The Central Asian region has been characterised by its landlocked geographical location, historical ties with Russia, wealth in minerals, and now, as a place rich with investment opportunities in inclusive finance. In 25 years, the region has undergone a complete transition. Following the breakup of the Soviet Union in 1991, the countries of Central Asia – Kyrgyzstan, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan – embarked on individual transitions from a centrally planned economy towards a market economy. While some of the countries chose a more gradual reform process, others became the leaders of market liberalisation and privatisation. Both types of transitions have led to positive reform; however, the benefits of a fully liberalised economy are being hotly debated as it leaves the country exposed to external shocks but with a growing economy, while the gradual reform process can be more resilient to market crises, but is state controlled. As the discussion continues, investors are beginning to turn their focus to Central Asia and particularly, the microfinance sector. Historically, Central Asia has a predominantly rural population with limited access to finance, which lends itself to a developing investment environment with positive social implications. In the past 6 months, Triodos Investment Management has taken equity stakes in three different institutions in Central Asia (Tajikistan, Kyrgyzstan, and Kazakhstan) and all three have a strong rural focus on the (un)banked population with missions that coincide with Triodos’ values on inclusive finance.

Rosanna Sarkeyeva, Senior Investment Officer for Triodos Investment Management describes the previous landscape as such, ‘Financial penetration level in these countries was extremely low, even in urban areas. Banks were traditionally servicing corporate clients and were not very successful in providing services to the middle-to- low-income population, particularly the rural population.’

A growing focus on rural populations

In recent years, more banks have switched focus to rural clients and there’s been significant growth in competition amongst MFIs and from downscaling banks. On the other hand, it’s difficult to provide loans to those residing in rural areas or to those who don’t have sufficient means for collateral. The competition is, therefore, less saturated and there are more possibilities for differentiation, especially those institutions with up scaling potential. By extending financial services to the rural poor, there is also opportunity to integrate modern technologies, such as mobile technology and the use of agents, which leads to greater access. Central Asia has a sizable younger population that is adept at using modern technologies and is quick to adapt and share alternative means of banking. Therefore, the climate in the region is ripe for innovation and development in inclusive finance.

Three equity investments in Central Asia

While there is risk involved in an equity investment in Central Asia, equity investments tend to have a higher return, thereby we approach the situation through a positive outlook by evaluating investment prospects on sound growth, good return on investment, diverse scope of activities, and mission alignment. MDO Arvand LLC, Tajikistan (Arvand), MFO KMF LLC, Kazakhstan (KMF), and CJSMFO Kompanion, Kyrgyzstan (Kompanion) are individually recognized by the sector for their social and environmental initiatives. For all three institutions, there is potential to expand operations (in their current forms or as they transition into a fully-fledged microfinance banks) and support their growth strategies through governance, our knowledge, expertise, and network. As an equity investor, we aim to establish long-term strategic relationships and representation on the board of directors, which enables us to add more direct value to investees.

For all three equity investments in Central Asia, we worked with international shareholders with diverse backgrounds that addressed the need for knowledge of the local business culture and availability in the local network. By providing support and governance to these institutions, Kompanion, KMF, and Arvand can continue to provide a variety of services to the rural poor that go beyond credit, such as education programs and savings products, and they can continue to be regional market leaders, embarking on the next stages of their institutional development.  Through our investment in Central Asia, we will provide professional expertise in growing the institutions and thus expanding access to financial services among the rural population in the region while maintaining positive returns.