Banking competition, good or bad? The case of promoting micro and small enterprise finance in Kazakhstan

Abstract

Competition is claimed to be beneficial in development projects promoting micro and small enterprise finance although there are still doubts as to whether these loans can be developed into a profitable business. Our research sheds new light on the question of how many MSE banking units should optimally be created and supported in a certain region. We employ a unique data set from the European Bank for Reconstruction and Development for Kazakhstan, and investigate which strategy contributes more to the overall success of the programme: a strategy of setting up several competing banks or a strategy of establishing regional monopolies. ‘Competition is the most important principle on which our strategy is based. As in any other market, effective competition provides incentives for banks to offer market-based and demand-oriented financial services. Competition encourages the development of better products and services at lower cost.’ (Matthäus-Maier and von Pischke, 2004, p. 1).

Acknowledgements

We are grateful to the EBRD Small Business Department, namely Elizabeth Wallace and Elvira Lefting, which kindly supported the supply of the data. For their valuable support during the period of building the data set, we thank Berthold Hertzfeld and Dennis Völzke from IPC GmbH, Frankfurt, the consulting firm providing management service for the Kazakhstan Small Business Programme (KSBP) on behalf of the EBRD. We thank Clive Bell, Hans Gersbach and participants of the Global Finance Conference 2005 in Dublin, the Annual Meeting of the German Economic Association 2005 in Bonn and the Annual Meeting of the German Finance Association 2005 in Augsburg for helpful comments and suggestions. Finally, we acknowledge the excellent research assistance of Benjamin Klaus. Of course, the usual reminder applies.

Notes

¹The subsidies are normally provided in the form of technical assistance for selecting and training special micro loan officers and establishing the administrative structures and procedures of the new loan departments.

²The first article to point out that competition has reached the microfinance market and will be important for the future of the microfinance approach is Rhyne and Christen (1999). The article was presented in 1998 at a conference on Microfinance for practitioners and academics by Elizabeth Rhyne, one of the most prominent consultants in the microfinance industry. The article is based on a case study of microfinance in Bolivia, which is one of the furthest developed microfinance markets in the world. Donors first supported microfinance in Bolivia at the end of the 1980s, building up several MFIs, among them BancoSol and Caja los Andes which now belong to the flagship institutions of the microfinance movement (Rhyne, 2001). Rhyne and Christen point to the dangers that the entrance of commercial players into the microfinance market carries for the financial sustainability of incumbent nonprofit players.

³Navajas et al. (2003) find empirical evidence backing their model results in the data of two big competing MFIs in Bolivia, BancoSol and Caja los Andes.

⁴See also Terberger and Lepp (2004).

⁵See Indices of main socio-economic indicators, The Agency of Statistics of the Republic of Kazakhstan. Retrieved 3 April 2007, http://www.stat.kz/index.php?lang=eng&uin=1171952844&chapter=1171220044 and http://www.expert.ru/tables/kazakhstan/2005/26/document244025/

⁶Among them EBRD, USAID and TACIS.

⁷The qualification criteria consisted of a full banking licence, approval by the NBK, IAS audit, programme compatible strategy and commitment of bank management to gain experience in MSE business, location of geographical interest as well as financial stability according to banking regulation standards.

⁸The KSBP was implemented under the management of IPC GmbH, Frankfurt, a private consulting firm specialized on development finance.

⁹The standardization includes the introduction of an IT-based Management Information System (MIS), the MSE lending guidelines and the introduction of an incentive-based payment scheme for loan officers, which covered all aspects of their performance from disbursement to portfolio quality.

¹⁰In the following sections, we use city and town interchangeably.

¹¹We also tested the covariate expenses for personnel (CostPersonnel) which is less comprehensive than (CostAdmin). Results did not change qualitatively. Thus we abstain from reporting these regressions.

¹²The figure does not include the 12 nonreporting branches.

¹³Ikhide (2003) showed that a higher perceived risk on the bank's side can cause a credit crunch in developing countries.

¹⁴ It has to be mentioned, however, that there are rather big differences between the various MSE departments. The least profitable department contained in Table 1 reports a return on average portfolio of just 0.15% for the first quarter of 2004. An analysis of why profitability varies is beyond the scope of this study.