What problems small medium-sized businesses face when applying for a loan from banks

In the era of COVID-19, the economy of the Republic of Kazakhstan, like the global economy as a whole, has noticeably sagged.

Economic activity is under pressure from lockdowns and other quarantine measures, reports with reference to

For almost the entire 2020, the business activity index in the Republic of Kazakhstan was in the negative zone, i.e. below 50 *. Small and medium businesses were expected to suffer the most. By April 1, 2021, the number of temporarily inactive small businesses increased by 21.7% per year, to 119.6 thousand units. The volume of production by small and medium-sized businesses decreased by 5.4% over the year and amounted to 32.7 trillion tenge.

In general, according to market surveys, the country's enterprises, most of which are SMEs, note that the main factors hindering their activities are associated with financing problems and lack of funds.

Among others, the following can be noted:

• lack of own funds;

• insufficient working capital;

• insufficient credit and borrowed funds;

• unavailability of bank loans.

* A value of the indicator above the level of 50 means a positive change, below the level of 50 - a negative one.

At the same time, small and medium-sized businesses experienced financing problems even before the pandemic. For example, in 2017–2019, there was a gradual decrease in the volume of loans from STBs of the Republic of Kazakhstan to small businesses. So, by the end of 2019, the loan portfolio in the sector decreased by 1 trillion tenge compared to 2016. That is, in fact, bank loans were inaccessible for SMEs. In 2020, there was an increase in the volume of small business loans in the loan portfolio of banks - this time the main reason for the growth was the implementation of state programs aimed at supporting the sector.

In general, a small business faces the following problems when applying for a loan from banks: bureaucracy when applying for a loan; processing time, which may take several business days; heavy dependence on credit history; a client with delays has a negligible chance of getting a loan; often - the need for a pledge or surety; high bounce rate. Geography also plays a role: the clients of banks are still mainly urban entrepreneurs, and the entire vast rural area is actually left out of the banking interests.

An alternative source of finance for SMEs is microfinance organizations (MFIs). Note: the loan portfolio of MFOs shows dynamic growth from year to year, and the sector willingly provides financing to small businesses. So, by the end of 2020, the amount of loans provided reached 418.1 billion tenge - 42.5% more than in the previous year.

The leader in lending among MFOs is the microfinance organization KMF, whose loan portfolio amounted to 136.4 billion tenge. Over the year, the amount increased by 2.8%. The company provides loan products aimed at supporting entrepreneurship, increasing the well-being of the population and developing agriculture.

The TOP-3 MFOs in terms of the loan portfolio also included Toyota Financial Services Kazakhstan (57.1 billion tenge) and MyCar Finance (44.7 billion tenge).

In general, such a dynamics of the loan portfolio of MFOs indicates an increased availability of loans. The following advantages of loans in MFOs can be noted:

• minimum of documents for registration;

• the speed of making a decision on a loan;

• low percentage of refusals - a loan in an MFO can be obtained by people without official employment and with "nuances" in their credit history;

• opportunity to improve credit history - by issuing new loans, MFIs enable people to correct their damaged credit history;

• no collateral and guarantors are needed;

• there are loyalty programs for clients.

In 2020, there is a significant increase in the already high share of unsecured microcredits. Thus, the share of unsecured microcredits amounted to 60% (a year earlier - 47%), and in quantitative terms, their share increased to 96% (a year earlier - 79%). Such loans are much more affordable for SMEs.

The microfinance market is one of the fastest growing sectors in the financial industry. Over the past five years, MFI assets have been growing at an average rate of 42% per year. Over the years of development, a legal framework has been formed that has given impetus to the growth of domestic microfinance, government decrees and regulations have been adopted to regulate this sector of the economy and increase its importance.

In addition to affordable loans, MFOs of the Republic of Kazakhstan provide their own preferential lending programs, and are also actively involved in providing various types of support to small and medium-sized businesses. For example, the largest MFI in the country, KMF, according to the order of the Agency of the Republic of Kazakhstan for the Regulation and Development of the Financial Market, decides to grant a deferral based on the application of the borrower submitted to the credit institution from April 1 to June 30, 2021. The postponement is provided without signing additional agreements to microcredit agreements. This measure applies to microcredits issued before April 1, 2021 to micro, small and medium-sized businesses for entrepreneurial purposes, including individual entrepreneurs.

Thus, for small and medium-sized businesses, microfinance organizations are a necessary support and source of available funds. This is especially important during the global economic crisis.

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