Small business lending in Kazakhstan (предоставление кредитов малому бизнесу в Казахстане)

I.   Introduction.

A.   Reasons for undertaking research.

At the times of Soviet Union, there wasn’t not only small or middle business, there was not any business at all, everything was public and there was no owners; so all countries of ex-Soviet Union have to develop their small enterprises intensively. For Kazakhstan, it was very difficult, mainly because Kazakhstan had more mineral industry and a little of agriculture, for the most part - grain. Processing industry was very weak. When USSR broke up and young Kazakhstan had to care about itself, enterprises needed huge amounts of money to buy necessary equipment, employ qualified workers to work in mineral industry and to develop processing industry, which demand, by the way, more expenses. However, firstly, government and banks did not have enough money to give credits to the enterprises and secondly, it was much easier to create monopoly. Thus, our system of supporting small business was not correct from the very beginning. But still, 10 years later when it seems that Kazakhstan had grown roots and almost everything going rather well, our system of supporting small business in a bad condition (see Appendix 1).

There are several reasons why our small business develops very slowly. Firstly, there was not any optimal government strategy it support small business. Government did not reveal the appropriate branch and regional priorities for small business. Secondly, another problem is corruption. As we know, officials can build huge barriers before entrepreneurs, for example, different checks, problems with registration, and others. Thirdly, a high taxes on enterprises.

Small enterprises pay more taxes than big ones. This system of taxation should be more fair, because for small enterprises there is no stimulus not to develop, but even to conduct their own business. Lastly, in our country there is no appropriate lending system. Banks do not want to credit small business, because there is more probability that business won’t go well, also there is big problems arises with preparing necessary documents in order to receive a credit, another problem is liquid enough pledge. So we can see, that enterprises collide with many problems when they are trying to receive a credit.

What for our country should support small business? Small business creates new workplaces, form middle class, develop trade and production. If we would not develop small business, there will be no competitive market, thus there will be no improvements in our market, in products and services. So, we should develop small business in Kazakhstan to build up our economy, particularly we should improve our crediting system of small enterprises, because small firms have to develop themselves, but they can not do that without money. Thus, our research problem is with which problems small business meets, when it is trying to receive a credit.

B. Research structure.

Our research structure:

1.   Necessity to credit small business. In this chapter, we will tell you about needfulness of developing small business and some ways to realize financing and investing support.

2.   Goals for receiving a credit. In this chapter, you will read about aims of entrepreneurs who are trying to receive a loan and on what kind of goals banks lend money.

3.   Terms for receiving a credit. You will read about necessary documents, required in banks and difficulties with preparing these documents, about meeting with representative of credit department, about pledge and interest rates.

4.   Interest rates and repayment. In the chapter we will tell you about one of the most important things, with which each entrepreneur meets when he receives a loan – interest rates. Another important thing you will read in this chapter is a day or period of repayment.

C. Research methodology.

We conducted our research on case study and survey. We reviewed literature, Internet, publishing information, periodical, science magazines, and reports of different banks. We conducted an interview with respondent Ms Sahauyeva Zhanar, who is working as a chief accountant in “Oasis” company, this interview was organized in 3 of April (checklist, see Appendix #1).

II.   Necessity to credit small business.

First of all, let us define the notion of small business. According to the existing law, to small business refer new and working enterprises, in which number of employee not more than 50 and total cost of assets not more than 60 000 calculation indexes ( Law of Republic of Kazakhstan from 19 July 1997 N 131-1 O gosudarstvennoi poddershke malogo predprinimatelstva (with amendments to this law in 10.07.98  № 283-1; in 26.07.99  № 458-1; in 29.11.99   № 488-1)). Thus, for today maximum amount for assets of small enterprises cannot exceed 46 500 000 tenge.  Small and middle business – the basis of market economy, it overcomes monopoly, provide employment (see Appendix 2), provide revenues from its activity to government, provide more innovations than other forms of business.

It is important to credit small business. Most of small enterprises had to limit their activity because of lack or inaccessibility of credits. Thus, now the weakened business cannot carry out its functions, which is create new workplaces, form middle class, develop trade and production, and which is effective especially in sphere of agriculture, tourism, rendering of services to the population, etc. Therefore, financing and investing support is the most important for effective development of small business.

Finance and investing support for small business can be realized in the following ways:

§   Crediting by second tier banks priority projects by tender system on the preferential conditions;

§   Creating and development of guarantee credit system in a second tier banks, on a basis of forming pledge funds in regions;

§   Promotion of stimulation of second tier banks;

§   Continuation of budget and second tier banks financing of projects;

§   Development of venture financing;

§   Encouragement of credit partnerships creation, mutual insurance societies (Finansirovanie I kreditovaniye subyektov malogo biznesa, 2001).

Summary.

Thus, we can see, that it is very important to develop investing and financial support of small business in Kazakhstan. Small business needs money to expand their business, buy equipment, employ more workers, that is why the key in developing small business is investment in it.

References.

Finansirovanie I kreditovaniye subyektov malogo biznesa, 2001

This diagram shows in what level each factor influence on decision of the bank, when it is giving a credit to the enterprise. As we can see, the most important is financial report – 31%, that is why it is very important for the enterprise to prepare it in a best way. After financial statement of the company, follow market, which takes 16%, this means information about customers, suppliers and enterprises’ borrowers, and lenders. The next is pledge –15%, we will consider it in more details later. 

(Source of the diagram: Osnovniye prinzipi kreditovaniya MP, 2001).

Another problem is getting sanction for realization a project. This is due to difficulties with receiving confirmation in different state organizations. There are several supervising organs whose corroboration you have to receive, but they are varying depending on the project itself.

§   Ministry of Ecology and Natural Resources regional representations

§   Sanitary-epidemical services

§   State Supervision of architecture and construction

§   Standardization and certification organs

§   Fire services

§   Custom services (Dauanov I., 2000)

Mainly, because of imperfectness of our organs, and especially due to corruption, getting through the expertise takes 6 or more months.

C.   Meeting with representative of credit department.

No credit can be given until a meeting of banker and entrepreneur. During this meeting borrower should show and tell about his business, how it works, in short, he should do the best to present his business. Banker will ask him questions about financial statements of the company, about revenues and losses, so borrower should be prepared for questions like

this. Credit interview is often held in bank or in enterprise office. By the way, entrepreneur should always offer to visit his office, and not only because owner is proud to present his business, but also to present additional information about his business like first appearance of the office, other rooms and buildings; site, neatness of the office; show employees, equipment. This information will improve impression of representative about business (Sahauyeva, 2001). Representative in his turn has to be in connection with borrower, keep abreast with the needs of the company, should offer bank in order to solve financial problems of the enterprise, and should offer to submit application for a loan. Thus the representative has to understand how business works, risks connected with making deals with this company, keep up that everything is legal, and look after how borrower spend credit (Osnovniye prinzcipi kreditovaniya MPS, 2001).

From the interview with Sahauyeva Zhanar we learned that “Oasis” company also prepared to the meeting with representative of credit department. Executor looked through office rooms, presence of the basic, and turnaround means, in general he was satisfied with total condition of the business (Sahauyeva, 2001).

D.   Pledge.

1. Required pledge.

 Banks have to ensure their credits, which are given to entrepreneurs in case of bankruptcy. Thus, all banks demand pledge maintenance from borrowers. Banks accept as a pledge property, guaranties of other legal persons, and other types of pledges. For instance, European Bank of Reconstruction and Development accept real estate, motor vehicles, personal property, enterprises’ property and  goods, which are in business (Yevropeyskiy bank rekonstrukzii I razvitiya, 2001). In our considered “Oasis” company, the pledges were real estate of the founders and commodity stocks. Estimated value of the commodity stocks was equal to 20 mln. tenge.

 2.  Difficulties of enterprises with providing a pledge. 

It is very difficult to receive a credit on ordinary terms, offered by banks. This is due to most enterprises are not able to provide a pledge required by banks or their pledge is not liquid enough.

There are several problems, which are arising with providing a pledge to bank. The most important is illiquidity of the pledge that if offered by enterprises. Banks accept movable and immovable property, which is owned either by enterprise or entrepreneur, guaranties of other legal persons, marketable securities (Kreditovaniye, 2001). Another important thing is that banks usually underestimate cost of the pledge. And the last thing is registration of documents confirmed your ownership of the pledge. Banks, when they are giving out a credit, demand these last two items. Thus, if the estimation of the pledge that is carried out by experts of the bank is free of charge, then confirmation of ownership is carried out at the expense of the businessman. (Dauranov I., 2000).

As we already mentioned, the pledge of  “Oasis” company to the bank were real estate and commodity stocks. But firstly, “Oasis” company offered only real estate as a pledge, but in bank said that this is not enough, and then company added commodity stocks (Sahauyeva, 2001). Most probably, that bank underestimated the cost of real estate, and then demanded more property in order to ensure its money in a best way. It is well, that “Oasis” company could offer commodity stocks, but if there were another company with not very big amount of assets, we think, that bank would deny in borrowing money, because there are so many companies that needs money to increase their turnover or to buy some equipment, that banks could just choose the biggest company with a big amount of assets. This is support the idea that banks are more pleased to work with big companies and with big money, rather than with small enterprises.

Thus, it is very difficult to receive a credit. You may have problems with providing a liquid pledge, demanding by banks. Even if your business goes well and profitable, your company could just have not enough assets to offer it to the banks, moreover, you are asking a loan to buy an equipment, to increase your assets, but bank gives loans only to those, who already developed. Thus, there is a situation, that rich become richer and poor become poorer.

E. Interest Rates and Repayment.

Now, let us consider interest rates, which enterprises have to pay as a payment to the banks for lending money. For example, interest rates of NSBK are determined in dependence with concrete case and project:

§   On credits in national currency – from 24%

§   On credits in national currency with fixation of currency equivalent –from 17 %

§   On credits in foreign currency – from 17% (Kreditovaniye, 2001).

These interest rates looks pretty high, but there are a lot of programs on supporting small business, and many banks support this policies and offer credits to enterprise on less interest rates. For instance, Kazkommertz Bank offer 1% on foreign currency credits (Kreditovaniye (kkb), 2001). For example, our case company “Oasis” took credit under program of supporting small business and took a credit in Bank Centercredit in national currency under 10%.

The scheme of repayment of the credit and interest is usually in most banks on personal scheme. “Oasis” company’s payment schedule also was personally scheduled. They took credit on 9 months and made monthly payments: part of the credit itself and part of interest rate. In first months repayments interests charged on low rate, but closer to the 9^th month interest grew.

Summary.

Thus, we can conclude, that entrepreneur has to prepare many documents, prepare to meeting with executive of credit department of the bank, have a liquid pledge, and have enough assets to give it as a pledge in order to be able to satisfy the bank’s requirements. There are so high interest rates, but still there are many programs on supporting small business lending and enterprises have to discover first, which bank is more suitable and then go and find out its personal specific terms.

References.

Dauranov I.(2000), Maliy bisnes: problemi oformleniya kredita, Al Pari No.5:82.

Kreditovaniye, 2001 #"#">http://www.tacisinfo.ru/brochure/banksme/pzayav_m.htm

VIII.   Appendixes.

Appendix 1

Checklist.

Respondent: Ms. Sahauyeva Zhanar, the chief accountant of “Oasis” company.

1.   Information about company.

1.1   For what purpose company was organized?

1.2   Sources of funded capital (relatives, savings, sponsors)?

1.3   In which sphere do you work (trade or production)?

1.4   How many employees do company has?

2.  Goals of receiving a loan.

2.1. How do you think, do small enterprises need to be credited?

2.3. What amount of gain did company received from the loan?

3. Loan.

3.1. In what bank do you prefer to receive a loan?

3.2. What liquid pledge did the company provide?

3.3. What interest rates did the company pay?

3.4. In which terms the company can made a repayment (monthly, quarterly or in the certain date)?

Appendix 2

Table #1

Regions

For the 1 October 1997

For the 1 April 1998

Parity of small business wages and region’s (%)

Parity of small business wages and region’s (%)

Akmolinskaya

64.5

74.9

Aktubinskaya

53.8

46.0

Almatinskaya

91.5

75.9

Almaty

80.2

70.9

Atirauskaya

52.2

50.3

Zhambilskaya

40.3

36.9

Karagandinskaya

38.3

35.6

Kizilordinskaya

45.2

41.9

Kostanayskaya

75.7

63.8

Mangistauskaya

75.2

66.7

Pavlodarskaya

63.5

55.9

Total

680.4

618.8

(Source: Tukayev, 1998).