ECONOMY: Thinking Big, Russia Misses Microfinance

By Kester Kenn Klomegah Reprint | | Print |

Kester Kenn Klomegah

MOSCOW, Aug 28 2007 (IPS) - In the big expansion plans for the economy, financial institutions are neglecting the microfinance that small and medium business enterprises need, experts say.

Many entrepreneurs blame lack of understanding of microfinance and excessive bureaucracy for holding back such support.

The estimated finance demand for micro-businesses is estimated at eight billion dollars, of which 15 percent is offered by microfinance institutions. The demand in the small and medium enterprises (SME) sector is 22 billion dollars, of which 20 percent is at present met by banking institutions, according to market estimates.

Lack of microfinance is limiting business and employments in rural areas, leading to a widening gap between rural and urban areas, and to migration to the cities, member of the National Committee on Microfinance Vasily Solodkov told IPS.

“The system of microfinance has not fully been considered as an opportunity to improve conditions of the impoverished population, fight rural poverty, provide the needed infrastructure and create employment, because the system has been highly monopolised so that it does not permit equal distribution of financial resources.”

Micro lending is also “fraught with administrative bureaucracy and graft and misplaced priorities that negate real development goals,” he said.

According to market estimates, six million small enterprises need microcredit. The Russian Microfinance Centre, that offers counselling and support, has reported that last year many banks began providing microfinance services but ran into difficulties such as determining the limits of loans and a reach in rural areas.

“It is expected that within the next few years microfinance provisions by the banks will be enlarged taking into account the huge market capacity and the rapidly growing credit cooperatives of all types that are actively developing their own programmes,” vice-president of Russian Microfinance Centre Rigo Ovchiyan told IPS.

Over the past few years, he said, the number of credit cooperatives has grown 25-fold, testifying to increased efficiency. But the regional distribution is not even, he acknowledged.

Microfinance is not fully regulated as yet. “It is obvious that development of microfinance in Russia depends on improvement of legislation that would ensure the effective functioning of a financial mechanism, and a bill about microfinance organisations that would activity both by the non-commercial and commercial organisations to attract investment and ensure its protection,” Ovchiyan said.

Some experts believe the Russian economy is still not healthy enough for microfinance.

“The economic environment is not very transparent, and standard regulations as well as business etiquettes are not observed here,” Anton Makharov, senior lecturer in economics at the Moscow Institute of Law and Economics told IPS.

“It’s necessary to consider the development of a system of standards directed towards an increase in transparency and investment attractiveness of the market if the authorities really want the economy to catch up with industrialised countries.”

Many small and medium sized businesses are dissatisfied with the present microcredit system, he said. No proper system of resource access or risk control has been put in place.

“Small and medium businesses can grow faster and contribute to strengthen the economy if all those barriers are removed,” Makharov said. “Already this sector contributes some 20 percent to the gross domestic product, offers significant employment, and raises the competitiveness of the economy.”

Moscow-based Ernst & Young spokeswoman Galina Malahkova told IPS that “there would be more incentives for greater efficiency as the market becomes more competitive due to increased microfinance activities, and less competitive enterprises will have to leave as they are unable to adapt themselves to the changing environment.”

That would have some social implications, she said. But there is evidence that the investment climate and the quality of the institutional system are picking up, and that would to a great extent help support initiatives in the microfinance services sector, she added.