Kyrgyzstan, though still scarred by a violent government coup d’etat in 2010, has seen robust economic growth thanks to international investment in its agribusiness and energy production industries. National GDP has grown at an average of 4 percent annually since 2015. However, the landlocked Central Asian country still struggles with a pronounced lack of domestic consumption expenditure. Improving low levels of credit access in Kyrgyzstan can boost consumer spending and confidence, which is paramount to ensuring a viable financial future for its citizens.
The Economic Importance of Credit
Credit is integral to the maintenance and growth of a market economy. Individuals and private organizations borrow money to buy goods and services in the market, which raises production and stimulates the consumer economy. Once credit debt and loans are paid back, the cycle continues again and again. It logically follows that if more consumers have access to a reliable credit system that provides loans, the economy expands and poverty is reduced.
This reasoning backs the approach that international multilateral organizations such as the World Bank and the U.N. employ in their efforts to combat poverty. In Kyrgyzstan, agriculture is by far the largest sector of the economy, employing about 40 percent of the working population and comprising nearly 20 percent of the country’s GDP. The Food and Agriculture Organization of the United Nations apprised the industry in 2006 and found that approximately 900,000 households contributed half of the agricultural output on 5 percent of Kyrgyzstan’s arable land. In addition, roughly 250,000 private farms employed half of the agricultural labor population while also contributing 40 percent of total output.
Different Types of Credit Access
Although households and private farms are the two largest employers and producers of agricultural output, they cannot rely on the same systems of finance due to their fundamentally different roles in the economy. The categories of credit access in Kyrgyzstan differentiate based on the debtor. As household farms are usually individually operated, micro-financing institutions (MFIs) and non-governmental organizations more aptly serve their personal needs; these small-scale family farms generally have neither the land nor the assets to pay off the sizeable loans. On the other hand, commercial banking suits the privatized farm industry, which can afford to invest in equipment and expansion while employing up to several hundred laborers.
Recognizing this dichotomy, the World Bank’s International Finance Corporation (IFC) invested in multiple projects across different financial sectors. Its Investment Climate Advisory Services Project, initiated in 2009, works to remove barriers to entry in the market that would otherwise dissuade private businesses from expanding. From 2009 to 2012, the IFC also invested $26 million into Kompanion Financial Group, FINCA Kyrgyzstan and UniCredit Kyrgyzstan, all of which provide microfinance services to individuals and small businesses.
Potential Dangers of Expanding Credit
With the relaxation of government regulation and growth in spending, however, comes the danger of a potentially cataclysmic credit bubble. Eurasianet reported in 2012 that only 100 of the near 450 MFI’s in Kyrgyzstan actively engaged with clients; the barriers to starting an MFI are virtually nonexistent. Interested investors need slightly more than $2,000 USD to found their own MFI, and most have no education or background in finance. This lack of barriers, coupled with borrowers that often do not understand the loaning process, can result in overspending of nonexistent money and consequent high debt, which harms those who borrowed money to escape poverty in the first place.
The failure to properly rear a financial market and the motive of profit before anything else promoted in local populations spells disaster for both loaners and borrowers. Financial education of the local population and proper regulatory oversight is crucial for efforts to expand credit access in Kyrgyzstan to succeed. The implementation of finance in an industry as important to Kyrgyzstan as agribusiness bears the grave possibility of worsening the predicaments of those it was designed to help. However, if managed correctly, it also holds a much greater potential to lift Kyrgyzstan’s citizens out of poverty.
– Alex Qi