Lessons

Kazakhstan: Small and Medium Enterprise Investment Program Tranche 3 and Multitranche Financing Facility

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Lessons

Careful examination of absorptive capacity is vital to ensuring that ADB loans are fully utilized and therefore are as beneficial as possible. 

The Damu Entrepreneurship Development Fund (Damu), the executing agency of the multitranche financing facility, and ADB had different views on the factors that led to the excessive size of the tranche 3 loan. In its facility completion report, Damu in effect offered the view that the third tranche was too large to be absorbed by the participating financial institutions (PFIs) in a short time and that ADB should have done a more thorough analysis of the demand for funds. The ADB project team’s recollection is that it had questioned the PFIs’ absorptive capacity during tranche 3 processing, but Damu and the PFIs had expressed full confidence about their ability to disburse the full loan amount quickly.  On hindsight, ADB should have scrutinized PFIs’ projections more carefully in light of the weakened economy and the significant devaluation of the tenge in 2014−2016. 

Project Cycle Stage: 
Preparation

Aside from loan capitalization, incentives need to be developed to encourage commercial banks to lend more to small and medium enterprises (SMEs).  

The participating financial institutions (PFIs) in this investment program were intensely focused on the cost of the funds provided to them (6.49% in tranche 1, 7% in tranche 2, and 8.5% in tranche 3) and were not properly incentivized to increase the number of SME borrowers. Had Damu charged a lower margin for PFIs that achieved the specified lending targets, the number of SME borrowers might have been higher. Whereas the loans to the PFIs were supposed to be disbursed promptly to SMEs, some PFIs—Tsesnabank in particular—instead utilized the funds for their own treasury operations for as long as possible. ADB tried to convince Damu, but without success, to impose penalties on Tsesnabank to deter it from engaging in the abusive practice. (Preparation: FILs, SME FILs, SME FILs Kazakhstan)

Project Cycle Stage: 
Preparation

Implementation of agreed measures to mitigate the risks associated with foreign currency funding is critically important, particularly for financial intermediation loans that will be sub-lent in local currencies.

The investment program intended to raise local currency funds for Damu (and indirectly for the PFIs) in one of two ways: (i) through cross-currency swaps with international bank counterparties, which was achieved in tranche 1 but could not be achieved in tranches 2 or 3; or (ii) the issuance of a local currency bond, which was never achieved. Therefore, ADB had to lend US dollars to Damu for tranches 2 and 3, an arrangement that Damu did not find satisfactory. In its facility completion report, Damu gave notice that, in the future, it will not consider attracting [foreign] currency loans, though hedging instruments are provided, since the practice proved their high risks and lack of flexibility….. 

Project Cycle Stage: 
Implementation

Gender targets need to be clarified with PFIs during project processing and their attainment strengthened through direct implementation support, better communication, and capacity building.

The investment program fared well in its gender targets. It successfully incorporated sex-disaggregated data collection in the executing agency’s monitoring system for the program and ensured women’s participation in the training activities in excess of targets.  It also surpassed its target of at least 26% loan applications received from women, with women comprising 31% of the borrowers under tranche 1, 34% under tranche 2, and 37% under tranche 3.  But more could have been done at the level of the PFIs to improve the implementation of the gender action plan (GAP).  Drawing on this program’s experience, GAP implementation in future financial intermediation loans may be improved by: (i) seeking agreement with the PFIs on the GAP and gender targets right at project processing to develop their ownership of these; (ii) ensuring the integration of genders indicators into the PFI data collection systems; (iii) maintaining open communication lines with the PFIs to facilitate the provision of gender implementation support as necessary; and (iv) providing gender capacity building activities to the PFIs. 

Project Cycle Stage: 
Preparation
Implementation

Having a simple environmental and social management system (ESMS) and an environmental staff in place in F1 financial intermediation loans will make implementation more efficient.

ADB’s Safeguard Policy Statement, 2009 does not require PFIs to have an ESMS if the project is categorized as FI (equivalent of safeguards category C). However, based on the experience under tranche 1, it would be beneficial if a simple ESMS is in place and an environmental staff is on board to review and support the safeguards compliance of subprojects even if the investment program itself is classified as F1. Because of the absence of an ESMS and environmental staff, numerous requests for information were made to ADB’s Central and West Asia Department that used significant resources to respond to the requests. 

Project Cycle Stage: 
Preparation
Implementation
Background

At program appraisal, limited access to medium-term credit constrained the growth of small and medium enterprises (SMEs) in Kazakhstan.  To help address the challenge, the Asian Development Bank (ADB) approved a $500 million multitranche financing facility (MFF) for the Small and Medium Enterprise Investment Program, in September 2010. The program was to provide government-guaranteed financial intermediation loans (FILs) to the Damu Entrepreneurship Development Fund (Damu), the state agency tasked with supporting SME development. The FILs were to be onlent by participating financial institutions (PFIs) to SMEs.

The MFF was structured in three tranches. Tranche 1, approved for a loan of $150 million in September 2011, was relent by Damu in equal amounts to three PFIs and fully repaid on time in August 2016. Tranche 2, approved for $122 million loan in October 2014, was relent by Damu equally to two PFIs.  Damu repaid the loan in two installments, with the second one made just one month before loan maturity in October 2015.  The tranche 3 loan of $228 million, the focus of this report along with the whole MFF, was approved in September 2015 and relent by Damu to four banks. Repayment of the loan was completed in several installments from April 2017  to December 2018.

As with the previous tranches, the tranche 3 loan had a 5-year maturity period. Its envisaged impact and outcome were aligned to those of the MFF: sustained job creation and economic growth, and increased access of SMEs to medium-term credit on a sustainable basis, respectively. But it took up only two of the three planned outputs of the MFF: medium-term financing to SMEs and improved financial sector outreach, with a focus on women entrepreneurs and lending outside of the bigger cities.  Like the tranche 1 and tranche 2 projects, tranche 3 did not adopt the planned output of improved effectiveness and efficiency of Damu, as only the MFF can achieve this in measurable and verifiable terms.

At completion, both the tranche 3 project and MFF substantially achieved their expected outcome and in addition, most of their output targets.  By end-2016, the tranche 3 project added about $197 million to the SME loan portfolio, overachieved its target to maintain women at 33% of its SME sub-borrowers (accomplishment was 39%), overachieved its target to maintain the women entrepreneurs supported under Damu’s Business Development Services at 46% (accomplishment was 57%), and surpassed its target to bring at least 50% of its lending outside the cities of Almaty and Nur-Sultan (accomplishment was 76%). However, compared to its 3,100 target, only 403 loan accounts were opened by end-2016.

Moreover, two of the four PFIs of the tranche 3 loan—Delta Bank and Kazinvestbank—became insolvent during project implementation after suffering deposit runs. The other two—Kazkommertsbank and Tsesnabank—also exited the project early because of financial deterioration. Kazkommertsbank was acquired by Halyk Bank in 2017 after the state-owned Problem Loans Fund assumed $7.5 billion of the bank’s bad loans. Tsesnabank received a $3.4 billion bailout in 2019 and also underwent a change in control (and a change in name to First Heartland Jysan Bank).  These developments forced a rating of less than likely sustainable for the tranche 3 loan.

Aggregating all three tranches, the MFF for its part achieved five of its six output targets, including those on the amount of SME loans issued (about $5.86 billion vs. the target of about $2.55 billion); the percentage of women in total number of borrowers (33% of 2,355 borrowers vs. 26% target); enabling Damu to meet the requirements for getting a credit rating (BBB+/A-2 from Standard & Poor’s in 2014); collection of sex-disaggregated data by Damu, and (v) increased women’s participation in Damu’s SME Top Management Training (40% in 2011 and 45% in 2018). 

Unlike the tranche 3 loan, the MFF was deemed sustainable.  This was because it enabled Damu to expand its lending programs to banks to allow them to provide albeit short- not medium-term financing to SMEs and helped improve Damu’s effectiveness and efficiency. Over the decade ending 2019, Damu’s loan portfolio grew substantially and remained profitable in 9 out of 10 years. Damu has also continued to play an important role in the government’s SME development strategy. Very importantly, the MFF increased Damu’s focus on women entrepreneurs—a focus that has continued after the program ended in 2017.

Both the MFF and the tranche 3 project had Damu as executing agency.  Implementing agencies for tranche 3 comprised the four PFIs.

Project Information
Project Name: 
Small and Medium Enterprise Investment Program Tranche 3 and Multitranche Financing Facility
Report Date: 
December, 2020
Main Sector: 
Finance
Country: 
Kazakhstan
Project Number: 
44060-025
Report Type: 
PCR
Project/Modality: 
MFF
Themes: 
Inclusive Economic Growth
Gender Equity and Mainstreaming
Private Sector Development
SDG: 
Goal 8: Decent Work and Economic Growth
Goal 5: Gender Equality
Sub Sector: 
Small and medium enterprise finance and leasing
Loan Number: 
3231, 3261
Source of Funding: 
OCR
Date Approved: 
L3231: 15 December 2014, L3261: 24 June 2015, MFF: 29 September 2010
Report Rating: 
MFF: Successful, Tranche 3: Less than successful

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