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

1. Project Data:   
ICR Review Date Posted:
Project Name:
Kyrgyz Second Rural Finance Project
Project Costs(US $M)
 22.9  23.9
Kyrgyz Republic
Loan/Credit (US $M)
 15.0  15.2
Sector, Major Sect.:
Crops, Animal production, Micro- and SME finance, Other social services, General industry and trade sector,
Agriculture fishing and forestry; Agriculture fishing and forestry; Finance; Health and other social services; Industry and trade
Cofinancing (US $M)
 0.0  1.75
L/C Number:
Board Approval (FY)
Partners involved
Closing Date
06/30/2004 06/30/2005
Evaluator: Panel Reviewer: Division Manager: Division:  
Christopher D. Gerrard
Kris Hallberg Alain A. Barbu IEGSG

2. Project Objectives and Components:

a. Objectives
The project had three main objectives:

(1) To strengthen and expand a sustainable rural financial system that would serve a broad range of beneficiaries,
including small-scale farmers and rural entrepreneurs
(2) To contribute to the reduction of poverty in rural areas by supporting the development of viable economic activities (on-farm and off-farm) to generate income
(3) To expand access to credit for those with limited collateral.
The objectives were not revised during implementation.

b. Components (or Key Conditions in the case of Adjustment Loans):
The project had three components and four sub-components:

(1) Rural Finance Component

    (a) Commercial Credit Line (US$ 16.1 million at appraisal, US$ 21.5 actual) -- to provide a credit line to the Kyrgyz Agricultural Finance Corporation (KAFC), and to other commercial banks when they become eligible, to on-lend for working capital and investment under commercial terms and conditions
    (b) Special Credit Line (US$ 4.3 million at appraisal, US$ 0.4 actual) -- to provide credit for group lending based on "social collateral" to allow those with inadequate physical capital but with sound bankable projects to receive loans
(2) Institutional Development Component
    (a) Capacity Building Support for KAFC (US$ 2.0 million at appraisal, US$ 0.9 actual) -- to support comprehensive capacity building in KAFC to improve its operating efficiency and to ensure that it can survive as a self-financing financial intermediary
    (b) Other Technical Assistance (US$ 0.5 at appraisal, US$ 1.0 actual) -- to provide institutional support to develop group lending based on social collateral, and to develop small-scale rural business development services.
(3) Project Management (N/A at appraisal, US$ 0.1 actual)

The third component was added mid-way through the project in 2003, when Ineximbank, one of the major private banks in the country, joined the project as a participating financial institution (PFI). Until that time, KAFC had performed both the functions of the PMU and a PFI. After that time, a new PMU was established in the Ministry of Finance, as it became inappropriate for KAFC to continue to perform both functions.

Otherwise, the components were not revised during implementation, except that the technical assistance to support the development of rural business development services was dropped and the funds were reallocated to the commercial credit line, since another Bank project -- the Agricultural Support Services Project -- together with co-financing by the Swiss Government supported a similar activity in a more comprehensive way.

c. Comments on Project Cost, Financing, Borrower Contribution, and Dates
EU-TACIS contributed about US$ 0.75 million in technical assistance to support the project objective of folding KAFC into the banking sector, and UNDP’s Poverty Alleviation Project contributed about US$ 1.0 million, to finance technical assistance for the group lending sub-component of the project.

The project was extended by one year due to IMF restrictions on the amount of external debt that could be assumed by the government under an IMF program to manage (and reduce) the country's overall debt burden. Extending the project by one year permitted the project to utilize the remaining $2.7 million of project funds within the debt limits imposed by the IMF. It is also the case that the project was suspended for four months in early 2002 -- after it became effective but before any withdrawals had been made -- due to a government decree in April 2002 which promised farmers interest rebates on loans received from the KAFC -- in violation of the project agreements. This delayed the implementation of the project for seven months until the interest rebates were cancelled. Thereafter, the government learned its lesson and allowed the KAFC to operate independently of government, even though it was wholly owned by the government.

3. Relevance of Objectives & Design:

The project was consistent with the strategic objectives of the Comprehensive Development Framework for which the Kyrgyz Republic was a pilot country, and with the Bank's 1998 CAS. These emphasized the importance of agricultural growth to reduce rural poverty and the need for a fiscally sustainable rural financial system -- providing both operating and investment capital -- to foster agricultural growth and accelerate private sector development in rural areas.

The design of the project was simple, straight-forward, and commensurate with the implementation capacity in the country at the time. It drew upon the Bank's experience with similar operations in the ECA region, particularly the need for substantial technical assistance to accompany credit-line operations.

4. Achievement of Objectives (Efficacy) :

Objective (1): Strengthen and expand a sustainable rural financial system -- substantial

KAFC has established an extensive rural network, has become the leading lender in rural areas, and has achieved full sustainability -- an example that some other commercial banks, notably Ineximbank, are beginning to emulate. At the end of June 2005, its loan repayment rate was 98.3 percent. The Subsidy Dependency Index has been negative since 2002, and was negative 40% at project closing. The KAFC has become one of the largest and most successful financial institutions in the country, accounting for more than 50 percent of all non-bank financial sector assets, and 10 percent of all banking sector assets as of August 2005. The privatization of KAFC was initiated in the second half of 2005 and is expected to be completed by the end of 2006.

Objective (2): Contribute to rural poverty reduction -- substantial
An additional 15,600 small farmers and rural entrepreneurs have received loans for investment and working capital through the project’s participating financial institutions. The Impact Assessment that was conducted in the summer of 2005 showed KAFC borrowers had achieved increased production levels, increased incomes, faster new technology adoption rates, and a higher likelihood of starting a new business than among non-borrowers. Overall, 65 percent of active clients and 70 percent of former clients -- compared to only one-third of non-clients -- reported an improvement in their well-being. Forty seven percent of respondents associated this reported improvement with greater cash inflow, followed by 25 percent who related it to increased consumption of more food produced at the household level. However, one needs to interpret these results with caution because of a possible selectivity bias (i.e. the more successful farmers were the ones that borrowed money).

Objective (3): Expand access to credit for those with limited collateral -- modest
The social collateral-based group lending methodology was refined by combining the two group lending windows which had existed under the previous project. KAFC financed 498 groups (about 3,500 individual beneficiaries) during the project period for the total amount of KGS 39.6 million (US$ 0.97 million equivalent), including repeated loans, with an average loan size of about US$ 280 equivalent. But the amounts disbursed under this sub-component and the number of beneficiaries reached was less than expected due to the two-year delay (until 2002) in starting the implementation of this sub-component.

5. Efficiency:

No ERR was computed at appraisal due to the demand-driven nature of the investments, financed from the two credit lines. From the impact assessment that was conducted in the summer of 2002, the ICR computed a series of budgets for the most predominantly grown crops and livestock raised, as well as other typical investment models for the various activities financed by the project. This showed that among KAFC clients, the households relying on livestock for income received the highest incremental annual income -- on average KGS 26,140 (US$ 638) compared to KGS 10,580 (US$258) for non-clients -- i.e., 147 percent more than non-clients. Net income from crop production amounted to approximately KGS 22,340 (US$ 545) among clients compared to KGS 10,080 (US$ 246) among non-clients -- i.e., 122 percent more than non-clients.
6. M&E Design, Implementation, & Utilization:

The PAD (p. 4) established four major key performance indicators, the first two of which would be part of the regular M&E of KAFC's operations and the last two of which would be measured by social impact assessments carried out during project implementation:

    (a) increases in institutional lending to rural clients
    (b) soundness of portfolio quality with minimum repayment rates of at least 85 percent
    (c) demonstrated improvement in the profitability of major agricultural commodities as estimated by random sample analysis
    (d) demonstrated increases in income levels in rural areas.
An initial social assessment was completed before project approval to establish a baseline reference for future M&E of project impact.

While the data presented in the ICR strongly suggest that the anticipated M&E did take place, the ICR does not provide an overall assessment of the quality of M&E under the project, except to say that:
  • The technical assistance provided under component 2a strengthened selected aspects of KAFC operations, including loan appraisal and monitoring (p. 8)
  • The PMU proved very effective in dealing with the multitude of project-related tasks, including monitoring and evaluation (p. 15)
The World Bank also commissioned the anticipated independent impact assessment study -- mentioned above -- which was financed by a Swiss Trust Fund.
7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative):

The project was classified as environmental category Fl, because it involved on-lending of IDA funds through a financial intermediary (FI). The KAFC agreed to employ an environmental officer who would be trained on the IDA/Bank environmental guidelines, who would participate in the loan appraisal process, and who would ensure that loan officers were fully aware of the requirements so that appropriate actions could be taken before and after sub-loan approval, including submission to the IDA for prior-review (PAD, p. 21). However, the ICR does not provide any explicit information about whether the KAFC lived up to these agreements, except to say that the KAFC prepared an Operational Manual in close cooperation with the World Bank and completed all the training programs agreed upon during negotiations (ICR. p. 9).

8. Ratings:
ICR Review
Reason for Disagreement/Comments
Institutional Dev.: 
LikelyLikelyThe summary (p. 1) rated this "likely", but the text (p. 12) rated this "highly likely". While the tulip revolution of March 2005 has not adversely affected the achievements of the project, there remain uncertainties relating to the privitization of the KAFC.
Bank Perf.: 
SatisfactorySatisfactoryBank performance was particularly strong in reacting to the April 2002 government decree on interest rebates, but weaker in responding to the Borrower's request to consider transforming KAFC into a deposit-taking full-service bank.
Borrower Perf.: 
Quality of ICR: 

- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

9. Lessons:

The ICR has extracted a number of useful lessons from the experience with this project.
  1. The creation of a "greenfield" financial intermediary, such as the KAFC, from scratch, takes a long time. Stakeholders, including the Bank, must be prepared to invest sufficient time and attention -- in this case, two Bank-supported projects over almost 10 years -- in getting the new institution firmly established on a profitable and financially sustainable basis.
  2. Achieving financial sustainability required not only a capital base and loanable funds, but also extensive technical assistance for institutional development. This included not only training, hands-on support, and effective motivation to improve the capacity of KAFC staff , but also technical assistance to improve the knowledge and capacity of borrowers, in this case through the development of rural advisory services.
  3. It is important to have regular and effective dialogue with the government to ensure that the government does not make politically-based decisions that undermine the day-to-day operations of state-owned financial institutions. The Bank was very effective in responding to the April 2002 decree on interest rate subsidies, but less effective in relation to the privatization of KAFC.

10. Assessment Recommended?  Yes

          Why?  It would be good to do an assessment of this project as part of a cluster of completed agriculture and rural development projects in the Kyrgyz Republic. The Kyrgyz Republic was a CDF pilot that has received a substantial amount of lending in agriculture and rural development, especially when considered on a per capita basis.

11. Comments on Quality of ICR:

The ICR is well written and covers most of the bases. However, the ICR does not provide an overall assessment of the quality of M&E. Nor does it provide information on whether the Borrower lived up to the environmental safeguard agreements. There is also an inconsistency between the summary and the text with respect to the rating on sustainability. Two of the usual cost tables are missing from Annex 2.

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