WASHINGTON, March 12, 2012 – The World Bank’s Board of Executive Directors approved on March 8 a US$ 7.15 million credit and US$ 5.85 million grant for the Financial Sector Development Project for the Kyrgyz Republic. The project will enhance financial sector stability and increase access to financial services.
The political turmoil of 2010 in the Kyrgyz Republic led to significant financial sector instability, causing the collapse of its largest bank and stress in several other financial institutions. This in turn impacted access to financial services in the country, as the number of nonperforming loans and funding constraints grew and lending slowed. This further reduced the already low level of access to formal financial services in the Kyrgyz Republic. Bank credit and deposit penetration in the country are among the lowest in Europe and Central Asia, and interest rates are among the highest and constitute one of most significant constraints to private sector development. While nonbank financial institutions, such as microfinance organizations, are filling some of the gaps for smaller borrowers, including in rural areas, they remain small and face high operational and funding costs, as well as legal, regulatory, and institutional constraints that inhibit their expansion.
“The Kyrgyz Republic’s financial system was severely stressed in the wake of the 2010 political crisis,” says Brett Coleman, head of the World Bank team designing the project. “Extraordinary efforts by the National Bank prevented a more severe crisis, but the experience also revealed several weaknesses in the bank regulation and supervision. The aftermath of the crisis and the renewed commitment of the new government and new management at the National Bank to improve governance and expand access to finance have presented the country with an opportunity to develop a stronger, safer, and more inclusive financial system. We’re especially pleased with the focus on expanded access to safe deposit facilities, which currently are severely lacking in the country, and we’re happy to partner with the government in supporting all these reforms.”
The new project aims to enhance financial sector stability and increase access to finance throughout the Kyrgyz Republic, including in remote rural areas. Specifically, the project will: (i) strengthen banking regulation and supervision, including a new IT system for bank supervision; (ii) support reforms in the Kyrgyz Post Office to expand its financial services; (iii) support deposit mobilization in, and privatization of, Aiyl Bank, a state-owned agriculture bank, while also providing it with liquidity support through a credit line; and (iv) modernize the moveable collateral registry to expand the use of moveable collateral, such as equipment, livestock, and accounts receivable.
The project is expected to benefit existing and new clients of banks, microfinance organizations, credit unions, and the Kyrgyz Post Office as it is expected to increase the safety of these institutions and their outreach. Those living in remote or rural areas will benefit from significantly improved access to financial services, through new points of sales in post offices, possibilities to better leverage their assets to obtain loans, greater access to safe deposit facilities, and expanded payment and remittance services. Given the explicit targeting of women as good clients by many microfinance organizations and credit unions, it is expected that women will particularly benefit from this project.
The project is also expected to support the government’s objectives of improving governance, encouraging economic stabilization; and promoting social stabilization. Increasing access to a variety of financial services, especially deposit services, for the poor, vulnerable, and other underserved populations, will help them manage shocks (e.g., food prices, illness, unemployment), especially in rural areas and remote regions of the country, and will enhance employment opportunities.
The World Bank’s overall mission in the Kyrgyz Republic is to promote economic growth, reduce poverty, and encourage a better quality of life. 45 percent of the World Bank’s assistance to the Kyrgyz Republic is in the form of grants. The other 55 percent is in highly concessional credits – no interest, and only a 0.75 percent service charge. Credits are repayable in 40 years, including a 10-year grace period, while grants require no repayment. The financial assistance to the Kyrgyz Republic since 1992 amounts to over 1 billion, in the form of grants and highly concessional credits.