In Central And Eastern Europe - Microfinance Centre

in Central and Eastern Europe and the New Independent States
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• A competitive edge in contested banking markets could come from the prestige of participating in an EBRD
downscaling programme.
In 1994 in Russia, the EBRD initiated the first of these downscaling programmes through the Russia Small
Business Fund, a US$300-million programme aimed at jump-starting lending to micro and small businesses in
this vast country. Similar programmes followed in Kazakhstan, Uzbekistan, Kyrgyzstan, Ukraine, Belarus,
Bulgaria, Latvia, and Lithuania. The EBRD’s programmes are typically different in two major ways from the
IDB’s earlier projects in Latin America. The EBRD programmes have avoided using a governmental, intermediary
institution to on-lend funds in most cases. Instead, it has engaged in direct bank-to-bank lending. This
strategy saves time but exposes the EBRD itself to higher default risk, since there is no sovereign guarantee for
bank-to-bank loans. 2 Participating banks are allowed to offer a wide range of loans, up to US$150,000 in some
cases. Microloans are considered to be those under US$5,000.
Almost every country in the region now has at least one commercial bank that engages in micro- and smallenterprise
lending. Not all are EBRD sponsored. Other development banks, such as Germany’s Kreditanstalt für
Wiederaufbau (KfW), now sponsor similar programmes.
However, so far, most commercial-bank downscaling programmes have failed to reach large numbers of microenterprise
clients; in fact, most reach fewer than the other MFI types (see Chapter 4). Two key factors seem to have
undermined the downscaling commercial banks’ performance.
The first has been bad timing. At the beginning of the transition in the early 1990s, major efforts were made to
restructure the region’s banks from a state-owned to a market-oriented, private banking system (see Chapter 2).
It was in the midst of this restructuring and reform, in the mid-1990s, that downscaling was introduced.
This first decade of financial-sector reform was disappointing. Many of the region’s banks suffered from severe
governance problems, resulting in bad lending practices and a lack of public confidence. Some countries hit
major financial crises, as did Russia in 1998. Many of its banks, including some with downscaling programmes,
went bankrupt. (Sberbank was an exception—both the bank and its downscaling programme survived.)
Now, in the midst of the region’s second wave of bank reform, downscaling is faring better. However, in many
countries, bank managers have made the programmes a low priority, relative to the larger task of simply keeping
their banks afloat.
The second factor to undermine the downscaling commercial banks’ performance has been their lower-thanexpected
profits. Potential profit margins from microlending now appear relatively small overall—perhaps
smaller than initially assumed. Furthermore, the realization of profits from downscaling is slow. Banks must take
the time to:
• Shift from traditional asset- and collateral-based lending to cash-flow lending
• Delegate lending decision-making to the branch level
2 The Kazakhstan Small Business Fund is the exception to the EBRD rule; it does have an intermediary that has been cooperating smoothly with the partner
banks and the technical-support team.
Organisational Models of Microfinance in CEE and NIS