Bai Tushum – A success story of Microfinance in Kyrgyzstan
Bai Tushum is a bank in Kyrgyzstan which started out as a microfinance fund in 2000. It was set up to serve the countries poorest with loans that would help develop their businesses and farms. In many parts it is also a Swiss success story as a lot of funds have flown from Switzerland to boost the development of Bai Tushum. The evolution of the organization has not only affected the company itself but also had a major impact on the microfinance and general banking landscape of Kyrgyzstan and even Central Asia.
I flew into the Kyrgyz capital Bishkek in early November 2015 to visit Bai Tushum. The newly built and modern looking headquarter is located on 76 Ulmetaliev street in the proximity to the city center. The structure stands in stark contrast to its surrounding were construction has pretty much seized entirely, serving as a reminder to the current economic slowdown. Entering the bank I somewhat left these problems outside as I was being greeted by friendly staff in modern uniforms. All of the employees were wearing pins with the number 15 on the company’s logo, marking the recent 15 year anniversary of the bank. While I was being lead through various corridors and to different rooms I could hardly believe that the start of this enterprise lay less than two decades back.
The history of Bai Tushum
The roots of Bai Tushum can be traced to the late nineties when activity began in the form the international program “Food for Progress” in Kyrgyzstan. It was in parts being supported by the Swiss Agency for Development and Cooperation (SDC). The program was implemented by two NGOs – American ACDI/VOCA and Swiss Caritas. The Bai Tushum Financial Fund (BTFF) was founded in October 2000 before being transformed into Bai Tushum and Partners Microcredit Company LLC in 2005. In the year 2011 the BlueOrchard Private Equity Fund and Credit Suisse Management Company of ResponsAbility Social Investments AG Microfinance Fund increased their investment in Bai Tushum as a proof of trust in the achievements and the promising future development. In 2012 Bai Tushum became the first microfinance company in Central Asia to be granted a fully operational banking license. Bai Tushum has now branches operating in all seven regions of Kyrgyzstan with 66 Outlets, serving more than 60’000 clients and employing over 800 people. Today the larger Swiss lenders to the bank include Blue Orchard, ResponsAbility and Symbiotics. The client base is focused on corporate clients, SME clients and retail clients with the loan portfolio mainly shared between the latter two. Bai Tushum, according to their own accounts, has financed more than 181 thousand clients in the 15 years of their existence. After receiving the banking license, there has been a subsequent growth in demand for deposits and other services, such as their newly launched VISA credit cards and online banking.
Making the way for others
Since Bai Tushum was the first microcredit company to be granted a banking license the entire Kyrgyz banking landscape itself has seen major changes. Not only did other microcredit companies follow on the same track and become banks but the legislation evolved to support and simplify the transitional process. The Kyrgyz national bank has and still does work closely together with Bai Tushum and as a result many initial barriers that had to be faced were substantially lowered. Bai Tushum is regarded as somewhat of a model case and supports other organizations with similar ambitions. For example I visited Kompanion, another microcredit company, that in preparation to its application to the banking license has reached out to Bai Tushum and asked for advice on possible problems and steps that had to be taken. Procedures that took almost 5 years of careful planning and executing can now be done in less than half that time. This supports the organizations and ultimately benefits customers who are still very much in need of a better financial infrastructure.
Current problems and issues
A general problem the financial sector faces in Kyrgyzstan is that of attracting savings and deposits in Som, the national currency. This is an issue common amongst financial institutions in many post-Soviet countries and is in large parts to blame on the collapse of the Soviet Union and the resulting mayhem. From one day to another numerous banks seized to exist. No one took responsibility and large parts of the population lost their entire savings. The resulting lack of trust and the preferred use of cash in most transactions, makes it difficult up to this day to convince people to put their money in saving accounts. Personal and corporate savings are still often held outside of the formal financial system though that seems to be slowly changing, at least in Kyrgyzstan.
Another big issue is related to currency and exchange rate fluctuations. The recent strengthening of the Dollar has many customers demanding accounts in foreign currency, but in contrast want their loans in local Som. This requires financial institutions to carry substantial hedging costs as they try and secure themselves against exchange rate volatilities.
Currently many countries in Central Asia are facing a wide range of economic challenges and so does Kyrgyzstan. Economic growth was around 7% in the first half of 2015 slightly lower than inflation. The full year numbers, according to the Asian Development Bank, will be relying strongly on remittances from and trade with the Russian Federation, which has been heavily affect by falling oil prices, the tumbling rouble and the international sanctions. Therefore the forecast for the economic growth for the entire year of 2015 is almost halved to around 4%.
How does Bai Tushum fair in the current situation? When speaking to many of its employees they seems eager to move on and go forward. The Banking sector in Kyrgyzstan is highly competitive. Even though the economy has been hit by troubles in neighboring countries such as Russia, as well as economic slowdowns in China and other neighboring trading partners, such as Uzbekistan and Kazakhstan almost every Kyrgyz bank has set its goal to be one of the top 5 banks by 2020. Bai Tushum currently sits somewhere between 8th and 9th place, depending on the measurement.
The bank of experimentation and innovation
To keep up with the rapid changes and to sustain an edge on competitors Bai Tushum is almost forced to be innovative. This is one of the reason that for example online banking has now recently been introduced. Even though, especially in the rural areas, few people are apt in using modern smart phones or any sort of mobile banking technology, the implementation and the offer sends a message of Bai Tushum’s ambition – to possible clients and to the competitors.
Innovations in the credit scoring systems and processes, which form the core of evaluating clients creditworthiness and the subsequent decision by credit committees, have been developed over the last years. Business and Finance Consulting (BFC) based in Zürich has shaped the strategy of this aspect strongly with the goal to increase the quality of the decision making while bringing down the time it takes to disperse a loan.
One of the growing infrastructural access points comes in the form of terminals located in many areas in and around Central Asia. One of the providers is Mobilnik, who now has partnered with Bai Tushum to offer the clients additional services. These include payments with digital wallets. A digital wallet, as the name says, allows clients to keep their cash digitally rather than in physical form. These services also requires a special license from the side of the national bank. Clients can access their digital wallet at terminals, can process invoices, pay bills or transfer money to other electronic wallets. This can be viewed as a somewhat alternative approach to mobile smartphone banking.
Another new project implemented this year during the World Savings Day, celebrated on October 31st, was to help as many people as possible with their basic ABC of finance. People of all ages were invited to different Bait Tushum outlets to school them about their elementary finance knowledge. The topics ranged from teaching general vocabulary, to what a saving account is, up to more complicated things such as balance and cash flow statements. The service was free of charge, but of course success was also measured by how many new clients were won that day.
This last example is one of many efforts by Bai Tushum and other banks to increase the financial literacy of the population who in the past had a rather poor understanding of finances. Apart from progress in innovative fields and financial literacy, Bai Tushum also supports many social projects with a very wide range of focuses. These come in the form of funds allocated to reconstruction of irrigation systems, repairments of schools and kindergartens, assistance for orphanages and programs benefiting adults with disabilities.
An example of a partnering organization is KIVA. This non-profit platform is a microfinance version of kick-starter on which lenders can, with very small amounts, support projects. Bai Tushum in this case is responsible for the execution and the operational aspects and in return receives the interest rates. KIVA donors then receive their money back and can then fund another project.
Another post-Soviet country problem is the poor quality of many farming techniques. This can be attributed to the lack of a central organ, coordinating harvests and making sure that adequate techniques are used to produce yields. Many projects are therefore focused on making sure that farmers operate more efficiently to increase their returns and earnings. These projects can be aimed at making sure that correct input materials are bought, knowledge is transferred, or on communicating when and how to plant seeds. A simple concrete example – one project had the goal to explain to the farmers to sort apples by batches of quality so they could sell them to different prices instead of one low price for all unsorted apples. Another project that Bai Tushum backed was to send a group of farmers to Israel. The program aimed at widening the horizons of the participants and giving them the opportunity to see what sort of possibilities there are when it comes to agricultural technology.
All of these projects are of course no only done out of pure goodwill. These measures do in the end come as a benefit to the bank. Increasing returns for farmers means more stable and larger credit possibilities for Bai Tushum. A population that is more insightful is also more likely to want other banking products, be aware of opportunities the market has to offer and pay back their interest rates adequately.
Generally speaking credit rates are quite substantial in Kyrgyzstan. In Switzerland it usually does not take to much to find a loan that is below 10% and that would already be considered as fairly high. Consumer loans for retail clients at Bai Tushum start at around 30% in Som and at around 21% in Dollars. Business loans for retail and SME clients begin at over 32% in local currency and express loans are even higher. These are some of the interest rates that Bai Tushum offers as a Bank and they seem rather excessive for someone trying to understand the sector from within Switzerland. But if compared to the interest rates of some Kyrgyz microfinance companies that can easily exceed 40%, 50% or even 60% annual interest, this view is somewhat put into perspective. Interest rates in Kyrgyzstan are higher to compensate for the risk related to currencies and economic fluctuations. A bank can usually offer lower interest rates, because their sums tend to be larger and they have deposits to finance part of the loans, whereas microfinance companies often rely entirely on external funding. Usually microfinance companies can offer loans faster, because their structures are more flexible, which is another reason for the higher rates that customers are willing to pay. Importantly, for clients to be able to pay back these loans, they need to be able to have a somewhat close connection to the different credit officers. This is especially so in the more rural areas where a frequent interaction between borrower and lender takes place.
Employees and people
Bai Tushum does pour much effort into the social aspects. They try to follow ecological standards, provide training for their clients and offer certain charity help in the form of projects. This all might read a bit like a green washing of Bai Tushum but it should not be forgotten that the original set up was under a non-profit development fund. This is something which is still very important to the employees. Roughly one third of them are credit agents, which seems to compare to other similar institutions, as for example Kompanion. To make sure that the legacy of the values is kept and the right knowledge is transfered to the employees, they are subject to numerous and frequently organized training programs. There are several stages of tests to increase the quality controls and install the bank’s code of ethics. In addition Bai Tushum runs a substantial feedback system that, as was affirmed to me, treats branch manages and employees alike. I asked many employees what they liked about working at Bai Tushum. Many answered the vibrant organization trying news things, but the most common reply was that their work is meaningful and is gratifying, because of the positive impact even a small loan can have for some people.
The original purpose of the Bai Tushum Financial Fund was to assist with economical and social development in rural and urban areas of the Kyrgyz Republic through the provision of basic but necessary financial services to farmers and SME’s. Bai Tushum has managed extremely well over the last 15 years, growing and developing to the point that it received a fully fledged banking license. It has served a strong social purpose that benefited clients and the bank alike. The core principle that the customer is to be helped, originally through the provision of microcredits to individuals, farms and private entities with no or very limited access to the formal banking sector still remains their priority task. Bai Tushum which literally translates to “great harvest” has managed to keep this spirit largely intact in the dynamic and rapidly changing environment that the Kyrgyz financial sector is. I hope but also am confident that Bai Tushum and its employees continue to carry these value with them into the future.