Specifics of small and medium business lending in the Republic of Kazakhstan

Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016

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.


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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