Financial services of business entities, their tasks and functions
Table 3 Definition of Microfinance Services in Uzbekistan
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financial services of business entities, their tasks and functions
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- Fig.5. Microfinance Outreach and Financial Penetration
- Fig.16. Average Size of Microfinance Services Leasing.
- Foreign investments and external assistance programs.
- Table 4 International Financial Institutions Credit Lines to SME
- The main directions of development of the financial services of business.
Definition of Microfinance Services in Uzbekistan
Demand-side analysis of SMEs in Uzbekistan likewise points to limitations in their eligibility and appetite for bank services. A lack of real-estate collateral, limited financial capacity, and lack of credit history constrain these firms’ access to formal bank credit, but the need for finance is currently addressed by microcredit institutions.
Commercial banks provide microcredit at concessional rates but require high rates of collateral and provide only noncash credit. Borrower requirements to access bank microcredit seem overly burdensome for the target borrowers, who may not be able to meet these requirements (provide financial statements, a business plan, documented proof of repayment capacity, formal collateral, notarized confirmation of agreement, etc.). Commercial microfinance is not well developed either through banks or MCOs. All microfinance activities, both concessional and commercial, are strictly regulated. Although MCOs offer simplified credit in cash and without collateral, they have low financial capacity and small loans. There is a gap between these two providers, and hence the financial needs of businesses (small and medium-sized) and entrepreneurs are not currently accommodated. The microfinance market consists of 78,337 active borrowers. Following the CBU requirement to increase the capital up to SUM2 billion ($250,000), the MCOs were able to attract more capital financing and doubled their loan portfolio over 2015−2017. The outreach of microcredit organizations has shown a positive tendency since 2012 as well as financial penetration increasing from 5% to 8% over 2012−2017 (see Figure 5).
Fig.5. Microfinance Outreach and Financial Penetration
The average size of microloans reduced from SUM5.3 to SUM4.5 million ( equivalent to $662−$562) due to the growth of outreach in rural areas, while the average size of microcredits and microleasing increased by around 1.5 times from 2016 to 2017, which resulted in the increase of MCOs’ capital and encouraged interest from small businesses (see Figure 6). MCOs are credit-only institutions that are not allowed to mobilize deposits or borrow from the general public, thus they pose no systemiс risks for the financial system. MCO regulations focus heavily on prudential requirements, which seems excessive for these institutions. Similarly to banks, borrower requirements to access MCO microfinance products seem overly burdensome (in particular, collateral requirements similar to bank loans). Like banks, MCOs are limited in issuing cash-flow-based and uncollateralized microcredits—the features that are key for traditional microlending. It is an unlevel playing field—MCOs do not enjoy any of the benefits accorded to banks engaged in the provision of microfinance services (such as access to government funding and tax exemptions on microfinance activities with a social focus).
Fig.16. Average Size of Microfinance Services
Leasing. Leasing is another source of SME finance. Leasing provides a viable substitute for loans to finance equipment. Leasing costs more than bank lending but fewer guarantees are required from the borrower.
As of January 1 2018, there are 126 officially registered lessors of which 104 are leasing companies, the majority of which are state owned and 24 are commercial banks. The largest players in the Uzbek leasing market are state-owned companies. including: “Uzagroleasing,” the largest leasing company focusing on agricultural equipment, “Uzmelyomashleasing” company leases irrigation equipment, and “Uzavtosanoat” involved in leasing commercial vehicles.
The clientele for leasing in Uzbekistan includes a growing array of service sectors including: large construction companies (which are engaged in building construction, power plants, and road development, for example); transport companies; chemical companies; medical service providers; manufacturers; and traders.
The leasing companies primarily focused on providing high-tech equipment as part of the state program implementation of modernization of state-owned industrial enterprises. As Table 8 illustrates, 78.2% of the leasing portfolio belongs to the leasing companies, the volume of leasing transactions in 2017 comprised SUM2.68 trillion ($337.5 million).
Although the regulation of leasing companies is fairly light, banks face some constraints in undertaking leasing operations. The Central bank of Uzbekistan limits leasing activity to no more than 25% of banks’ Tier-1 capital, making leasing relatively more costly for banks. Many banks split the activity into a child-company to avoid this limitation. Leasing companies owned by banks benefit from easier access to low-cost funding.
At the same time, the leasing market faces some growing pains that require further development, and some improvements in the legal framework would help. Like microcredit organizations, leasing companies often struggle to find long-term funding and there is a disproportional regional distribution of leasing services: compare the share of Tashkent city of 30% with regions that have from 3% to 9%.
In addition, there is a lack of knowledge among many potential customers about how leasing works and its potential benefits. One leasing company has conducted a market analysis and estimates that 80% of the potential market does not understand the product (the same company derives more than a third of its customers through deals with suppliers). Also, clear and comprehensive rules for priority over property are needed.
In order to further promote growth of leasing, it is advised to consider building up a secondary market for leased objects and amending the Leasing Law to allow for secondary leases. Adoption of the law will provide a major boost to the industry. The regulator can support leasing further by relaxing regulations defining eligible lease objects to allow for greater variety of equipment and machinery.
Foreign investments and external assistance programs. International Financial Institutions (IFIs) such as Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), the World Bank, International Finance Corporation (IFC), and KfW (German bank) have been actively providing credit lines to SMEs’ lending as well as more targeted business groups such as women businesses and horticulture farms. Given a high interest rate environment, significant unmet demand for SME finance, and limited government subsidy programs, funding from the international financial institutions is very important in Uzbekistan (see Table 4).
Among multilateral donor institutions, ADB is the most active in financing SMEs through two partner commercial banks—”Hamkorbank” and “Ipak Yuli Bank”—over the past decade. Within the framework of these projects with participating financial institutions (PFIs), funds for SMEs’ working capital and fixed assets financing were channeled to developing agriculture, production, and service in rural areas to create jobs. The capacity of PFIs in credit underwriting and analysis also improved so that more than 6,000 micro and small enterprises were trained on financial literacy. Capacity building from these projects suggests that PFIs need to be provided with longer term funds for lending to small businesses, rural outreach, risk management, and continuous enhancement of their entrepreneurial capacity.
International Financial Institutions Credit Lines to SME
Currently, the European Bank of Reconstruction and Development (EBRD) is one of the IFIs actively lending to SMEs through commercial banks. The EBRD currently provides five credit lines for SMEs totaling around $140 million and large-scale technical assistance to strengthen the institutional capacity of the partner banks on MSME lending.
In addition, international financial institutions also consider providing assistance to improve the wider lending environment by supporting regulatory frameworks and developing overall lending infrastructure, and introducing digital technologies to upgrade and expand lending to small businesses.
The main directions of development of
the financial services of business.
As long as one looks mainly or even exclusively at industrialized countries’ financial systems, the focus on GDP growth that characterizes most of the relevant literature is appropriate. But when one looks at the so-called developing countries, as we do in this section, it is definitely too narrow. Development is more than growth. It is also concerned with the distribution of wealth, income and economic opportunities. Moreover, development also has to do with the structure of societies and political systems. Correspondingly, development policy aims at achieving a more equitable distribution of income and opportunities and creating open and stable economic, social and political systems. As we argue in this section, the financial system and its quality are a crucial determinant of development in this broad sense. How are finance and development related? The first link is that the financial sectors of most developing countries are underdeveloped. Lack of financial development reflects general underdevelopment and is both a consequence and a cause of general underdevelopment.
A low level of financial development shows up in a lack of financial institutions, in inefficiency and instability of those institutions that exist and in a financial sector that does not provide services to a large part of the economically active population. In many developing countries not only the really poor but also middle class business people do not get bank loans. In view of the considerable benefits that a country may be able to gain from having a good financial infrastructure one may wonder why many financial systems are so underdeveloped. This has three reasons.
One is a misguided policy of “financial repression” that has its roots in the false notion that finance is not important and that has seriously restrained the emergence of banks and financial markets. The second reason was that those who held power used and “abused” the financial sector for their own enrichment. The third reason was, and still is, that it is simply very difficult to create a healthy financial sector in inhospitable environments.
Finance has to overcome pervasive information and incentive problems that are even stronger in developing countries than in advanced countries with well-functioning legal systems. There is also a close connection between financial systems and development policy. For many years, development finance consisted in simply channeling capital from developed to developing countries.
For a long time after World War II, this policy consisted in transferring large volumes of capital to fund governments and big infrastructure and industrial projects. Then, after 1973, policies changed. The transfer of capital was redirected to specific target groups of poor people that policy makers in the donor countries considered as needy and worthy of external support. These target group-oriented capital transfers deliberately avoided using the formal financial sector as a conduit because development experts were convinced that existing commercial and development banks were neither willing nor able to reach poor However, development policy did not always treat finance as synonymous with capital.
A third phase of development finance policy took a completely different perspective and “detected” that finance can also be understood in the sense of financial institutions and markets. It whole-heartedly subscribed to the new learning of Shaw (1973) and McKinnon (1973) that instead of financial repression, liberalization and deregulation of the financial sector were called for. Some experts expected that banks that were set free to pursue their own financial interests would soon start to extend loans to the formerly neglected clients and that they would do this wisely. However, this expectation was frustrated. Instead of opening up to a new clientele, many financial institutions took on too much risk and entire financial sectors became highly instable and collapsed under the burden of bad loans (Diaz-Alejandro, 1995). What the ultra-libertarian policy makers had overlooked was exactly what Stiglitz (1988) had taught for years: finance is shaped by serious information and incentive problems, and therefore financial systems must be regulated and guided by policies that limit risk-taking. This negative experience finally paved the way for a new policy approach that aims at strengthening financial systems by building up financial institutions that are at the same time financially viable and socially relevant. Recent experience suggests that this latest development policy approach, which considers finance in a broad sense and focuses on financial systems, on institution building and incentive design may finally be successful.
Trends in the economy of Uzbekistan provide the basis for expanding investment in the real economy and require accelerating the growth rate of the Bank's resource base.
The main directions of attracting funds and increasing the resource base:
- increasing the bank's capital by increasing profits and raising funds through the issue of shares;
- attraction and maintenance at a stable level of funds of legal entities and individuals;
- gradual transition from short-term to long-term resources by attracting deposits of legal entities with a view to consolidate part of corporate clients' funds.
Specific volumes, instruments, terms of attraction/placement and schemes of operations are determined on the basis of the current needs of the Bank for replenishment/use of the resource base, as well as taking into account the financial markets and the results of a comparative analysis of possible options for attracting. Capitalization of the Bank is a priority strategic task, the solution of which will ensure the further development of the Bank and the strengthening of its financial potential. The implementation of the Bank's capital increase program will allow to increase the volume of active operations while complying with the mandatory economic standards of the Central Bank and in turn will provide additional income for the Bank to form and reinvest profits.
At the same time, the main tools used by the Bank to allocate resources are:
- commercial lending to legal entities;
- placement of funds in the interbank deposit market;
- conducting operations with securities.
As part of its asset management strategy, the Bank will strive to maintain a sufficient level of liquidity, balance the structure of the Bank's assets and liabilities by terms and types of currencies, and ensure the required level of diversification by industry, clients and investment. The main objectives of the Bank's development for 2017:
- strengthening of the bank's position in the financial services market;
- build-up of the resource base, by attracting funds from new customers and stimulating the growth of funds in the accounts of legal entities and individuals;
- increase in the capital of the Bank, which ensures the dynamics of growth in business volumes;
- strengthening positions in regional markets, improving infrastructure, increasing the efficiency of the network of branches;
- improvement of customer service, combining standard technologies with an individual approach to each client;
- development of the client base and attraction to the Bank of the greatest possible number of first-class clients with the consolidation of long-term mutually beneficial cooperation;
- improvement of the product range aimed at building long-term relationships with customers;
- development of partnerships with leading financial institutions to provide customers with more opportunities to choose high-quality banking products;
- ensuring stability and sustainability in relation to existing and potential risks, by supporting the effective operation of a full-featured risk management system that includes an internal control system;
- qualitative improvement of business processes on the basis of automation and development of information technologies;
- improving the productivity, efficiency and quality of the Bank's staff.
At the broadest level, we can distinguish among the following development outcomes where DFIs report direct impacts:
Employment generation: Employment creation is often reported as the “direct” number of jobs created (or supported) in DFI-supported business and sometimes as “indirect” jobs calculated through input-output tables. Direct employment impacts are relatively easy to monitor, assuming willingness by DFI clients to divulge such information and capacity to baseline, monitor and report any changes in employment levels. Most DFI annual reports report on direct jobs supported, and the evidence base on this is of reasonable quality.
Government/tax revenues: Reported tax revenue relate to government revenues generated by DFI-supported projects in-country. An increase in taxes paid by DFI clients helps improve government revenues, which could in turn unblock growth- enhancing public investments (e.g., infrastructure, health care, education). Revenues tend to be reported as direct contributions (by DFI clients/projects).
Investment outcomes: As part of the project appraisal processes, DFIs report financial rates of return of an investment. DFIs also examine the direct contribution impacts on other enterprises supported by their financial activities.
Environmental and social outcomes: Information varies significantly between DFIs. Some DFIs report on CO2 emissions avoided through saving energy. Some also report on the quality of jobs.
Catalyzing and mobilization: Mobilization is usually measured as the amount of coinvestment by other parties (often divided into other DFIs and private-sector finance). This is relatively straightforward to report, although there could be issues of commercial secrecy related to coinvestors. Mobilization is often reported in annual reports in the form of leverage ratios (e.g., the ratio of DFI investment to total investment), although we should realize that a statistical leverage ratio does not automatically assume cause and effect. DFIs can also catalyze investment through demonstration effects. In a systematic literature survey, Spratt and Ryan-Collins find that the existing evidence on DFIs’ demonstration effects is still limited, given the too recent introduction of DFI impact evaluation systems as well as the difficulty of proving causality.
DFIs report development outcomes at project level, but these outcomes are normally not reported in the context of global goals such as the SDGs. Understanding how DFIs contribute to global development goals hinges critically on the ability to assess and communicate the indirect effects of DFIs. Some evidence on the indirect impacts has emerged, but further, more detailed analysis would be beneficial.
There are many examples of the importance of indirect impacts for reaching global goals. For example, the ability of DFIs to contribute to climate change goals depends on their ability to catalyze investment in energy efficiency and green technologies, not just on whether an individual project has an acceptable good financial return or saves on energy use. Likewise, their impact on poverty does not depend so much on how many jobs are created directly in beneficiary companies, but also on how many jobs are consequently created indirectly in suppliers and the wider economy. If DFIs had better evidence of their indirect impacts, they would be able to have more strategic engagement on the global development goals, and this more compelling case would make it easier for their shareholders to allocate more resources through DFIs.
The emerging evidence on the indirect effects is structured around: indirect employment effects; labor productivity and economic growth; investment; and poverty and environmental effects. This section discusses the availability and quality of evidence relating to indirect impacts.
Indirect employment effects. The employment impact of DFIs follows a number of channels:
Direct Impacts: Jobs created in companies or projects directly supported by DFI investments.
Indirect Impacts: Jobs created through forward and backward supply-chain linkages as a result of a DFI-supported project or company.
Induced Jobs: Jobs created through demand multipliers and other consumption effects of direct and indirect jobs created by DFIs.
Second-order, Growth Effects: Jobs created through growth effects (some of these relate to productivity spillover effects when third companies operate more efficiently, expand economic activities, and create more jobs in the process).
Gaps in Knowledge on Development Impact
There is much to admire in the way DFIs already cover the direct outcomes of their investments. They do this better than most aid agencies, for example. Improvements can be made (e.g., by adopting the same metrics), but it is not a major source of contention among stakeholders. Instead, as the previous section indicated, the indirect effects matter a lot for understanding the contribution of DFIs to global development goals. Progressing on these areas requires more studies that examine the indirect effects of DFIs. However, these effects are not easy to measure and there are challenges to navigate. DFIs can be expected to deal with some but not all of these challenges as they extend well beyond the realm of DFIs. We discuss the challenges and possible solutions here.
• The type of DFI investment shapes the type of development impacts that is usually highlighted. Investments in infrastructure will generate data on infrastructure availability (i.e., additional energy generated), but not data on productivity, which need to be estimated; investments in small and medium-sized enterprise funds will provide data on the number of SMEs supported. As investments target private-sector engagement through operations that lead to financial returns, development impacts (i.e., poverty reduction) beyond this sphere cannot feasibly be captured without making assumptions and engage in estimations.
• A further constraint relates to data protection regulation and use of commercially sensitive information. There are limits to how much commercially confidential information can be divulged. This leads to potentially missing metrics that could provide the DFI development impact discussions with more depth (e.g., finance flows and profits coming in and out of target countries). Stringent data requirements for impact evaluation will require collaboration from DFI clients, who may have challenges to complying. DFIs need to keep pushing the boundaries on this given the reasonable demands from taxpayers, who provide the funding for DFIs.
• Finally, attention and capacity to undertake development impact studies within DFIs is limited, especially in smaller bilateral DFIs. They will not be able to undertake detailed impact assessments of each individual investment.
It is important to undertake more impact studies of indirect effects and tackle the issue of additionality, but this needs to be done in a targeted way underpinned by a practical strategy. For example, DFIs can work together for a number of sector studies and individual DFIs can undertake a number of illustrative studies each year.
In this coursework describes the financial services of business entities, their tasks and functionsin in Uzbekistan with a special focus on two types of non-bank microfinance institutions – Credit Unions and Microcredit Organizations.
The private commercial nature of these MFIs provides new evidence on the commercially oriented microcredit model and SME lending, which is an emerging trend in mainstream microfinance.
The coursework provides two important contributions. On the supply side of microcredits, the determinants of initial placement of MFIs are analysed. Using district level data, we find that the determinants of MCO growth are closely associated with the household/family nature of business to which the microcredits are disbursed. In contrast, CUs serve middle class enterprises on a higher business and economic scale, for which the economic development of the region and industrial composition is an important factor.
The results suggest that non-bank microfinance institutions in Uzbekistan follow general economic principles. Given that MFIs represent the financial segment functioning based on competitive market principles, historical changes in the legal framework and other exogenous changes did not impede their free market functioning. On the demand side, the excess demand for microcredits is analysed. The specific contribution is based on identification of eligible non-participants, as not all visitors to MFIs end up eventually getting the microcredit.
Analysing the ratios from MFI managers and credit officers, we find that the total probability of microcredit approval is on average 0.5. This data is potentially important for policy makers, as actual margins of the untapped market could shrink by as much as half when the narrow definition of eligible applicants is taken into consideration.
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