Specifics of small and medium business lending in the Republic of Kazakhstan
Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016
Authors: Tonysheva Yevgeniya, Kazakh-American Free University, Kazakhstan
Bordiyanu Ilona, Kazakh-American Free University, Kazakhstan
Successful development of small and medium
business depends significantly on availability of both long-term and short-term
financial resources of entrepreneurs. Currently, Kazakhstan lending market is
characterized by institutional underdevelopment, limited range of financial
instruments and services used, absence of efficient legal mechanics ensuring
realization of proprietary interests of lending transaction participants. Focus
of banks on working with financial instruments in prejudice of production
lending and poor development of non-banking institutions leads to reduction in
lending of real sector of economy. On loan market, short-term lending resource
offer prevails which limits investment opportunities of businesses. In such
conditions, the problem of limited access to lending resources is common for
all categories of business entities, however, it is mostly evident in small
business.
As small businesses are important element
of economic system, structuring of hospitable lending environment for their
development is of considerable importance for achievement of economic stability
in the country. This determines the urgency of studying the lending relations
of small and medium business, existing models and mechanisms of small businesses
and opportunities for their optimization.
In spite of the fact that the sector of
small and medium business lending has high potential for development, the demand
of small businesses for loans in Kazakhstan is satisfied by 10% maximum as of
today [1]. The existing situation is conditional upon absence of adequate approach
to small and medium business lending based on studying the specifics of
circulation and turnover of small business funds. Being an economic basis of
lending, circulation of small and medium business funds has a great impact on
compositions and structure of their lending system.
Small and medium businesses (hereafter SMB)
– are essential component and subjective base of civilized market economy,
integral component of competitive mechanism on the market. Their entrepreneurial
pattern provides market economy with flexibility and carries anti-monopoly
potential.
It is commonly known that the sector of
small and medium business is one of key components of market economy with
specific development regularities. Its role is defined by three essential
functions:
- economic function (its goal consists in
its contribution to GDP production, influence on economy structure and creation
of competitive environment). Besides, small business promotes strengthening
economic independence of population and, as a consequence, growth of effective
demand.
In virtue of its specificity and opportunities,
small businesses focus mainly on local very specialized segments of goods and
services market. They occupy specific market niches producing goods that due to
high indirect costs or rapidly changing consumer preferences may be economically
disadvantageous for production in large and medium businesses. By mobilizing
local financial, labor and other resources, small businesses promote revival of
local economy through development of intra- and interregional trading.
- social function of small and medium
business (consists in mitigation of consequences of economy structural transformation
and transfer to market relations, solution of employment problems, involvement
in economic activity of least socially protected segments of people).
SMB development solves the problem of
employment and other social market economy problems as well as ensures
breakthrough in a range of scientific and technical progress directions. For
these reasons, establishment, maintaining and development of SMB is currently
included in strategic objectives of economic policy of the Republic of Kazakhstan.
According to the data from UN Development
Program, number of small and medium businesses reaches over 95% of the total
number of all businesses. In global economy, small businesses account for over
60% of employed, and their share in GDP reaches 50%.
- political function of small business
sector (consists in creation of independent proprietary class in the community.
It is widely known that successfully developing small business representatives
make up the middle class which is the warrant of political stability in the
community) [2].
Recognition of importance of functions
exercised by small business promoted to that almost in all countries, issues of
development and support of small business are paid considerable attention both
on national and local levels.
Analysis of publications shows that in
developed market countries there are particular measures on assisting
self-development of small business helping it to enter the market, find
financing sources, partners, distribution chains, reduce system risks, etc.
In countries with developed market economy,
SMB system constitutes the basis of social relations. Exactly on the basis of
small business, there is creation of not only medium but also high money. In
our republic, small business segment as part of small business starts to spin
up. In average, a thousand of citizens in Kazakhstan accounts for about 10
small businesses, while in countries of European Union this number is 35-40.
Results of SMB situation study in Kazakhstan evidences the existence of multiple limiting factors of production activity one
of which is lack of financial means due to inefficient lending by commercial
banks. Based on the study of interaction of business sector and commercial
banks, we can give the following recommendations [3]:
- efficient operation of commercial bank
depends considerably on correctly selected risk-return ratio. Banking risks
relating to all types of active and passive operations reflect probability of
financial problem occurrence that may have an adverse impact on individual
factors and financial situation of bank in general. Risk level constantly
changing due to dynamic character of bank external environment and due to changes
in bank itself requires from its managers continuous adjustment of policy in
the field of risk management. Optimum risk-return ratio is different and
depends on a range of objective and subjective factors;
- currently, many of problems of banking
sector in the Republic of Kazakhstan have structural nature closely associated
with general economic situation, development level of monetary relations and
legal base. The following may be referred to them: inefficiency of risk
management system and internal control of many banks, insufficient reliability
of information of financial situation disclosed by banks, limitation of deposit
guarantee system;
- economic growth of Kazakhstan over the
last years stimulated expansion of demand for lending resources that, however,
in conditions of high level of lending risks and lack of funds in commercial
banks affected short-term loans;
- slowdown in dynamics of long-term lending
growth acts as specific trend. Main customers of banks remain industrial
enterprises, construction organizations and trading companies. Low level of
long-term lending in 2005 was significantly conditional upon insufficiency of
equity capital, provision of banks with long-term lending resources, high
lending risks;
- objectives of banking statistics include:
acquisition of reliable information of characteristics of functions exercised
by banks; development of analytical materials for the purposes of managing
monetary and credit system of the country and, primarily, credit and cash
planning and control of plan execution. Banking statistics is designed to
identify directions of bank activities; forecast and assess obtained results as
well as define factors determining these results; evaluate influence of banking
activity on development of market relations and its contribution to final economic
results;
- summary efficiency factor of using loan
funds is profit per one tenge of credit investments which is defined by
division of profit gained from using loan funds by average balance of loan
debt. In calculation, profit gained from using loan funds is obtained by
multiplying of sales profit by loan share in circulating funds of enterprise.
In its turn, loan share in circulating funds – by proportion of average debt balance
on loans to average balance of circulating funds;
- creditworthiness of commercial banks’
borrower is the most important term in the field of lending relations. In Kazakhstan, in conditions of market economy, nature of relations between enterprises and
creditors changed significantly. Primary objective is building of
mutually-beneficial partnership uniting creditor and borrower with common
economic interests;
- assessment of creditworthiness provides
for development of bank’s paying capacity forecast in relation to potential
customer based on liabilities of a particular loan contract for the short-term
as well as degree of individual risk of the bank itself associated with
possible non-repayment of credited loan in time stipulated in the contract;
- in practice of economic management of
foreign countries, there are different systems of qualitative factors for assessment
of enterprise creditworthiness. They are reasonable to divide into the following
groups: liquidity factors; turnover factors; profitability factors; long-term
solvency and reputation factors of a company;
- in developed countries, there is a rating
of financial situation, reliability and creditworthiness of companies that are
from time to time published and give creditor an opportunity to correctly
assess its risk when granting a loan. Domestic banks act in this direction
primarily by intuition paying a lot of attention to credit history of borrower
and its business reputation but not to financial capacities;
- based on the analysis of Kazakhstan commercial bank lending experience, we can conclude as follows: when granting a
loan and monitoring, it is insufficient to conduct a formal analysis of
financial statements of borrower and perfect a security. To mitigate credit
risk, it is necessary to know capacities and needs of borrower’s business,
prospects of its development, etc. Bank may impose conditions of «transparency»
of business for itself, participation in gained profit, business pledge, in
form of shares and property of a company, i.e. the bank becomes a financial
partner of a borrower which mitigates non-repayment risk to the maximum;
- investment-credit cooperation of
commercial banks and small and medium business enterprises in current
conditions is not efficient and strong to the right degree. This is encouraged
by general economic situation in the country: there is no unified clear credit
policy of commercial banks in the field of development of small and medium
business, no clear recommendations on bank capitalization, no complete
information base on credit histories of borrowers. One of the limiting factors
of SMB lending is majority analyzed enterprises’ lack of equity funds as
pledge, for which reason banks have no reliable guarantee of loan repayment and
ensuring real desired profit at optimum risk.
Changes in economy have common nature:
crisis affected both banks and their customers. Many small and medium businesses
reduced return, demand for their products and services; non-payments between
counteragents became more frequent – consequently, paying capacity decreased.
Analyzing crisis situation which occurred
on the market, it without doubt affected this segment and, by the way, the rest
of segments. Many banks have already reduced volumes of financing and tightened
requirements to borrower quality. Growth potential of this segment is high
enough, therefore the direction is certainly prospective. High rate of growth
and market volume depends generally on multiple factors, main of which is
growth of this segment – both in quantitative and qualitative terms. Such
growth is possible only with intensive state support including reduction of tax
and administrative barriers. The second important factor is access of banks to
resources. Due to situation on financial markets, in the short term growth rate
will decrease. However, in the medium term, upon condition of successful
overcoming of crisis and intensive state support, market volume in future may
reach high values.
In spite of instability of economic
situation on the market, small business in the Republic of Kazakhstan continues to develop and, consequently, needs for lending resources. Perhaps, a part
of players will leave the market but loans will not stop granting, and those
banks that outstand will increase their volumes, tighten requirements to
borrowers thereby improving quality of loan portfolio. Nowadays, cost of
attracted funds increased significantly, consequently, banks shall adjust
interest rates offered to SMB enterprises.
It should be noted that small and medium
business – is an incidental field of economy. Small and medium business is
limitedly included in economic structure, competitive environment and social
division of labor. Besides, its role in current conditions keeps steadily
growing.
Small and medium business lending by banks
in 2015 was carried out selectively, majority of banks significantly tightened
requirements to borrowers to obtain loans. As anti-crisis measure for survival
of banks, it is decided to suspend loans aimed to investment purposes (purchase
of new equipment, real estate, etc.) and be limited to granting loans for replenishment
of circulating funds by decreasing lending periods and by tightening requirements
on mortgage security.
Advantage was gained by customers with
transparent, stable business and financial situation that had positive credit
history in servicing bank and with liquid security. Many enterprises could not
obtain loans with banks in required amounts due to decrease of market prices
for pledged property (particularly real estate) and loss of liquidity. Many
enterprises could not procure granting a liquid pledge to obtain bank loan, and
in difficult economic conditions they appeared deficient of lending as banks do
not grant unsecured loans, particularly in conditions of crisis. Special
feature of bank lending of small and medium business was reduction of periods
and amounts of business lending. In conditions of high uncertainty and high
risks, banks provide mainly restricted short-term loans to small and medium
business (for a period of up to 1 year) [4].
One more feature of small and medium
business lending was decrease of granted amount of bank loan from value of
pledged property, in crisis conditions banks grant loans to the amount of about
50% of the value of pledge due to high risks. External capital markets for domestic
banks are temporarily closed, and fund loan abroad may be procured only by subsidiary
banks of foreign banks.
Without small and medium business, market
economy is able neither to function, nor to develop. Development small and
medium business is one of the main problems of economic policy in conditions of
normal functioning of market mechanism. Small and medium business in market
economy – is leading sector defining economic growth rates, structure and quality
of gross national product; in all developed countries, small business accounts
for 60-70% GNP [5].
Therefore, in conditions of small and
medium business development, a huge role currently is played by bank which
provides loan services for establishment and development of business and which
is the link between SMB and the state. Thus, it is very important to understand
that SMB lending in Kazakhstan has a range of specifics that are important to
take into account when undertaking loan liabilities as well as study these
specifics to assess future results.
REFERENCES
1. Address of the President of the Republic of Kazakhstan N. Nazarbayev to the Nation
“Kazakhstan 2050” Strategy: New Policy of the Established State (Astana,
December 14, 2012)
2. Gorfinkel V.Y.
Entrepreneurship, Moscow: Banks and exchange, 2009, p. 286.
3. Nazarbayev N.A.
Kazakhstan At the threshold of new shoot forward in its development/Message of
the RK President N. Nazarbayev
to the peoples of Kazakhstan. – Astana: Elorda, 2006,
p. 48.
4. Dosanov D., Kurmanov O. Small business.
Global experience and Kazakhstan reality. - Sayasat-Policy,
№12, 2003, p. 32-35.
5. Study of small and medium business issues.
Part I / I. I. Yevtushenko, R. A. Abdullayeva // Current issues of science and
education. - 2009.-5, p.176 – 180.
Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016
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