364. The non-bank financial sector (NBFS) is a component of the financial system that provides the community with various financial services and attracts fd inancial resources for investment in the economy. Micro-financing organizations, insurance companies, non-state pension funds and the securities market are major elements of the NBFS that have an impact on poverty reduction.
365. Accessibility of financial services and small credits to the population and entrepreneurs in rural areas of the Kyrgyz Republic is one of the most important conditions for an increase in employment and poverty alleviation. At present, there are a number of micro-financing institutions and schemes for extending individual and group micro-credits successfully operating the country. It is worth noting positive operational experience of local organizations in this area.
366. The Kyrgyz Agricultural Financial Corporation (KAFC) is actively increasing its operations. In 2001, the volume of credits to agricultural commodity producers was about 587 million soms, which is 18 times more than four years earlier. It is important to note that, in recent years, interest rates have been continuously declining on extended credits, the repayment rate of which is more than 90 percent. Analysis demonstrates the high level of efficiency of micro-financing. For example, a line of credit for potato growing resulted in an increase in the monthly income per one member of a family (after repayment of the credit) from 84 to 492 soms, for wheat growing and cattle feeding, from 86 to 270 soms and for livestock farming, from 170 to 245 soms.
367. Starting in 2002, the Kyrgyz Agricultural Financial Corporation plans to continue and broaden its activity within the UNDP project, Rural Financing-2. The Corporation intends to reduce the interest rate from 26 to 22 percent, while for permanent, honest clients with successful credit histories, down to 18 percent. In 2002, it is planned to increase the total volume of crediting to more than 800 million soms, and by 2003 to increase the credit portfolio to 1.5 billion soms. These intentions deserve all possible support It is also necessary to emphasize that within the framework of the project, Rural Financing-2, for a total volume of US$15 million, a special allocation of funds for micro-financing is expected to be US$3 million. Within the framework of micro-financing, it seems to be quite possible to form rural community funds at the local level that can act as wholesale recipients of the KAFC credits for their further allocation to community members.
It is necessary to promote such forms of financing in the services sector, which underused micro-financing because of a lack of effective business plans. This is very important because, in contrast to financing producers, growth in the services sector creates new jobs. This will require active explanatory work, consultations and assistance from local self-government bodies in the preparation of business plans.
368. Significant growth rates have been recorded in the development of credit unions in the Kyrgyz Republic. Today, credit unions represent a successfully developing system, comprising more than 300 credit unions with a total equity of more than 120 million soms. As of 1 December 2001, repayment of credits in the system of credit unions as a whole was almost 99 percent. The work of credit unions promotes creation of additional jobs, development of small and medium business and increases in the volumes of agricultural output. They help borrowers to develop a new psychology of work under free market conditions, promote the process of social mobilization that broadens opportunities of the very poor and their communities, strengthens confidence and ensures access to micro-financing resources.
369. Financial support is provided to credit unions by the ADB under an international agreement but, in future, there is the possibility for their gradual transfer to self-financing. Special legal provisions and prerequisites have been established for this purpose. The credit unions have a regulatory and legal framework in the form of a separate Law on Credit Unions, that came into force on 24 November, 1999. Issues on taxation of the credits unions have been resolved; in 2001, certain amendments were introduced to the relevant legislation that envisage exemption from tax of dividends received by the credit union participants. At the same time, it should be emphasized that, so far, credit unions have not established institutional capital, which creates problems for their future growth. There is also a need to improve the concept of credit union development and formation of the credit unions’ capital, introduction of book-keeping and other issues.
370. For the successful development of the system of credit unions, it is possible that auxiliary structures will be developed, such as deposit insurance, training centers and auditing services. At present, a large number of credit unions have already indicated their intention to develop as independent cooperative financial institutions in the form of mini-banks in their regions, rendering a broad spectrum of financial services. For this purpose, many credit unions are institutionalizing their equity in order to obtain licenses from the National Bank of the Kyrgyz Republic for attracting deposits from their participants. Positive developments in the area of credit unions make it possible to anticipate the probable development of a specialized financial company for the support and development of credit unions and its transformation into a cooperative bank for credit unions, that will provide the population of rural areas with access to a large spectrum of banking services.
371. Active work in micro-financing is being carried out by international donors; in 2001, the amount of the credits allocated by them was more than 1.2 billion soms. A significant contribution in development of micro-financing is being made by the World Bank and European Bank for Reconstruction and Development (EBRD). Credit lines for micro- and small-scale credits have been opened. An important factor is that the new line of credit (EBRD-2) for the amount of US$15.0 million is being opened without a Government guarantee and without direct participation of the National Bank. The EBRD will provide financing to clients directly through participant banks. No fixed interest rate is being established. Such a flexible financial policy has a great significance, which implies that a potential burden on the state budget is removed and local banks are being involved in micro-financing. Since micro-financing is a basis for social mobilization of the population, the State will actively promote activities of micro-financing and micro-financing institutions, providing accessible services and credit resources to the poor strata of the population, and pay more attention to creation of a legislative framework for their successful development. The accumulated experience with micro-financing should be widely replicated among financial organizations.
372. With the transition of the economy of the Kyrgyz Republic to a market-based system, an obvious need has appeared to form an insurance market as an integral part of the financial system. Insurance carries out both economic and social functions, including mobilizing medium-term and long-term capital within the economy as well as covering the population and legal entities for various risks.
373. At present, there are 24 insurance companies operating in the Republic. The volume of insurance premiums received does not exceed 0.2-0.3 percent of GDP. Less that 1 percent of potential risks (against 90-95 percent in a majority of developed countries), have been insured. The proportion of types of activities does not change practically from year to year. Life insurance represents the largest share, about 80 percent of premium payments of all types of insurance activities. The share of property insurance is about 18 percent and the smallest share belongs to liability insurance, about 2 percent. This indicates the insufficient development of this sector, although the insurance market has considerable potential, a formed infrastructure and an established regulatory and legal framework.
374. Within recent years, there has been an increase in collected premiums. In 1998 they totaled 25 million soms and 130 million soms in 2001. It is important to stress that the increase in received insurance premiums has taken place under the conditions of voluntary insurance, which indicates that the interest in these services on the part of the population is gradually increasing.
375. Further development of the insurance market is being effected by the generally unstable situation of the economy and the real sector, low culture of insurance, non-involvement of large legal entities in this activity, and a lack of effective mechanisms for the protection of the rights of insurers and those of the insured. Taxation of insurance companies does not stimulate the development of insurance activities. The system of supervision and regulation has not been improved, the current practice does not correspond to international requirements, while the methodological base has not been well developed. A problem that persists is the insufficient number of specialists able to carry out actuarial estimates of risks that are the basis of insurance business.
376. Insurance companies have low levels of capitalization, offer only a limited number of insurance services to their clients, lack highly qualified specialists who have good command of presentation and promotion of services, and they are characterized by a low level of management quality. For these reasons, insurance companies do not fully execute the functions assigned to them for improvement of the populations’ access to insurance services and mobilization of domestic investments in the economy.
377. In order to develop and strengthen the market for insurance services, the following improvements are advisable:
· Legislation will need to be developed to improve the regulatory and legal framework of insurance activities that will create the pre-conditions for further development of the market for insurance services.
· An institute of actuaries should be established in the Republic. For this purpose, it is necessary to form and develop a corresponding database. Such and institute would provide advisory, analytical and informational services to insurance companies and pension funds, as well as to other financial institutions of the Republic. Actuarial training courses would be organized and necessary educational materials prepared for this purpose.
· There is a need to strengthen the system of financial supervision over insurance companies in order to ensure guaranteed protection of interests of all participants in the insurance market.
· Analysis of the range and sufficiency of the list of essential forms of insurance is required to help to raise capitalization of national insurers, promote the establishment of insurance companies and develop an insurance culture.
· Measures need to be taken to establish the Centralized Reinsurance Fund on the basis of an association of local insurance companies for the purpose of ensuring sustainability of the insurance system and reducing capital outflow from the Republic.
All these measures will create a competitive insurance market, ensure the financial stability and reliability of insurance organizations, improve the quality of services provided by them, and expand the scope of application of insurance protection of property and personal interests of the population against various risks.
Non-Governmental Pension Funds
378. Non-government pension funds (NGPFs) are destined to play an important role in formation of the NBFS. The Law on Non-Government Pension Funds has been developed and adopted in the Kyrgyz Republic. Notwithstanding this, there is only one such fund functioning in the Republic. The activities of NGPFs are characterized by an imperfect regulatory framework and insufficient awareness by the population about their activities. Insufficient guarantees of preservation of deposits and the risk of their devaluation due to high inflation, the core causes of which have not yet been eradicated, are also regarded as barriers to their development. In general, this situation makes it impossible for NGPFs to mobilize domestic resources for their investment in the real sector. At present, pensioners make up 7 percent of the population. Today, almost 600,000 people in the Republic receive pensions and allowances. In addition, it should be borne in mind that thousands of people do not have permanent jobs and are not covered by the public pension scheme, probably resulting in negative social consequences.
379. The State should ensure the basis for attainment of stable and long-term development of the economy. With the successful implementation of the stabilization strategy, conditions will be created for strengthening NGPFs as an alternative to the existing state pension system. The Republic will continue working on development and improvement of the regulatory and legal framework of activities of NGPFs, creation of a system of supervision and introduction of individual pension schemes and individual accounts. As a result of this policy, NGPFs will be able to accumulate financial resources that will be invested in securities. These funds will then help to provide protection from poverty.
380. Together with the banking system, the securities market (SM) promotes investment activity and the flow of funds from one sector to another, thus stimulating structural change in the economy.
· Lack of attractive financial instruments Corporate securities are mainly represented by shares, the yield on which depends on the company’s profitability, and a majority of enterprises of the Republic are loss-making. The market for corporate bonds is developing weakly. There is no legal base regulating circulation of mortgage, municipal and derivative securities, one of the major factors impeding their development.
· Limited domestic investment resources Low income of the population and insufficient development of the institutions for collective investment do not promote investing in securities.
· Insufficient transparency of the securities market The present situation regarding disclosure of information by issuers and professional participants of the securities market do not satisfy investors’ requirements related to information.
· Imperfect legislation on securities The existing legislation has gaps related to issuance of securities, regulation, disclosure of information, etc., which sometimes leads to conflict situations.
· Insufficient protection of investors’ rights and a low level of awareness of the population about the issues on investing in securities.
· Tax on yield The existing system of taxation on securities yields does not promote the development of the market of long-term bonds.
· Existing technical infrastructure of the securities market Although the SM is capable of offering the whole spectrum of services, it does not cover all regions of the Republic. In this connection, certain difficulties are faced when concluding deals on securities in the regions.
383. The mission of the Kyrgyz SM is establishment of an effective mechanism for accumulation of investments and their redistribution, transforming them into a source of additional income generation for the population, and promoting inflow of long-term financial capital into the country.
384. Further development of the SM will be carried out by implementing the following priority measures.
In order to protect against violation of investors’ rights, to increase the effectiveness of supervision on the part of the regulator of the securities market.
The principle of equal market access for all participants of the SM, state, legal entities and individuals, shall be observed.
All participants shall have equal conditions for carrying out activities in the SM, including implementation of the rights provided by securities, conducting operations with them, etc.
It is necessary to draft a special law establishing the mechanisms for protection of investors, the major objective of which is compensation of a part of investors’ funds in case they are lost due to the fault of intermediaries of the SM.
385. Improvement of corporate governance should also promote protection of investors’ rights and strengthen their confidence. An important direction is compulsory introduction of international accounting and financial reporting standards at enterprises. The issue of an increasing variety of financial instruments and their accessibility will be resolved by creating conditions for the emergence of new securities and the development of existing instruments. For the purpose to increase attractiveness of debt securities, it is necessary to improve taxation applicable to such securities. Continuous work should be conducted with the public in order to explain investing, activities of institutions of collective investment and professional participants of the SM. Broadening of a network of professional participants of the SM in the regions will promote operations with securities at the regional level. To solve problems of transparency of the SM, it is necessary to ensure disclosure of the information on issuers, professional participants and other information on the securities market to any interested person. This problem can be solved by establishing an informational center, where potential investors may have access to reports prepared by securities issuers, as well as other information.
386. Implementation of these measures should increase the number of attractive instruments for investing in the SM. It will become transparent, additional guarantees will appear to protect the rights of securities holders that should result in an inflow of additional resources. A study on assessment of the current situation of the NBFS and the future for its development will be carried out with the support of the TACIS Program. It will serve as a basis for the development of institutions of collective investing, insurance business, NGPFs and the banking sphere. The public will have the possibility of increasing income, creating savings and accumulating resources.
Creation of an effectively functioning market for securities will promote the development of investment activities, that will result in broadening the activities of enterprises, increase in production and, as a result, creation of new jobs, increase in salaries and growth of the state budget revenues.
All these will have an impact on reducing poverty.