In Kyrgyzstan, Informal Enterprises Sustained Their Businesses through Islamic Trade Finance

Micro-entrepreneurs and the self-employed – particularly those operating in the informal economy are among the most affected by external shocks. In Kyrgyzstan, most micro and small enterprises (MSEs) are farmers-led, individual entrepreneurs and small businesses. Despite their importance, they face significant challenges such as inadequate access to finance: Only 5% of MSEs have access to adequate financial services through banks and other formal financial institutions (ADB, 2019). 

ITFC partnered with Mol Bulak, a national leader in microfinance and socially responsible lending, to tackle these bottlenecks. Mol Bulak is one of only two microfinance institutions granted a license for an Islamic window from the central bank. To support the client’s efforts in promoting financial inclusion and Islamic Finance, ITFC approved a trade finance facility worth US$ 2 million. An evaluation, conducted in November 2020, assessed the operations’ outcomes against the following development pathways  :
i) Decreased reliance on solely informal networks. 
In targeting primarily underserved rural micro-enterprises, the operation contributed to decreasing their reliance on solely informal networks. The beneficiary profile of the ITFC facility were micro-enterprises located in rural areas across the country and practicing agriculture (cereals and horticulture) and livestock. These rural MSMEs are characterized by informality, single ownership, self/family employment and reported no or limited access to finance. The financing was mostly disbursed in 2020, during the first waves of the COVID-19. Disbursements benefited 7,449 MSMEs, out of which 1.788 were women-led. Each MSME received an average loan of KGS 14,717, which approximately amounts to US$177. 

The facility could tap into Mol Bulak’s sizeable physical network in often inaccessible areas and proximity to its clients. Toraliev Alchynbay, a community leader in the village of Min-Chynar, Batken region, used the financing to purchase 10 tons of fertilizers to be applied in 10 ha of rice field he owns. He commends Mol Bulak’s local presence, explaining: 

Our village is located far from the center, and we do not have many financial institutions in our area. We used to work with local commercial banks, but their interest rates were high, and the conditions were generally quite complex. As soon as Mol Bulak opened its office in our district center, we started working with them. They provide very flexible terms and low-interest rates. Also, they are very actively involved in our village's social life, providing free assistance to our residents. Sometimes, people cannot go to the district center to make a payment. In this case, they call Mol Bulak, and they come in their car to accept the payment. We started working with Mol Bulak around three years ago, and now more than half of the 3000 households in our village have been cooperating with Mol Bulak.
ii) Promotion of Islamic Trade Finance. 
The main value addition of the ITFC facility derives from being an innovative Islamic Trade Finance product. The Islamic banking sector in the Kyrgyz Republic is underdeveloped. There are only two fully-fledged Shariah-compliant banks and two Islamic MFIs operating in the country despite increasing demand and interest for this financial product. Jenishbek uulu Bozulan, a farmer from Zhany-Zher village (Batken region), appreciated Mol Bulak product for its Sharia Principles, commenting: “I think, to have Islamic financing would be better, not only for me but for everyone. Islamic principles are perfect since the people use funding only for its intended purpose. For example, imagine you received money for fertilizer, but your child or wife becomes sick, for example, COVID-19. Instead to look for the money, you will just spend the money from the credit. And now, with such Islamic financing, at least you can't pay with fertilizer in the pharmacy.”

For others, Islamic Finance is convenient and protect from price fluctuations: “The biggest advantage of Islamic finance is the stable price of products. At the beginning of the season, diesel's price was the same both with Mol Bulak and on the market. Later, the market price increased, but not with Mol Bulak”, says Toraeva Altynai from Kenesh village (Osh region). This opinion is shared by Zhumabaev Asambay, a farmer from Ak-Olon village (Issyk-Kul region) who further stresses the easiness of the procedures: “I did not know what Islamic finance was, and I had never had contact with Mol Bulak before. I liked this product immediately. Because the price of fertilizer was lower than in the market, and besides, no charge for transportation. This is also a saving, especially this year when we had many problems with transportation because of COVID-19. The second thing I liked is the speed and simplicity of the documentation. Banks usually always require a lot of papers. But it was not the same for Mol Bulak. They arranged everything for me in a few days.”

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iii) Increased spending on basic services 
Microfinance plays a crucial role in agriculture (30% of total loan portfolio), and as such, is an effective tool for combating poverty, which remains high - 25.4% of the Kyrgyz population, over 1.5 million people, are below the poverty line, the bulk of which (74%) live in rural areas. 

For most of the surveyed beneficiaries, agriculture is their primary source of income. All respondents started working in this area to meet the food needs of their own families. They developed the farming business exclusively on their own, and after 30 years, their activities are developing into a family business and benefits only members of their family. Based on the data collected, borrowers predominantly allocate their profits toward food purchases and a lesser extent toward starting a business, or other productive purposes.
iv) Accelerated business expansion
The financing was used to purchase agricultural inputs (fertilizers, diesel, seeds) and sustain agricultural production and rural livelihoods during the Pandemic. “We always need fertilizers and diesel fuel. Without fertilizers, our work will stop. And of course, the profit is also very much dependent on it. For example, if the price of fuels and fertilizers rises, not only me, but all the farmers will have a problem with the fertilization of fields, and it will have a negative impact,” states Toraeva Altynai. 

The evaluation tried to identify intangible and non-financial impacts affecting business development. Survey questions aimed to determine the impact of Islamic finance on business development and identifying the respondents' main consumers. All respondents indicated that the financing's main impact was an increase in the volume of trade, bearing in mind that the received fertilizers helped to get better productivity and, accordingly, more turnover. 
Beneficiary profile of ITFC facility Additionality
Micro enterprise / Production sector
Located in rural areas
Operating in agriculture (cereals and horticulture) and livestock
Informality / Limited or no legal existence
Single ownership
Self-employment / family employment
No or limited access to finance
Filling Islamic Trade Finance gap in Kyrgyzstan
New product offering for the client / First Islamic trade financing
Sharia-compliance for the benefiting MSMEs
Integrated solutions: Islamic Finance training + food distribution