5. Implications and policy recommendations

This report aimed to analyse the demand for and use of green financial instruments. The results clearly show that improving access to and use of green financial products and services needs to go hand in hand with efforts to increase the use of formal financial instruments in general. A functioning financial market where households and businesses actively use financial products and services is in many ways a precondition for introducing elements of green finance.

At the same time, the general policy framework can support the attractiveness of investing in green financial instruments for both households and industry. Such policies include setting tariffs for green electricity generation, lowering interest rates for energy efficiency improvements of homes or offering state-supported loans and similar instruments. These policies can lower some of the financial barriers of undertaking green investments for households.

In addition, financial and social inclusion as well as green finance are interlinked and mutually reinforce each other. A coherent legal and regulatory framework that targets the three issues is an important instrument.

The National Bank and the Government of Kyrgyzstan can increase the use of (green) banking products and services in several ways. These include supporting awareness and understanding among the population; subsidising access to tools such as disaster risk insurance; lowering collateral requirements; and allowing movable asset-based lending together with policies that are conducive to low-carbon, climate resilient investments.

The following sections outline interventions to improve access to and use of green financial products and services. Some instruments will help increase use of financial instruments in general, not just those that are green.

Kyrgyzstan should consider developing a green finance roadmap to set out its strategy on how to make the financial system more sustainable and connect financial flows to sustainability. Such a roadmap can build on the actions outlined in the Kyrgyz Green Economy Program. The Kyrgyz Ministry of Finance together with the National Bank and other relevant state entities that work on sustainability could lead the development of the strategy. In one key task, the government is to ensure that state entities collaborate to direct finance to sustainable projects through coherent policy. Another key task is to develop a vision that both public institutions and private actors can share.

As part of the roadmap, the National Bank of the Kyrgyz Republic can consider mandatory requirements to improve environmental, social and governance (ESG) principles in the operation of banks. Any such requirements would need to lead to wider and faster implementation of green finance activities among banking institutions compared to voluntary commitments. It is questionable whether non-regulatory instruments provide enough incentives for banks to develop products and services which they have not yet considered to date.

The regulatory environment is moving towards mandatory requirements, driven by the EU’s Technical Expert Group on Sustainable Finance but also by efforts outside the European Union. The National Bank of Georgia, for example, launched a new set of principles in February 2020. These principles, developed by the OECD, aim to guide commercial banks on how to disclose and report on their ESG activities. The principles became mandatory in 2021. Ultimately, they will help increase transparency on ESG issues and improve market discipline as an important prerequisite for sustainable financing. It is worth investigating what Kyrgyzstan could take from the Georgian experience.

The survey shows that 5.5% of survey respondents would be interested in taking out agricultural or other disaster risk insurance and that 6% have done so. Financial products to manage risks such as insurance are important complements to credits and savings. A large proportion of smallholder farmers in the agricultural sector may not have large financial buffers in case of income losses. In addition, large areas of the country are vulnerable to the impacts of human-made climate change. Consequently, it is important to expand access to insurance in Kyrgyzstan.

The Kyrgyz government should consider incentives for setting up agricultural insurance systems to spark more development in the insurance market. Insurance providers have so far played a small role in the Kyrgyz economy (OECD, 2019[1]; Hasanova, 2018[2]). Subscribing to insurance would allow farmers to protect themselves against high fluctuations in their earnings and improve their credit standing. This, in turn, would enable small farmers especially to invest in modernising their farms, for example. The government could give some financial support for insurance payments (or benefits or payouts) to farmers. The government of Armenia, for example, introduced agricultural insurance schemes in 2019. A mix of domestic sources (from the Ministry of Agriculture), bilateral and international funding (from KfW Development Bank and the Climate Investment Fund) will subsidise insurance payments up to 60% to cover agricultural losses from weather-related events (Agroinsurance, 2019[3]).

The survey also sheds light on where Kyrgyz households need more information and support for green financial instruments. Almost 35% wish for support to lower interest rates and around the same number wish for more patient capital and more lenient repayment schedules so they can use a green financial product. Data from the National Bank of the Kyrgyz Republic confirm that interest rates on loans are high. Average weighted interest rates on loans from commercial banks for private consumers were 24% in 2019 (13% on mortgages) (National Bank of the Kyrgyz Republic, 2020[4]). Weighted interest rates on loans from microfinance institutions for private consumers were 32% in 2019 on average (30% on mortgages and construction) (National Bank of the Kyrgyz Republic, 2020[4]). If institutions had more information on borrowers’ credit history, credit risk decreases and financial institutions could lower interest rates for some clients. This idea was explored in Chapter 2, in the section titled “Overcoming challenges in the banking sector”.

More flexibility in the approach to collateral could also make it easier for potential loan takers to receive credit. Collaterals are assets that a lender accepts as security for a loan. In the survey, lack of sufficient collateral, although not the highest barrier, was still a stumbling block for respondents who wanted a loan or green loan. In all, 6.5% wished for more support to fulfil collateral requirements, while 10% mentioned that insufficient collateral poses a hypothetical barrier to using a green financial product.

Small enterprises in Kyrgyzstan in particular struggle with high collateral requirements (OECD, 2018[5]; Hasanova, 2018[2]). Collateral requirements imposed by the central bank are relatively high. They demand collateral of at least 120% of the loan amount (OECD, 2018[6]). This is the minimum amount, however; collateral requirements demanded by commercial banks can be higher (OECD, 2018[6]). In fact, the average value of collateral needed for a loan in the Kyrgyz Republic amounted to almost 300% of the loan amount for small enterprises in 2019 and more than 90% of business loans require collateral (World Bank, 2020[7]). The challenge of valuation issues is particularly acute for SMEs in the agriculture sector. This is especially true for those in the south because of their assets in remote, rural areas (OECD, 2018[6]).

The International Finance Corporation (IFC) has started to promote movable asset-based lending to allow smaller businesses to use assets like machinery and crops as collateral for loans (Development Partners' Coordination Council, 2016[8]). Outcomes from this project should be evaluated. If positive, outcomes should be used to trial movable asset-based lending across commercial banks and microfinance institutions. It could also be considered whether to extend this measure to households. In addition, the National Bank could consider decreasing minimum collateral requirements given that collateral requirements are much higher in reality.

A credit guarantee fund has been set up to alleviate collateral constraints for businesses. If a business fails to fulfil collateral requirements of a commercial bank, it can apply for a guarantee from the Guarantee Fund. Since its establishment in 2016, the fund has provided more than 2 000 guarantees amounting to more than KGS 2 billion (USD 24 million) (OECD, 2018[9]). As of 2020, the amount of loans issued by banks under the guarantees exceeds KGS 7 billion (USD 80 million) (OECD, 2018[9]). SMEs have received 90% (OECD, 2018[9]). In May 2020, the National Bank of the Kyrgyz Republic added KGS 1 billion KGS (USD 12 million) to the authorised capital of the fund to help SMEs weather the COVID-19 pandemic (OECD, 2018[9]). Further increasing the size of the fund over the coming years could help make a significant difference in access to credit, particularly for individual entrepreneurs. Only around 17% of small enterprises (under 20 employees) had a bank loan or line of credit in 2019 compared to 40% of large (more than 100 employees) and 35% medium-sized (between 20-100 employees) enterprises (World Bank, 2020[7]).

Financing opportunities are also limited by the lack of breadth of financial products, particularly risk capital (OECD, 2018[6]). Although this is more relevant for business owners than households, new products could help mitigate financing constraints for SMEs, including individual entrepreneurs. The Highland Private Equity and Mezzanine Fund (OECD, 2018[6]) is trying to address this gap. The fund, set up in 2014, aims to provide long-term risk capital to SMEs (OECD, 2018[10]). Positive examples from its investments can help expand private equity and mezzanine finance as an asset class in the Kyrgyz Republic. According to the fund, it tries to operate according to its own ESG policy (Highland Capital, 2020[11]) and could thus help promote green investment activities.

Tapping into remittance flows is another area that can be used to motivate more households to bring additional money into the financial sector. More than 10% of the Kyrgyz population work in the Russian Federation and the money they send back accounts for a third of gross domestic product (Fitzgeorge-Parker, 2018[12]). According to Hasanova (2018[2]), the population only reluctantly bring remittances to the financial sector and most banks lack special financial products for them. Migrants send money via money transfer services without opening an account, and their families receive cash (Hasanova, 2018[2]). The receiving households use most of the additional money to cover current consumption, to invest in durable goods such as housing and cars or, especially in rural areas, to invest in livestock [Lukashova and Makenbaeva cited in (Hasanova, 2018[2]); (OECD, 2018[13])]. Although investment in physical capital and durable consumption contribute to well-being, other types of investments such as in human capital (e.g. education) or financial capital is important for long-run development (Kroeger and Anderson, 2014[14]). Data show that remittance flows in Kyrgyzstan are not contributing to such development (Kroeger and Anderson, 2014[14]; OECD, 2018[13]; Muktarbek kyzy, Seyitov and Jenish, 2015[15]).

Only some banks try to attract this money by explaining to migrants' families the advantages of opening an account and offering different kinds of deposits in national currency or Russian roubles (Hasanova, 2018[2]). Banks could introduce special services and products for migrants more widely. They can make transfer systems cheaper, more accessible and more transparent. They can also help customers combine remittance accounts with other financial products.

The study has shown that Kyrgyz households have some experience with financial products. Their awareness of green financial products, however, is lacking or limited. The follow-up strategy to the Program to Improve Financial Literacy in the Kyrgyz Republic for 2016-2020 could include a focus on green finance. This could detail measures and activities on how to further increase financial literacy and awareness of green financial products, as well as action plans to monitor and assess implementation.

Financial institutions could offer training on green finance to their front-line staff to help potential clients become more aware of the purpose of green loans and green investments in general. The Green Economy Program of the Kyrgyz Republic 2019-2023 outlines steps to promote sustainable finance. It already includes the goal to train employees and customers of Kyrgyz commercial banks and microfinance institutions on sustainable finance. The Union of Banks of Kyrgyzstan together with IFC will start to promote that financial institutions integrate ESG principles into their risk assessment and financial decision making in Kyrgyzstan from 2021. They will also try to increase awareness on green finance among financial service providers.

The National Bank of the Kyrgyz Republic and relevant public, private and civil society stakeholders can embed a focus on green financial products and services within general efforts to increase financial literacy. This can help increase both financial literacy and awareness of green finance instruments. The National Bank and other institutions involved in financial education could also consider joining the OECD International Network on Financial Education. Members of the network from over 130 economies work on key policy areas related to financial education such as standard setting, implementation and evaluation and the impact of digitalisation (OECD, 2020[16]). Meanwhile, the Network for Greening the Financial System, as well as the Sustainable Banking Network, provide platforms for peer-to-peer learning. Working together, members define and promote best practices on how the financial system can manage risks and mobilise capital for green investments.

References

[3] Agroinsurance (2019), “Armenia: Govt approved the procedure for subsidizing insurance payments under the pilot ag insurance program”, 25 October, Agroinsurance, https://agroinsurance.com/en/armenia-govt-approved-the-procedure-for-subsidizing-insurance-payments-under-the-pilot-ag-insurance-program/.

[8] Development Partners’ Coordination Council (2016), “World Bank Group helps improve Kyrgyz Republic’s financial infrastructure”, Press Release, 27 June, Development Partners’ Coordination Council, http://www.donors.kg/en/2816-world-bank-group-helps-improve-kyrgyz-republic-s-financial-infrastructure (accessed on 6 March 2020).

[12] Fitzgeorge-Parker, L. (2018), “Impact Banking: Microfinance Comes of Age in Kyrgyzstan”, webpage, https://www.euromoney.com/article/b1b0967crmxs3m/impact-banking-microfinance-comes-of-age-in-kyrgyzstan?copyrightInfo=true (accessed on 8 March 2020).

[2] Hasanova, S. (2018), “Financial inclusion, financial regulation, financial literacy, and financial education in the Kyrgyz Republic”, Working Paper, No. 850, Asian Development Bank Institute, Tokyo, https://www.adb.org/publications/financial-inclusion-regulation-literacy-education-kyrgyz-republic.

[11] Highland Capital (2020), About Us, webpage, https://highland.kg/ (accessed on 16 October 2020).

[14] Kroeger, A. and K. Anderson (2014), “Remittances and the human capital of children: New evidence from Kyrgyzstan during revolution and financial crisis, 2005–2009”, Journal of Comparative Economics, Vol. 42/3, pp. 770-785, https://doi.org/10.1016/j.jce.2013.06.001.

[15] Muktarbek kyzy, A., T. Seyitov and N. Jenish (2015), Remittances and Expenditure Patterns of Households in the Kyrgyz Republic, Economic Research Center of the National Bank of the Kyrgyz Republic, Bishkek, https://www.nbkr.kg/DOC/12022016/000000000040456.pdf.

[4] National Bank of the Kyrgyz Republic (2020), Bulletin of the National Bank of the Kyrgyz Republic, No. 9, National Bank of the Kyrgyz Republic, Bishkek, https://www.nbkr.kg/index1.jsp?item=137&lang=ENG.

[16] OECD (2020), “OECD International Network on Financial Education”, webpage, https://www.oecd.org/financial/education/oecd-international-network-on-financial-education.htm (accessed on xx xx 2021).

[1] OECD (2019), Roadmap for a National Strategy for Financial Education in Kyrgyz Republic, https://www.oecd.org/education/financial-education-cis.htm.

[5] OECD (2018), “Business environment in Central Asia: Access to finance”, in Enhancing Competitiveness in Central Asia, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288133-5-en.

[6] OECD (2018), “Business environment in Central Asia: Access to finance”, in Enhancing Competitiveness in Central Asia, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288133-5-en.

[9] OECD (2018), “Business environment in Central Asia: Access to finance”, in Enhancing Competitiveness in Central Asia, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288133-5-en.

[10] OECD (2018), “Business environment in Central Asia: Access to finance”, in Enhancing Competitiveness in Central Asia, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288133-5-en.

[13] OECD (2018), “Business environment in Central Asia: Access to finance”, in Enhancing Competitiveness in Central Asia, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288133-5-en.

[7] World Bank (2020), Enterprise Surveys, (database), http://www.enterprisesurveys.org (accessed on 2 August 2020).

Metadata, Legal and Rights

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Extracts from publications may be subject to additional disclaimers, which are set out in the complete version of the publication, available at the link provided.

© OECD 2021

The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at http://www.oecd.org/termsandconditions.