Kyrgyzstan Capital Map, August 2019

The country's geographic location and recent transition towards a more open economy have paved the way for future economic development. GDP growth rates have been strong for the last couple of decades, but the economic growth remains dependent on remittances and mining. SMEs can become the engine of Kyrgyzstan's economic growth, but their activity and growth indicate they have not been able to fulfill their potential. Commercial banks are the main external provider of capital, but their high collateral requirements present a bottleneck. There are 25 commercial banks in Kyrgyzstan, but they tend to have relatively low risk tolerance, as indicated by their strict lending requirements (150-200% collateral requirements and 15-25% interest rates). It is estimated that around 40-50% of SMEs fail to obtain a bank loan due to excessive collateral requirements. Furthermore, a significant number of SMEs operate informally in a shadow economy and are unable to qualify for bank financing. Microfinance institutions (MFIs) are a major provider of unsecured loans to SMEs with lower capital requirements, especially in agriculture and consumer sectors. There are 148 MFIs in Kyrgyzstan, with 26 of them registered with the Kyrgyzstan Microfinance Association (KMA). As of today, the MFIs collectively have a gross loan portfolio of US$ 240m (10% of total loans outstanding). MFIs total lending to the agriculture and consumer sectors reaches US$ 72m and US$ 56m respectively, altogether constituting 54% of the MFI portfolio. While MFIs can help small business owners, their smaller ticket size (US$ 700 on average) and high cost of financing (30%+ interest rates) mean that they are not well-positioned to provide growth financing as required by larger businesses. A number of development finance institutions (DFIs) have active investments or investment pipelines in Kyrgyzstan, providing capital in the form of grants or loans with a particular focus on large infrastructure and banking projects, or smaller non-commercial projects. DFIs, such as the EBRD, IFC, Aga Khan Foundation, and the Islamic Development Bank, play a crucial role in the Kyrgyz economy, capitalizing on the large underserved rural population, low banking penetration, and Kyrgyzstan's position as a Central Asian functioning democracy. However, to this day, DFIs have had a very limited impact on SMEs. The Russian Kyrgyz Development Fund (RKDF) was established jointly by the Russian Federation and Kyrgyzstan Governments in 2014 to provide financing below-market terms to SMEs via commercial banks and to large businesses directly. RKDF was established to facilitate accession of the Kyrgyz Republic to the Eurasian Economic Union and plays a significant role in the market providing financing on below-market terms to SMEs. Local fund managers have potential to attract institutional equity investors to Kyrgyzstan but face an uphill battle when fundraising. There are two active Kyrgyzstan-focused funds with active investments in Kyrgyzstan: Tredstone Capital and Highland Capital. There are also a number of SME-focused investment funds that are in early stages of fund structuring and fundraising, including AV Frontiers and Accelerate Prosperity. While the above-mentioned funds have potential to change the existing perception of the Kyrgyzstan investment ecosystem and help bring in larger foreign institutional investors, it is unclear how much success they will have fundraising. International equity investors rarely allocate capital to the Central Asia region due to perceptions of corruption and political instability. Perceptions of political instability, high corruption, and a lack of transparency in the investment process have led to a lack of confidence among international investors. As a result, SMEs in Kyrgyzstan face significant challenges in accessing financing from international sources. The USAID ECP Transaction Advisory Team has developed the Kyrgyzstan Capital Map to support the USAID Enterprise Competitiveness Project and its goal of facilitating US$ 22.7m of investment into Kyrgyzstan within three years. The capital map is sector-agnostic, with a focus on challenges that SMEs face while financing their growth. The Team has arrived at insights into the unique challenges faced by SMEs and opportunities for investment through conducting direct interviews with investors, entrepreneurs, and other key stakeholders. Further insights were garnered through extensive desktop research, drawing from proprietary investor and transaction databases, economic and investment literature, and the Team's past work in the region.