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Abstract

In the aftermath of the economic transition prompted by the collapse of the Soviet Union, the Kyrgyz financial system has been subjected to critical pressures. The sector of the economy bearing a disproportionate impact from these forces has been agriculture, the mainstay of up to 70% of the population. Confronted with the pervasive insolvency of rural finance, the government of the republic chose to bankrupt and dissolve the mainstream rural sector banks. International institutions, including the World Bank, the United Nations Development Program and several NGO's are working to employ micro credit systems to rejuvenate credit in this major sector of the economy. This paper seeks to assess the appropriateness of microcredit as a panacea in such a delicate cultural environment."
 
 
 

The Kyrgyz Republic

The Kyrgyz Republic is amongst the smallest and the poorest of the republics of the former Soviet Union. With a population of 4.6 million (International Monetary Fund 1996), and a per capita income of US$2,358 (1994), the country is classified by the International Development Association as one of extreme poverty. Over 50% of the Kyrgyz economy is directly concerned with agriculture or agricultural processing (World Bank 1997). The rural population comprises 61 % of the total. The country is landlocked, surrounded by mountainous terrain and is located in the heart of Central Asia, at the mid point of the historical silk route (see Attachment 1).

The Status of Agricultural Credit

After the collapse of the Soviet Union, the Kyrgyz Republic emerged in 1992 as an independent state devoid of an institutional base capable of coping with free market systems. As with other post Communist societies, the entire range of production was characterised by a management ethos geared to the bureaucratic nature of the centralised state planning system. Under this structure, the operation of the finance system for the agricultural sector involved two institutions, Agroprombank, which channelled credits, subsidies and other funds through to the large sovkhoz and kolkhoz (collective farms) (World Bank 1996a, World Bank 1996b), while Elbank acted as a deposit institution for private household savings. Following the privatisation of agriculture, the collective farms ceased to exist, leaving the structure and operational methods of Agroprombank entirely unsuited to what will now be the credit requirements of small individual farmers. The bureaucratic intransigence of the bank led the government to dissolve it. Elbank had become insolvent and its management was similarly judged to be bureaucratically impeded from implementing appropriate reform measures, so it too was dissolved.

These reform measures have left the agricultural sector, the poorest area of the economy, in a financial and resourcing vacuum. Some international NGO's have launched limited initiatives at bridging the gap, but mainly in pilot form (Oliver and Kasybekov 1997). As a result, the World Bank and the United Nations Development Program (UNDP) have combined to concentrate on an intense program of finance sector restructuring for the agricultural industry to the value of ~US$17 million (World Bank 1997, Oliver and Kasybekov 1997). With the lack of any substantial credit provisioning, the sector is virtually green field, meaning that not only do institutional forms have to be constructed anew, but the entire system of credit provisioning and regulation must be recreated. This provides an opportunity to build a system that is unique in its incorporation of a wide range of innovatory provisions reflecting the extensive experimentation with new forms of credit currently being carried out throughout the developing world. On the other hand, the task to be completed raises a threat in that little is known of how effectively different systems might operate under the social/cultural structures peculiar to the Kyrgyz agricultural community.

That the World Bank and the UNDP have already announced an intention to concentrate their reform program on the construction of microcredit systems raises the opportunity to address not only the potential gains from such systems, but also to address some of the potential pitfalls that may lie in waiting. In the next section of the paper, we review a range of current literature concerning the experiences of microcredit providers in various countries.

Micro Credit Experience

The emergence of microcredit systems in many countries in the last decade appears to draw its origins from two major developments:

1. There has arisen widespread acknowledgment among international institutions that the provision of grant based resourcing to assist in the remediation of poverty and underdevelopment has a very poor track record, particularly at the level of the individual member of the rural community (FAO 1996, Schmidt and Zeitinger 1996, Bennett, Goldberg and Hunte 1996, Mahajan and Ramola 1996). This has led to a search for more effective resourcing options.

1. In the current environment of minimal government budget provision for social asset acquisition and social fabric maintenance, pressure has arisen for community organisations to initiate a self-sustaining presence in the open economy. This requires some mix of the following resourcing options:
1. Endowment resourcing: the securing of a stream of endowment resources for use in community oriented activities, these to be obtained from government, where still available, and from a much broader provider base in commerce and the general community and/or
2. Operations resourcing: the generation of an operating surplus from an organisation's activities to be set aside for the extension of the community oriented activities of that organisation.

Historically, the phenomenon of microcredit grew from the operations in Bangladesh of the Grameen Bank, a commercial organisation with a commitment to lending relatively small amounts of money to women borrowers, and employing a peer-group contract reinforcement process via lending only through local community based borrowing coalitions (Grameen Bank 1988, Yunus 1992, Rahman 1992, Shams 1992, Jain 1995 and Madeley 1984). More typically, though, in many countries, the microcredit sector has evolved through non-commercial non-government institutions lending via community coalitions to individuals for the development of commercial activities (Burkett 1989, Robinson 1996, Shanmugam 1991, and von Stockhausen 1987). The contrast between the non-commercial microcredit provider and the commercial orientation of the overall process in terms of the borrower's use of the funds is stark. Yet it is these aspects of the microcredit phenomenon that have proved so attractive to so many aid and development oriented institutions, governments and international agencies. These characteristics very forcefully address the problems outlined above under items i and ii above.

In the literature concerning the operating efficiency of the microcredit sector, emphasis has recently been given to the importance of a number of key issues that need to be acknowledged in a microcredit program such as is proposed for the Kyrgyz Republic rural sector.

1. A number of papers (For example, von Pishke 1996, Bennett, Goldberg,and Hunte 1996, Mutua, Nataradol, Otero and Chung 1996, FAO 1996, 1991) have given emphasis to standard managerial effectiveness issues involving accountability, information systems, human resource management, skills selection and so on. It must be accepted without reservation that if a commercial basis is to underlie the ultimate effectiveness of the microcredit system, then the normal requirements of professional management must be in place. Proper systems design, appropriate communication media, technical literature in simple language, publicity kits etc all must be designed. This is similar to the design of an effective franchising system in a Western economy, and appropriate demonstration materials are easily accessible as models.

1. In dealing with the very poorest sections of a very poor nation, it is to be expected that literacy, numeracy, market management and other management skills will be at a low level. There is a need to develop methods of putting these skills on an open access footing. This requires a mix of training of, where possible, the individual borrowers and/or of representative peer supporters, and the funding of close supportive supervision through appropriately trained institutional representatives in the field. (See Mutua, Nataradol, Otero and Chung 1996, Dichter 1996, Bennett, Goldberg, Hunte 1996)

1. Wherever there is a substantial element of subsidisation involved in microcredit systems, problems appear to arise with repayment completions (Mutua, Nataradol, Otero and Chung 1996, Bennett, Goldberg, Hunte 1996, Mahakan and Ramola 1996, Schmidt and Zeitinger 1996, Robinson 1996). If subsidisation is deemed to be unavoidable because of extremely remote locations or other high cost difficulties, these should be confined to support resourcing in the form of assisted communication and transport and other services, but not used in the provision of cheap loans. The overwhelming conclusion is that the use of market rates of interest generates a solemn commitment to loan repayment.

1. Montgomery 1996, FAO 1996, Bennett, Goldberg and Hunte 1996 as well as most other writers espouse the need for small groups in group collateral microcredit systems. Kandel and Lazear 1992 provide theoretical analysis of this issue and point out that the impact of larger numbers will strengthen peer pressure until at some stage the individual simply "gets lost in the crowd". From the various schemes discussed, it appears groups cells of between 5 and 12 members might be appropriate.

1. At a deeper level, the question of the nature of the activity to which the borrower would apply any credit is of concern (Ghate, Ballon and Manalo 1996). A distinction can be drawn between the activities of what might be termed genuine microenterprise where a more astute, worldly and (in)formally trained individual seeks funds for a "marketable" activity, and those feasible for what tend to be the poorest applicants, "lifestyle" activities drawing from traditional craft skills or relatively unsophisticated agriculture. Such conditions call for careful distinction in setting eligibility criteria if the poorest representatives of the target group are not to be excluded on a systematic basis from the microcredit scheme.

1. Serious questions are also proposed as to the ultimate impact of some existing forms of microcredit systems and structures on the welfare of the targeted beneficiaries of the organisations involved (Montgomery 1996, Dichter 1996, Kandell and Lazear 1992). The questions raised centre on the individual's personal rights within the operation of particular forms of microcredit systems and, in particular, the use of peer pressure as a form of "social capital" to act as collateral for the loan. Montgomery argues very strongly that the nature of any social environment results in fluctuating financial capacity and that an individual who may be a perfectly successful long term borrower may suffer from group collateral obligations owing to a temporary difficulty. This is rather akin to the problem of cash flow in standard western business analysis which can be addressed by "come-and-go" temporary or overdraft financing. Montgomery's argument develops a similar line, drawing from the experience of a Sri Lankan scheme, SANASA. This flexibility is maximised when the discretion over a range of lending arrangements to cover varying conditions likely to be encountered by group members is left in the hands of the extended local community. This raises a further serious issue, the question of power or rights over one's personal status under the microcredit scheme. This issue has been raised separately under the notion of ownership rights over the microcredit system.

1. There are some very strong arguments developed over the importance of "community possession" of the microcredit system to its ultimate long term viability (For example, see Bennett, Goldberg and Hunte 1996, Chavez, Gonzalez-Vega 1995, Montgomery 1996 and Mahajan and Ramola 1996 ). This research has clearly demonstrated that where the funds employed in microcredit operations are raised within the local community, the performance of borrowers in terms of completing their contractual obligations for repayment of a loan is maximised. This is reinforced by Montgomery's call for local discretion over a range of credit conditions. This aspect of current research highlights the need to more clearly appraise the status of property rights throughout the workings of microcredit systems.

• With respect to the assets of a non-commercial microcredit organisation, the acquisition-possession-disposal rights (obligations) must be defined in terms of the ultimate target group to benefit from the organisation's activities. For non-community owned microcredit organisations, it is, in effect, membership of a borrowing group that gives the individual a share in 'ownership' of the system. Alternatively, some form of ownership employing non-saleable share capital can formalise this notion of owning the system. Then it is the delegated authority for the local community membership of groups to exercise rights (uphold obligations) with reference to the target group's needs and/or aspirations that effectively defines what is actually 'owned'.

• Quite separately, there must be defined the various rights (obligations) in use for the assets of the organisation, these also being in terms of the needs and/or aspirations of the target group. In microcredit systems, use rights are represented by access to the various forms of credit that might be available.

Kandel and Lazear 1992 have developed an interesting generic model of group/

partnership effectiveness that draws out some of these "ownership" issues from a theoretical base. This is built on an economist's interpretation of concepts of 'guilt' and 'shame' drawn from sociology research. Some conclusions coming from the model are of keen interest to the question of microcredit systems in the Kyrgyz Republic. These centre on the notion of the welfare of the 'family' and its preferred lifestyle activities being drawn into the operations of the group activity. As is intuitively appealing, this involvement of the family is shown within the model to be a crucial aspect of motivation within the group.

Based on an extensive field research project, Hvoslef 1997 provides a unique analysis of the role of the extended family or clan and tribal forms in Kyrgyz society.

• The basic clan (extended family) consists of male linked common lineage extending back up to seven generations.
• The tribe aligns back to ancient history.
• The clan members attach to a village.
• Many clans make up a tribe, which attaches to a particular region.
• Traditionally, there were no individual rights over land but there were very clearly defined and accepted clan and tribal property rights.
• With 19th century Russian hegemony over the former Kyrgyzia came individual private property rights over land and the formation of villages. But the traditional clan rights (not individual rights) remained for the crucial summer pastures in the mountains. These clan rights still prevail today.

In this context, there would appear to be some very clear policy lessons for institutions such as the World Bank, the UNDP and relevant government and private bodies in the program to effect microcredit systems in the Kyrgyz rural communities. Building on the local community property rights arguments in the microcredit literature and the role of the "family" or clan in reinforcing group strength in the Kandel and Lazear 1992 model, the need for a scheme closely resembling that counselled by Montgomery 1996 would seem apparent. Further, the issues raised by Ghate, Ballon and Manalo 1996 concerning the distinction between microenterprise borrowers and "lifestyle" borrowers can be integrated via recognition that the problems of less "marketable" lifestyle activities are compensated for by the close association of such activities with "family" or clan commitments by the borrower, thus ensuring greater commitment to repayment of the credit.

The following provisions offer a microcredit system structure representative of these arguments:

• Administration A professionally developed management and administration system, with training programs targeted to compensate for particular impediments affecting any particular sub-sections of the community.
• Credit Instruments Strong emphasis on a variety of savings and credit instruments to cater to the instability of financial conditions for particular individuals and sub-sections of the community over time.
• Market Interest Rates The charging of full market rates for all loans with rates varying according to the duration and flexibility of each credit instrument. Only in the most exceptional circumstances should cross-subsidisation of particular individuals or social sub-sectors be considered, usually confined to administrative support to compensate for unusually high participation costs such as those in very remote localities. Varying rate levels to reflect risk attaching to different applications of the funds with specific acknowledgment of the lower risk attaching to credits for traditional life-style applications.
• Local Savings A strong commitment over the medium (3-5 years) term to 100% funding of the program through local community savings to maximise the sense of local ownership of the system. Compulsory regular savings targets for all group members in the system.
• Share Capital The issue of non-saleable interest bearing share capital, to be purchased by members on joining a group.
• Organisation Profits Profits of the local organisation to be employed in extension of technical support services for the system.
• Group Structure Small group cells of 5-10 people, the size varying to suit particular conditions in different regional areas or amongst different social sub-sectors. The cells should then be linked into regional management centres where all decision-making regarding the operation of the system, including the types of savings and credit instruments to be offered, should take place on a collective basis. Depending on particular circumstances, membership of these management centres might be any level from 20 to hundreds.

This paper attempts to clarify the range of issues currently under discussion in the microcredit literature with the aim of determining practical guidelines of use in creating a microcredit system in the rural sector of the Kyrgyz economy. For all the reasons argued in the paper, it appears clear to the authors that the measures recommended here would significantly contribute to the long term effectiveness of such a system.

References

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Bennett, Lynn, Mike Goldberg, and Pamela Hunte (1996) "Ownership & Sustainability: Lessons on Group-Based Financial Services from South Asia", Journal of International Development, Volume 8 Number 2, March-April, (Special Issue: Sustainable Banking with the Poor )

Burkett, Paul (1989), "Group Lending Programs and Rural Finance in Developing Countries". Savings and Development, Volume XIII, Number 4, pp. 401-419

Chavez, R.A. and C. Gonzalez-Vega (1995), "The Design of Successful Rural Financial Intermediaries: Evidence from Indonesia", World Development Vol. 24, No. 1, January.

Dichter, T.W. (1996), "Questioning the Future of NGO's in Microfinance", Journal of International Development, Volume 8 Number 2, March-April, (Special Issue: Sustainable Banking with the Poor )

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FAO (1996), "FAO People's Participation Program", Food and Agricultural Organisation of the United Nations, Rome, 10 May

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