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Implementation Completion Report (ICR) Review - Kyrgyz Rural Finance Project

1. Project Data:   
ES Date Posted:
Project Name:
Kyrgyz Rural Finance Project
Project Costs(US $M)
 20.9  21.95
Kyrgyz Republic
Loan/Credit (US $M)
 16.0  15.9
Sector, Major Sect.:
Agricultural Credit,
Cofinancing (US $M)
 2.6  3.0
L/C Number:
C2959; CQ026      
Board Approval (FY)
Partners involved
SDC, EU and Japan 
Closing Date
06/30/2001 06/30/2001
Prepared by: Reviewed by: Group Manager: Group:  
Anthony J. Blackwood
Christopher D. Gerrard Alain A. Barbu OEDST

2. Project Objectives and Components:

a. Objectives
Under the government's strategy to provide financial services to rural communities on a commercially sustainable basis (SAR para. 2.18) the project had two primary objectives:

    (i) In the short term, to establish an interim institutional arrangement, namely the Kyrgyz Agricultural Finance Corporation (KAFC), for lending to the agricultural and agribusiness sectors, and
    (ii) For the medium and long term, to lay the foundation for community-based and managed rural financial institutions for the rural population.
In addition the project had a crucial sub-component (improving the policy environment for rural credit), without which the project objectives were unachievable, which should have had the rank of an objective but was not even reflected in the Loan Agreement.

b. Components
There were three components:

    Kyrgyz Agricultural Finance Corporation (KAFC) (US$13.0 million base cost): (a) financing of sub-loans for farm restructuring, agribusiness, privatization and development of a rural private sector; (b) TA for development entrepreneurs, and (c) goods for KAFC;
    Small Farmers Credit Outreach Program (SFCOP) (US$2.00 million): Administered by KAFC this program would: (a) test specific mechanisms for credit delivery to poor households; (b) develop farmer organizations to facilitate access of poor households to financial services; (c) provide TA for implementation; and (c) finance sub-loans to members of farmer organizations.
    Institutional and Policy Framework (US$4.5 million, incl. TA listed above):
        (i) Institutional development: (a) revision of KAFC’s charter, adoption of appropriate corporate and management structures, and development of operational policies and procedures; and (b) establish the legal framework for farmer organizations to develop into fully fledged RFIs;
        (ii) Technical assistance (TA) to assist institutional development.
        (iii) Policy changes to reduce credit market distortions and phase out government budgetary allocations to agricultural credit.

c. Comments on Project Cost, Financing and Dates
IDA funds not required for the third component (as government obtained grant funding) were used for KAFC sub-loans.

3. Achievement of Relevant Objectives:

The project experienced both substantial achievement and failures against relevant objectives, with some significant development shortfalls which require attention (under the follow-up project?). (a) KAFC met the quantitative target of the first objective (which was phrased in general nonspecific terms) by providing credit to a large part of the farming community while easily exceeding relevant indicators (number of clients, average loan size and recovery rates). Not surprisingly, and contrary to the interim concept of the appraisal plan, KAFC appears to be consolidating for the long run, possibly through privatization. (b) KAFC’s attempt to promote group lending operations on a pilot basis (SFCOP) for poor households did not succeed as neither a workable model nor substantial farmer organizations materialized.

4. Significant Outcomes/Impacts:

Despite some notable shortfalls, as the ICR puts it: "the project is a good example of a practical, innovative, stop-gap model to fill a complete absence of financial intermediation.....Tens of thousands of poor, small-scale farmers ..... in all corners of the country were able to access commercial credit [?] for the first time." The reach of KAFC credit seems extraordinarily high by normal experience: the ICR refers to 30,000 beneficiaries and about 15,000 borrowers (excl. 3,250 repeat borrowers) compared with about 23,000 private farms and about 2,000 family and collective farms -- coverage of perhaps half the farming community.

5. Significant Shortcomings (include non-compliance with safeguard features):

(a) KAFC lending has been far from "commercially-based" since the government subsidies to KAFC have been very large, especially free capital (incl. buildings and government receivables), interest free loans and Government bearing the foreign exchange risk of the IDA loan when inflation has averaged 25 per cent. It lent at well below market rates (according to beneficiary interviews), contrary to the project’s policy objective of reducing credit market distortions, and its profit margins have been extraordinarily large as a result. Not surprisingly no commercial banks were tempted during the project to compete for KAFC’s customers (the "crowding out" problem of traditional agricultural credit systems), although interest is now developing. However the conditions of the IDA credit did require that all on-lending interest rates equalled the (high) inflation rate. (b) By type of credit (recurrent) and beneficiaries (mostly primary producers) KAFC’s loan portfolio was much less diverse than planned (which partly explains it exceeding indicators). Borrowers were mostly farmers (compared with the broader clientele envisaged at appraisal to strengthen and deepen the rural economy), although KAFC has started lending for agro-processing, agri-business and non-agricultural activities in rural areas. Over 80 per cent was short term loans for farm working capital (incl. some triple repeaters) with most of the balance for livestock purchase (with arguably little capital creation - land purchase was as usual not eligible), whereas the project design allowed for initial emphasis (only for two years) on seasonal lending in favor of farm restructuring and improvements, equipment purchase, agribusiness (modernization, rehabilitation and expansion), and for privatization. Hence the portfolio has had narrower development impact than intended despite reaching a high proportion of farming families.
(b) The effectiveness of social collateral provided by group membership under the SFCOP component, as a means of supplying credit to otherwise high risk assetless poor borrowers, was not tested. All SBCOP loans were made directly to individual group members with full physical collateral (and moreover the small amount of group development achieved is considered unsustainable). Thus such loans would not have reached the poorer families (who were the targets of the group approach) and in any case the SFCOP borrowers would mostly have qualified for regular loans from KAFC. The SFCOP component was thus in competition with KAFC’s main lending operations without any extra social benefits, and there was little incentive for KAFC staff to promote SFCOP lending.
(c) The large amount of TA had limited impact: it was not all relevant nor attuned to the absorptive capacity of KAFC; the most relevant TA, for credit management, was not effective; the KAFC operational manual was not completed satisfactorily; and the assistance provided for group lending was neither relevant nor effective. This poor record was partly because TA was funded by cofinancier grants (instead of IDA funds) at the behest of the Borrower and KAFC, and these activities were not closely managed.
(d) Credit market distortions were increased temporarily during an election and as a result the IDA credit was suspended for four months in 2000.
(No information in the ICR on compliance with Bank safeguard policies.)

6. Ratings:ICROED ReviewReason for Disagreement/Comments
SatisfactoryModerately SatisfactoryAlthough a highly relevant need was filled (quite easily) there was much of high relevance not achieved, especially institutionally, as described in Section 5.
Institutional Dev.:
SubstantialModestKAFC is supposedly a temporary agency, was established prior to the project, still needs improvement, and the SBCOP component achieved little. Much of the ID work was to be driven by TA inputs which were generally poor. No information provided on the policy sub-component.
LikelyLikelyThe rating refers to the benefits for the bulk of expenditure, for farm sub-loans for recurrent costs, not to ID benefits, nor to the few farmer groups which are unsustainable. In any case KAFC repayments are at over 80 per cent and reflows are being relent.
Bank Performance:
Borrower Perf.:
Quality of ICR:

7. Lessons of Broad Applicablity:

(a) Filling a credit vacuum in the short term through sub-market rates through a subsidized line of credit under a monopoly parastatal agency makes it difficult to avoid the long term development flaws of traditional credit programs. These problems may constrain future attempts to move towards viable market based rural finance institutions. (b) A conventional public credit agency is not a competent or objective agency to be charged with social organization as a precursor of RFIs. (c) Technical assistance components must be carefully designed in consultation with all stakeholders, carefully managed and implemented in a flexible way if they are to be effective and avoid wasted effort. (d) Medium and long term investment lending, and lending to business enterprises, requires different skills and more effort than simple lending for operating capital, and therefore needs to be driven by specific programs and institutional arrangements.

8. Audit Recommended?  Yes

          Why?  Possibly together with the second project. The ICR does a nice job of describing the experience, but it was not as satisfactory as the ICR suggests. A lot did not happen, was done poorly (social organization and TA) or is not well reported.

9. Comments on Quality of ICR:

Satisfactory, incl. being frank about most of the project’s deficiencies, but could have been improved. It lacks clarity in places probably because of the confusing project objectives statements. It overstates the significance of the success of KAFC in getting out numerous working capital loans (with a ready market in a credit drought) and the positive demonstration value of the project to commercial banks (for the future), as KAFC is far from being a commercial bank. And finally it omits information on the achievement (or lack thereof) of the important policy objectives in the third component.

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