the “tough” world of business. They
can sometimes have difficulty in building reputational collateral or demonstrating a
consistent track record running their business as a result of family obligations, such as taking care of children, which may cause them to take a time off. They also lack access
to business networks that are often male-dominated and/or poorly organized.
(i) Low financial literacy and business skills
SMEs lack adequate training, knowledge and skills for effective business management,
preparation of realistic business plans and debt management. This leads to weak
business risks management, an increase in the cost of doing business, and limits access
to bank loans. Small businesses have limited access to business development services
that contribute to the efficiency, profitability, and expansion of their activities. Weak
financial literacy, especially among women’s small businesses and low-income groups,
limits their access to financial services and constrains their entrepreneurial capacity.
(ii) Limited knowledge of the availability and impact of business development
services (BDS).
Around 60% of surveyed SMEs in Uzbekistan could not name any private BDS provider
and almost none were aware of the existence of third-party providers, such as NGOs or
business associations.49 This is especially true for SMEs operating in the regions, where
70% of SMEs do not know any private BDS providers. Public−private dialogue, and
especially the role of business associations in promoting BDS, remains limited.
Moreover, the perception of an overall poor quality of services offered by certified BDS
providers, as well as of poor capacity of government-related bodies, leads to a limited
use of such providers.
(iii) Lack of knowledge on financial products, markets, technology and legislation
This affects the efficiency of SME businesses and limits their access to finance.
Misperceptions about the banks, and the financial system in general, appear to have led
to a lot of negative sentiment about banks among SMEs. SMEs often lack market
information, such as on prices and trading volumes, which limits their ability to prepare
reliable business plans and forecast cash flows. This challenge is very significant due to
the absence of an online portal for SMEs on new legislative changes or incentives
provided by the government.
4.2 Gender Constraints
While access to finance remains a business constraint for both men and women,
evidence seems to suggest that women face higher hurdles, particularly for those
who own micro and small enterprises. According to the ADB Uzbekistan Gender
Assessment Update,50 besides existing constraints, women-owned SMEs face a mix of
other challenges that combine to make the situation even more aggravated for them.
These include gender bias, socioeconomic constraints, and lack of access to business
networks. For example, women can have trouble posting adequate collateral because of
the way in which their marital property (collateral) is often registered—e.g., as joint
property or in their spouse’s name alone. They can face negative prejudice from lenders
about their capacity and commitment to succeed in the “tough” world of business. They
can sometimes have difficulty in building reputational collateral or demonstrating a
consistent track record running their business as a result of family obligations, such as taking care of children, which may cause them to take a time off. They also lack access
to business networks that are often male-dominated and/or poorly organized.
Tags:
credit