Completion Report

Project Number: 42007-014 Loan Number: 3043 Technical Assistance Number: 8480 August 2018

Uzbekistan: Small Business and Entrepreneurship Development Project

This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – sum

At Appraisal At Project Completion (as of 16 August 2013) (as of 19 July 2017)

1.00 = $ 0.00047 $0.000247 $1.00 = SUM2,114.16 SUM4,042.47

ABBREVIATIONS

ADB – Asian Development Bank BTOR – back-to-office report CBU – Central Bank of Uzbekistan DMF – design and monitoring framework ESMS – Environmental and Social Management System FMO – Netherlands Development Finance Company GAP – gender action plan GDP – gross domestic product MCO – microcredit organization MOF – Ministry of Finance MSE – micro and small enterprise MSME – micro, small, and medium-sized enterprise PCB – participating commercial bank SAP – strategic action program SEDP – Small Business and Entrepreneurship Development Project SLA – subsidiary loan agreement SME – small and medium-sized enterprise TA – technical assistance

NOTES

(i) The fiscal year (FY) of the government, its agencies and the participating banks ends on 31 December.

(ii) In this report, "$" refers to United States dollars.

Vice-President Wencai Zhang, (Operations 1) Director General Werner E. Liepach, Central and West Asia Department (CWRD) Director Tariq H. Niazi, Public Management, Financial Sector, and Trade Division,

CWRD Team leader Priyanka Sood, Senior Financial Sector Specialist, CWRD Team member Ruslan Kurmanbekov, Financial Sector Specialist, CWRD

Elinor Piano, Project Analyst, CWRD Mariane Sual, Senior Operations Assistant, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page BASIC DATA i I. PROJECT DESCRIPTION 1 II. PROJECT DESIGN 1

A. History 1 B. Scope of Operations 1 C. Relationship with ADB and Other Lenders 2 D. Project Design and Formulation 2 E. Technical Assistance 3

III. PROJECT IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 4 C. Implementation and Internal Operations of Subprojects 5 D. Organization and Operations of Hamkorbank 5 E. Portfolio of Hamkorbank 6 F. Financial Statements and Ratios 6 G. Covenants 6 H. Organization and Operations of Ipak Yuli Bank 6 I. Portfolio of Ipak Yuli Bank 7 J. Financial Statements and Ratios 7 K. Covenants 7

IV. SUBLOAN IMPLEMENTATION 8 A. Loan Appraisal 8 B. Implementation 9

V. EVALUATION OF PROJECT PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency 10 D. Sustainability 10 E. Development Impact 11 F. Performance of Hamkorbank 11 G. Performance of Ipak Yuli Bank 12 H. Performance of the Asian Development Bank 12 I. Overall Assessment 13

VI. ISSUES, LESSONS, AND RECOMMENDATIONS 13 A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES 1. Design and Monitoring Framework 16 2. Technical Assistance Completion Report 18 3. Implementation and Internal Operations of Subprojects – Hamkorbank 20 4. Implementation and Internal Operations of Subprojects – Ipak Yuli Bank 30 5. Status of Compliance with Loan Covenants 39 6. Gender Action Plan: Implementation Status 49

BASIC DATA

A. Loan Identification

1. Country Uzbekistan

2. Loan number and financing source 3043

3. Loan title Small Business and Entrepreneurship Development Project

4. Borrower Republic of Uzbekistan

5. Name of financial intermediary Ministry of Finance

6. Amount of loan US$50,000,000

7. Project completion report number 1704

B. Loan Data

1. Appraisal

– Date started 20 May 2013 – Date completed 28 May 2013

2. Loan negotiations

– Date started 06 August 2013 – Date completed 07 August 2013

3. Date of Board approval 01 October 2013

4. Date of loan agreement 21 Novembr 2013

5. Date of loan effectiveness

– In loan agreement 20 January 2014 – Actual 28 February 2014 – Number of extensions 2 times

6. Terminal date for commitments

– In loan agreement 31 December 2017 – Actual 20 January 2016 – Number of extensions none

7. Loan closing date

– In loan agreement 31 December 2017 – Actual 20 January 2016 – Number of extensions none

8. Financial closing date

– Actual 20 January 2016

9. Terms to the borrower

– Interest rate London Interbank Offered Rate (LIBOR-based) +0.60%

– Maturity (number of years) 20 years – Grace period (number of years) 5 years – Free limit None – Repayment terms Semi-annual payments

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10. Terms of relending (if any)

11. Interest rate for subloans

– Original Market-based interest rate – Revised Market-based interest rate

12. Disbursements

a. Dates

Initial Disbursement Final Disbursement Time Interval

10 Apr 2014 21 Dec 2015 20 months

Effective Date Actual Closing Date Time Interval

28 Feb 2014 20 Jan 2016 23 months

b. Amount ($’000)

Subloan Original

Allocation (1)

Increased during

Implementation

(2)

Cancelled during

Implemen- tation

(3)

Last Revised

Allocation (4=1+2-3)

Amount Disbursed

(5)

Undisbursed Balancea (6

= 4 – 5)

Credit Line – Hamkorbank

20,000 5,000 25,000 25,000 0

Credit Line – Ipak Yuli Bank

20,000 5,000 25,000 25,000 0

Credit Line – Third PCB 10,000 (10,000)

Total 50,000 50,000 50,000 0

C. Implementation Data 1. Number of subloans 2. Sector distribution of subloans

Sector (specify) Projected Actual

Microfinance loans (microcredits) 5,000 5,098

Small business loans 100 854

Total 5,100 5,952

[1] In accordance with the Law on Microfinance, the size of a microcredit cannot exceed 1,000 times the minimum wage, which is adjusted from time to time by the Government of Uzbekistan (Government of Uzbekistan. 2006. Law of the Republic of Uzbekistan on Microfinance. http://www.lex/uz). [2] Small business loans are greater than microcredit but less than or equal to $100,000.

3. Project performance report ratings

Ratings

Implementation Period Single Project Rating

From 1 Jan 2017 to 31 Mar 2017 On Track

From 1 Oct 2016 to 31 Dec 2016 On Track

From 1 Apr 2016 to 30 Sep 2016 Potential Problem

From 1 Jan 2016 to 31 Mar 2016 On Track

From 1 Oct 2015 to 31 Dec 2015 On Track

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From 1 Apr 2015 to 30 Sep 2015 Potential Problem

From 1 Jan 2015 to 31 Mar 2015 On Track

From 1 Jan 2014 to 31 Dec 2014 On Track

From 1 Sep 2013 to 31 Dec 2013 On Track

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons

No. of Person-

Days

Specialization of Membersb

Inception 4–6 June 2014 7 21 b, d, f, g, h, i, j

Review 1 20–24 October 2014 4 20 a, c, d, e

Review 2 17–25 December 2015 4 36 b, c, d, j

Project completion review

a = principal economist, b = financial sector specialist, c = project analyst, d = senior external relations assistant, e = social sector officer, f = micro and small enterprise (MSE) finance specialist, g = impact evaluation specialist, h = women MSE development specialist, i = MSE credit and reporting specialist, j = MSE finance specialist.

I. PROJECT DESCRIPTION

1. In November 2013, the Asian Development Bank (ADB) approved (i) a loan of $50 million from ordinary capital resources for the Small Business and Entrepreneurship Development Project1 requested by the Government of Uzbekistan, to be channeled through two participating commercial banks (PCBs)—HamkorBank and Ipak Yuli Bank, and (ii) a technical assistance (TA) grant for $500,000 to improve the PCBs' capacity to lend to and improve the entrepreneurial capacities of rural small businesses, 2 including women’s businesses. 3 The project funding comprised the ADB loan of $50 million, matching counterpart funds from the PCBs together of $50 million, and a $33.3 million (or 25%) equity contribution by sub-borrowers, for a total of $133.3 million. HamkorBank and Ipak Yuli Bank were allocated $25 million each.

II. PROJECT DESIGN

A. History

2. At the time of project preparation in 2012, the financial sector in Uzbekistan was dominated by banks, and the banking subsector’s assets accounted for 37.0% of gross domestic product (GDP). The project was strongly justified on the basis of the large unmet demand from women’s and rural small businesses for credit; the high collateral requirements (125.0% of the loan size); these businesses’ limited access to development services, which prevented them from expanding their activities and becoming more efficient and profitable; their limited access to long-term financing; and the weak institutional (risk management) capacity of the PCBs to meet the financial services needs of these businesses, particularly outside the city of Tashkent. The financing was needed to support the growing share of small businesses in GDP (from 35.0% in 2003 to 54.6% in 2012), to support employment (9.3 million people or 75.2% of all people employed), and to address the needs of the 84.5% of the micro and small businesses that were registered in 2012 as being outside Tashkent. Eight state-owned banks accounted for 23.6% of GDP in 2012. Lending to small businesses and microcredit loans accounted for 26.3% and 5.7%, respectively, of banks’ total outstanding loans in 2012. Lending to women was less than 15% of all bank lending in 2012. ADB chose to work with two smaller private sector banks, which passed all ADB due diligence requirements, had large portfolios of small business and microfinance, and were willing to expand their presence in rural areas. B. Scope of Operations

3. The project aimed to enable women’s and rural small businesses to play greater income-generating roles in Uzbekistan by enabling these businesses to become productive enterprises and grow and expand through better access to credit.4 Its envisaged impact was viable rural small

1 ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical

Assistance Grant to the Republic of Uzbekistan for the Small Business and Entrepreneurship Development Project (SBDEP). Manila.

2 Under Article 5 of Law N 69-II, enacted on 25 May 2000 and amended on 2 May 2012, small businesses include individual entrepreneurs, microfirms, and small enterprises (Government of Uzbekistan. 2000. The Law of the Republic of Uzbekistan N 69-II on Guarantees for Freedom of Entrepreneurial Activity. Tashkent; Government of Uzbekistan. 2012. Presidential Decree N328 on Measures for Further Improvement of the Business Environment and to Provide Greater Freedom of Entrepreneurship. Tashkent).

3 Under the project, women’s small businesses were defined as one of the following: (i) at least 50% of enterprise ownership is controlled by women, or (ii) at least 50% of managers are women, or (iii) at least 50% of registered employees are women.

4 As of 2013, small businesses were mainly active in agriculture (98.0% of the sector output), construction (70.7%), retail trade (45.3%), and services (44.7%).

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businesses with women’s participation. This was to be achieved by increasing the contribution to GDP of small businesses to 60% and the number of active female entrepreneurs outside Tashkent to 42%, both by 2020. 4. The aim was to improve the ability of women’s small businesses and rural small businesses to expand and build productive enterprises in profitable sectors, to access financing, and to benefit from economic opportunities. The PCBs were to benefit from greater long-term finance and stronger institutional capacity to enable them to better meet the demand for financial services from women’s businesses and rural small businesses. The project would also enable the PCBs to (i) provide short- and medium-term subloans in either sum or US dollars to small businesses; (ii) diversify their income sources; (iii) spread risk; and (iv) deliver more financial services and products such as e-banking, online loan applications, and services to support the development of women’s small businesses and rural businesses. TA was provided to support project implementation by improving the lending capacity of the PCBs and improving the entrepreneurial capacity of women’s small businesses and rural small businesses, as well as to work on regulations in some reform initiatives. C. Relationship with ADB and Other Lenders

5. The project was aligned with ADB’s country partnership strategy for 2012–2016 and the country operations business plan 2012–2014 for Uzbekistan. Both supported government reforms to enable small business to be an engine of growth, diversification, and investment for the economy.5 The project built on two previous loans that supported both access to credit for micro and small enterprises (MSMEs) and job creation.6 It also built on (i) an equity investment in Ipak Yuli Bank to improve banking sector quality, increase lending to small and medium-sized enterprises (SMEs), and help catalyze foreign investment in Uzbekistan;7 and (ii) an integrated rural development program that provided long-term housing finance and supported the building of new houses in rural areas.8

D. Project Design and Formulation

6. The project remained relevant at appraisal and at completion. It was aligned with government reforms aimed at enabling small businesses to be an engine of growth, diversification, and investment for the economy.9 It was also part of a government effort to improve the business regulatory environment so as to improve the ease of doing business and getting credit for small and micro enterprises.

5 ADB. 2012. Country Partnership Strategy: Uzbekistan, 2012–2016. Manila; ADB. 2012. Country Operations

Business Plan: Uzbekistan, 2012–2014. Manila. The project is reflected in the country operations business plan as the Third Small and Microfinance Development Project. The project name was changed to closely reflect the focus.

6 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Republic of Uzbekistan for the Small and Microfinance Development Project. Manila; ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Republic of Uzbekistan for the Second Small and Microfinance Development Project. Manila.

7 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Equity Investment in JSC Bank Ipak Yuli in Uzbekistan. Manila.

8 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Republic of Uzbekistan for the Housing for Integrated Rural Development Investment Program. Manila.

9 Government of Uzbekistan. 2011. Presidential Decree No. PP:1474 On Further Strengthening Micro, Small and Medium Enterprises Development. Tashkent; Government of Uzbekistan. 2010. Presidential Resolution No. 1438 on Priority Areas for Further Reforms and Sustainability Improvement of the Country’s Finance and Banking System in 2011–2015 and Achieving High International Ratings. Tashkent.

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7. The project and the specific activities within it were designed on the basis of a diagnostic assessment of (i) the role played by small businesses, including women’s and rural businesses, in driving economic growth and generating employment (75.2% of all people who were employed), and (ii) the shortcomings in the financial services and delivery mechanisms of banks in relation to these businesses. The assessment helped design a well-tailored project with suitable time frames for completion of activities and outputs, and hence achievement of the intended outcome. Extensive consultations with key stakeholders—government, small women’s and rural businesses, commercial banks, the Central Bank of Uzbekistan (CBU), women’s organizations, microcredit organizations, business associations, and development partners—were integral to the project design. 8. The project built on lessons from previous ADB experience in the banking and finance sector in Uzbekistan, including the need to strengthen the capacity of banks to lend to rural businesses, the need to target and strengthen women’s small businesses, and the importance of closely monitoring PCBs during project implementation. 9. The project’s intended outcome was increased financial access for rural small businesses, especially with women’s participation. By 2017, at least 50% of the number of new loans from the PCBs were expected to be received by small businesses in areas outside Tashkent and at least 30% of the number of new loans were expected to benefit women’s small businesses. The project had two outputs: (i) strengthened capacity of PCBs to deliver financial services to women’s small businesses and rural small businesses; and (ii) improved borrowing capacity for women’s small businesses and rural small businesses. By 2017, the PCBs were to issue at least 5,000 new microfinance loans and 100 new small business loans. Of the at least 3,000 potential sub-borrowers to be trained in accessing subloans, at least 30% were to be women and 310,000 small businesses were to be registered. The updated design and monitoring framework (DMF) is in Appendix 1.

10. At completion, the project remained aligned with ADB’s country partnership strategy for Uzbekistan and the government’s programs aimed at increasing the role of SMEs in economic growth. During 2012–2016, Uzbekistan made significant improvement in its overall ranking in the World Bank’s Doing Business 2016 report from 156th to 87th. These reforms are ongoing. E. Technical Assistance

11. The project was supported by TA to strengthen the PCBs’ capacity to provide loans to and improve the entrepreneurial capacities of women’s small businesses and rural small businesses. The project implementation period was 2014–2017. The TA was declared effective on 7 November 2013 and was implemented from 7 November 2013 to 31 December 2016. The TA was successful, providing support that was necessary to build the capacity of the PCBs and their clients. A minor change in implementation arrangements was approved on 23 July 2014 to allow the recruitment of a national expert in training in the Environmental and Social Management System (ESMS) for 1 person-month to provide training to the PCBs on the ESMS, including monitoring and mitigation of risks. Completion of the TA was extended for 9 months to enable the PCBs to complete planned activities.

12. TA implementation was closely coordinated with other ADB interventions, in particular the PCBs’ compliance with covenants in other ADB projects and programs in which they were engaged.10 The PCBs expressed satisfaction with the advisory services (inputs) provided. A study

10 Ipak Yuli Bank and Hamkorbank were participating commercial banks in the Second Small and Microfinance.

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tour to the Philippines on financial inclusion was conducted for middle managers from the CBU from 5 to 9 September 2016. There were no cost overruns. About 30% of TA funds were not used because of savings achieved (Appendix 2).

III. PROJECT IMPLEMENTATION

A. Lending Policies 13. The PCBs strictly followed all the provisions in the loan agreement. The lending policies of both PCBs were revised to simplify the process of reviewing and approving loans for small businesses. The approval limits were revised to allow branches to have more power in making decisions and to strengthen responsibility at the branch level. The introduction of an online system for processing loan applications reduced the time to process loan applications by 1.5 to 2 times during the project implementation period. 14. Known gender issues in the financial sector were incorporated in designing the project so as to make it relevant in addressing women’s needs. A project-specific gender action plan (GAP) was developed to promote the equal participation of female and male beneficiaries. Gender-related design features included (i) conducting gender awareness seminars for PCB boards, management, and staff; (ii) establishing gender-disaggregated client databases for regular monitoring and reporting; (iii) increasing the availability of loans to women’s small businesses; (iv) implementing public awareness campaigns to promote women’s entrepreneurship; (v) conducting business and financial literacy workshops for women’s small businesses; and (vi) promoting the use of e-banking by women’s small businesses. GAP indicators and targets were widely discussed during the design phase, monitored during the project’s implementation, and adequately reflected in the project’s DMF at both outcome and outputs levels.

15. Lending policies were revised to relax collateral requirements on microfinance loans. The recently established collateral registry made it possible to accept various types of property (not only real estate) as collateral and reduce risks in underwriting credit. Equipment, real estate, deposits, and securities as well as guarantees of third parties were accepted as collateral for the loans provided. The collateral was appraised prudently and where necessary by independent appraisers. To minimize credit risks and possible negative impacts on lending activities, the total loan portfolio was monitored by analyzing borrowers’ deposits and financial statements, comparing forecast project parameters and current performance, and carrying out onsite inspections of the collateral. The value of collateral was compared with current market prices for property, transport, and equipment on a quarterly basis. In the phase of non-achievement of project parameters, loss of the retail market, impairment of collateral, and occurrence of other factors adversely affecting the project, timely decisions were made to initiate restructuring or early recovery of loans.11 B. Characteristics of Subloans

16. Subloans were required to meet four criteria: (i) a repayment period of up to 5 years, (ii) a market-based interest rate, (iii) coverage of up to 75% of the subproject costs, and (iv) funding 50% from PCB funds and 50% from the proceeds of the ADB loan onlent to the PCB. The subloan

Development Project (ADB. 2010. Loan 2634-UZB: Second Small and Microfinance Development Project. Manila). Hamkorbank was a participating commercial bank in ADB’s Trade Finance Facilitation Program (ADB. 2009. Trade Finance Facilitation Program. Manila). ADB has an equity investment in Ipak Yuli Bank.

11 3043-UZB Small Business and Entrepreneurship Development Project: Project Completion Report. “Operational performance of joint-stock innovation commercial bank Ipak Yuli”, section C., pp. 9–11.

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limit for an individual loan and the aggregate value of individual subloans by an individual was $100,000. There was no change in the subloan ceiling. Qualified sub-borrowers had to meet two criteria: (i) a debt-to-equity ratio not higher than 75:25 for the subproject that the subloan was financing; (ii) a debt-service coverage ratio not lower than 1.1 times; and (iii) a proven track record and other criteria deemed necessary. At least 30% of all subloans made during the project life were to be to women’s small businesses, and at least 50% were to be made to small businesses outside Tashkent. At project completion, 76.2% of new loans were to be onlent to rural small businesses, and 31.6% of loans to women’s small businesses.

C. Implementation and Internal Operations of Subprojects

17. The PCBs did not report any major problems in implementing and operating subprojects. However, the segmented foreign exchange market (with official and black-market rates) and restrictions on cash transactions in the country, given the extent of the informal economy,12 started to increase transaction costs. The official rate of the CBU was used for accounting, reporting, customs, and other “obligatory payments,” according to foreign exchange regulations. Although the PCBs were reluctant to disburse subloans in US dollars because of possible problems and delays with repayment (owing to delays in authorization for conversion), loans in sum raised the overall risk for the PCBs. CBU regulations and the banknote shortage placed legal and practical restrictions on cash transactions (with the difference between cash and noncash prices hovering at 10–15%), while small businesses, mainly individual entrepreneurs engaged in trade, needed cash loans or at least loans that could be used for payments at card terminals. Direct transfers from the PCBs to the sub-borrowers’ suppliers were very inflexible, especially for inventory finance. 18. Other problems included heavy competition from other small businesses, problems with electricity supply13 (long power outages, especially in rural places, were increasing the cost of business), lack of capital for further investment, and low financial literacy. The project trained the PCB staff to deliver training in business development and financial literacy to sub-borrowers. By 2017, more than 8,000 sub-borrowers, 3,098 of them women, had received the training under the project. With the subloans, 7,639 jobs were created, of which 2,941 were for women. Most sub-borrowers reported that their income from business as well as their household spending either improved or would improve as a result of the subloans. Given that entrepreneurs to a large extent depend solely on their business to support their households, it is plausible that increased business profits would produce increased household incomes.14 D. Organization and Operations of Hamkorbank

19. The Joint-Stock Commercial Bank Hamkorbank was founded in 1991. It accepts deposits from the public and extends loans, makes transfer payments in Uzbekistan and abroad, and provides banking services for commercial and retail customers. At the end of 2017, Hamkorbank had 32 full-service branches, including 5 in Tashkent, 27 regional branches, and 69 mini-banks (the smaller outlets established mainly to serve its retail customers). It had 2,172 employees at year-end 2016. The bank focuses its lending activity primarily on SMEs and private entrepreneurs. The range of financial services includes deposit operations, international money transfers, retail and corporate lending, trade and project finance operations, microfinance and leasing operations,

12 Nina Blöndal. 2015. Qualitative Impact Study: Uzbekistan Small Business and Entrepreneurship Project, 5.

Conclusion and Recommendations, p. 10. 13 According to World Bank data, in 2013 electricity was the top-ranked obstacle named by small businesses. World

Bank/IFC. 2014. Uzbekistan Country Profile 2013. Tashkent. 14 Nina Blöndal. 2015. Qualitative Impact Study: Uzbekistan Small Business and Entrepreneurship Project, 4.4. Impact.

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cash management services, and securities operations. The bank has a wide network of correspondent relations with leading international financial institutions; it also enjoys the status of trusted partner in the country’s financial services market. On the basis of 2016 data, Moody’s assigned to Hamkobank a baseline credit assessment (BCA) rating of “b2”, a counterparty risk assessment rating of “B1(cr)/Not Prime(cr)”, and local and foreign currency deposits global rating of “B2/Not Prime”. Details appear in Appendix 3. E. Portfolio of Hamkorbank

20. Hamkorbank’s total loan portfolio stood at $758.1 million (equivalent) at the end of 2016. In sum terms, the value of the loan portfolio has grown significantly since 2014, increasing more than twofold, the result to an extent of the injection of capital from the Netherlands Development Finance Company (FMO). Despite such rapid growth, the value of net loans to total assets remains low—at 61.3% in 2016—indicating that a significant share of total assets is in non-interest-earning assets. Over 2014–2016, loan concentration in manufacturing gradually declined from 36% to 30%, while concentration in retail and small trade increased from 34% to 37%. The share of other sectors in the loan portfolio remained nearly unchanged. Hamkorbank has managed to maintain non-performing loans (NPLs)15 at very low levels—0.4% of gross loans at year-end 2016 (although this was an increase over 2015, when they were 0.2% of gross loans). Nonetheless, the low NPLs are an indication of the quality of Hamkorbank’s portfolio. Refer to details in Appendix 3. F. Financial Statements and Ratios

21. Details of Hamkorbank’s balance sheet, income statements, cash flow statements, and key ratios are in Appendix 3. G. Covenants

22. Hamkorbank was in compliance with all loan covenants at each year-end during 2014–2016. Appendix 5 contains complete details on compliance with loan covenants.

Table 1: Hamkorbank Compliance with ADB Loan Covenants (%)

Ratio ADB Covenants 2016 2015 2014

Capital adequacy ratio ≥ 12 14.6 13.6 15.2

Return on average assets ≥ 1 3.1 3.8 1.8

Loan to deposit ratio <100 85.3 81.8 81.8

Cost to income < 75 72.1 71.1 66.2

Loan delinquency ≤ 5 0.6 0.7 0.3

Maximum limit on an individual related party ≤ 25 0.0 0.1 0.1

Source: 2014-2016 audited financial statements.

H. Organization and Operations of Ipak Yuli Bank

23. The Joint-Stock Innovation Commercial Bank Ipak Yuli Bank was incorporated in 1990. The bank's primary business consists of commercial banking, securities and foreign currency operations, and origination of loans and guarantees. The bank accepts deposits from the public and makes loans and transfer payments in Uzbekistan and overseas. At the end of 2016, Ipak Yuli Bank had 14 full-service branches, including 7 in Tashkent, and 7 regional branches, as well

15 Portfolio At Risk (PAR) > 90 days, including restructured loans + doubtful + loans in non-accrual status.

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as 104 other, smaller outlets. The bank had 1,806 employees at year-end 2016. On the basis of the year-end 2016 figures, Moody’s assigned Ipak Yuli Bank a long-term bank deposit rating (local currency) and Outlook of B2 stable, and a baseline credit rating of b2 stable. Details of the bank’s organization and operation are in Appendix 4. I. Portfolio of Ipak Yuli Bank

24. Ipak Yuli Bank’s total loan portfolio stood at $392.4 million (equivalent) at the end of 2016. In sum terms, the value of the loan portfolio has grown by 91% since 2014. The growth in the loan portfolio is reflected in the continuous increase in net loans as a percentage of total assets, from 52% at the end of 2014 to 56% at the end of 2017. This percentage remains low, however, compared with peer banks and suggests that the bank has significant value tied up in non-interest-earning assets. The loan portfolio is dominated by SME loans, which decreased from 78% of the portfolio in 2014 to 74% in 2016 while the share of corporate loans increased from 13% to 18%. Ipak Yuli Bank managed to lower its NPLs16 in 2016 from the share of NPLs in 2014–2015. As a percentage of gross loans, they stood at 1.5% at year-end 2016. This is higher than the peer group of banks, though still below the 5.0% norm. Details of the bank’s portfolio are in Appendix 4. J. Financial Statements and Ratios

25. Details of Ipak Yuli’s balance sheet, income statements, cash flow statements, and key ratios are in Appendix 4. K. Covenants

26. Ipak Yuli Bank was in compliance with all loan covenants at each year-end over 2014–2016. Appendix 5 indicates the complete details on compliance with loan covenants.

Table 2: Ipak Yuli Bank Compliance with ADB Loan Covenants (%)

Ratio ADB Covenants

2016 2015 2014

Capital adequacy ratio ≥ 12 12.5 10.1 13.8

Return on average assets ≥ 1 3.0 2.3 2.3

Loan to deposit ratio <100 82.6 75.1 74.2

Cost to income < 75 64.7 72.4 68.6

Loan delinquency ≤ 5 0.1 0.1 1.1

Maximum limit on an individual related party)

≤ 25 0.1 0.1 0.3

16 Portfolio At Risk (PAR) > 90 days, including restructured loans + doubtful + loans in non-accrual status.

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IV. SUBLOAN IMPLEMENTATION

A. Loan Appraisal

a. Distribution of Subloans

27. The PCBs aimed to disburse by 2017 at least 5,000 new microfinance loans and 100 new small businesses loans. Actual distribution was 5,098 new microfinance loans,17 of which 1,661 were to women, and 854 new small business loans,18 of which 289 were to women. The actual distribution of microfinance loans exceeded the projected distribution by 1.1 times, while actual distribution of small business loans exceeded projections by 8.5 times. At least 30% of all subloans made during the project life were to be to women’s small businesses, and at least 50% were to be for small businesses outside the city of Tashkent. At project completion, 76.2% of new loans were onlent to rural small businesses, and 31.6% of loans were onlent to women’s small businesses.

28. The targets were fully achieved without the need for distribution criteria other than or additional to those established in the loan documents. Actual results exceeded those forecast, supporting achievement of the development objectives.

b. Covenants

29. Covenants applicable to subloans i.e., subloan criteria were met by both banks throughout the project implementation period. These covenants/criteria were: (i) repayment period of up to 5 years; (ii) market-based interest rate; (iii) cover up to 75% of the subproject costs; and (iv) funding deriving 50% from the PCBs; funds and 50% from the proceeds of the ADB loan onlent to the PCB. The subloan limit for an individual loan and aggregate value of individual subloans by an individual was $100,000. There was no change in subloan ceiling amount.

c. Quality of Appraisal

30. The PCBs that participated in the ADB loan have business strategies that reflect a strong track record and a commitment to serving rural and women-owned small businesses. Hamkorbank is privately owned. It has a strong regional footprint, with 95% of its loans made to individuals and businesses outside Tashkent. It serves nearly 22,000 borrowers, including about 6,000 women, with an average loan size of $12,900 and a maximum loan size of $350,000 equivalent. Ipak Yuli Bank, in which ADB holds a 13.4% equity stake, has 75% private ownership. Relative to Hamkorbank, it caters to the upper small business client segment, with 62% of its loans booked in the regions outside the capital, an average loan size of $54,100, and a maximum loan size of $2 million equivalent. The management and staff of both banks have experience in managing several credit lines as well as TA projects of international finance institutions (IFIs). Staff of the key project units in the banks have attended trainings and workshops organized in the framework of TA programs by ADB, the European Bank for Reconstruction and Development, the IFC, and other IFIs.

17 The maximum size of a microcredit should not exceed 1,000 times the minimum wage of SUM91,350, which will be

adjusted from time to time by the government. Microcredit was about $43,200 equivalent, using the exchange rate as of 16 August 2013.

18 Small loans are greater than microcredit but less than or equal to $100,000.

9

B. Implementation

31. Subloan documentation was reviewed during review missions to ensure that qualified sub-borrowers met subloan criteria. The loan reviews indicated the overall compliance of all subloans disbursed during the period with ADB subloan criteria. Those subloans which did not meet the criteria were not credited by ADB. 32. Corporate governance provided strategic direction and oversight over the banks’ activities, which supported efficient implementation of the project. Both banks had grown significantly in terms of assets, lending volumes, and profitability over the project implementation period. During 2014–2016, Hamkorbank experienced a 52% growth in assets, mainly driven by loan book (with a compound annual growth rate of 44%), while the growth rate of Ipak Yuli Bank’s assets was at 34% (38% for the loan portfolio). Pre-provision profitability in 2016 was 5.0% of average assets for Ipak Yuli Bank and 4.5% of average assets for Hamkorbank. However, the compound annual returns of both banks had declined from 2014 and stood slightly above the CBU-required minimums at year-end 2016. With the CBU raising the compound annual return to 13.0% starting in January 2019, there could be pressure on the further growth of lending volumes if the banks do not sufficiently replenish their capital.

V. EVALUATION OF PROJECT PERFORMANCE

A. Relevance

33. The project design was highly relevant. It was consistent with the country’s development priorities as enunciated in its state programs i.e., to enable small businesses to be the engine of economic growth and diversification in the economy, including through employment generation. It was aligned with ADB’s country partnership strategy for 2012–2016 and its country operations business plan for 2012–2014.19 34. The project was justified given the economic significance of small businesses in driving economic growth in Uzbekistan and the inability of the financial sector (which was dominated by banks) to meet the demands of small businesses, including women’s and rural businesses, particularly outside the city of Tashkent. The project was also justified by the employment generated by small businesses and its poverty reduction effects (see para. 4). B. Effectiveness in Achieving Outcome

35. The project was highly effective in achieving its expected outcome. Access to finance for rural small and women’s businesses increased. Nearly 70% of the new subloans issued by the PCBs were to rural small businesses outside the city of Tashkent and of these nearly 32% ($15.2 million) were to women’s small businesses (see para. 26). The baseline figure was $50 million. At completion, the entire amount of $50 million was fully disbursed. Early utilization of loan proceeds allowed the banks to refinance new projects as soon as repayments were made, thus expanding credit beyond the original amount. 36. Against the performance indicators for Output 1 (that by 2017, at least 5,000 new microfinance loans, and 100 new small businesses loans be issued), the two PCBs issued 5,098 microfinance loans and 854 small businesses loans by 2017. Against the performance indicators

19 ADB. 2010. Country Operations Business Plan: Uzbekistan 2010–2011. Manila.

10

for Output 2 (that by 2017, at least 3,000 potential sub-borrowers be trained by PCBs, that they access subloans under the project, and that at least 30% be women; and that the number of small businesses registered reaches 310,000), 8,028 business clients were trained by the PCBs and 4,625 sub-borrowers (or 57.6%) received loans. Of these sub-borrowers, 1,747 (or 37.8%) were women who were trained. The targets have been achieved. As of 1 January 2017, according to the official statistics, 233,292 enterprises had been registered as MSMEs.20 C. Efficiency

37. The project was efficient in achieving the outcome and outputs. The loan was signed 2 months after approval and declared effective 3 months after signing. This had no effect in terms of project performance and approval owing to the expedited submission of subsidiary loan agreements and legal opinions, and the establishment of PIUs by the PCBs. Disbursements were made in a timely manner, with clear guidance for the PCBs by ADB with regard to the procedures for submitting loan withdrawal applications and subloan disbursements, and reasonable performance targets that were based on the institutional capacity of the PCBs and the absorption capacity of SMEs. The TA was efficient in meeting targets. Its extension was necessary to deliver planned activities and ensure the efficient utilization of TA resources. 38. Some key elements of a strong legal and regulatory framework established in 2010–2013 enabled smooth project implementation.21 During the loan utilization, ADB worked closely with the executing agency and the PCBs to ensure prompt responses to operational issues. D. Sustainability

39. The project is likely to be sustainable. The PCBs improved their ability to expand beyond traditional areas and are now well equipped to finance rural and women’s businesses. Improved underwriting and risk management capacities provide solid ground for the banks to attract resources from deposits or other IFIs when needed. SME development, private sector development, and banking sector development to support SMEs has strong support from the government. The 2017 reforms indicated the government’s strong commitment to addressing the key issues of easing the business environment and tackling difficult issues such as access to foreign currency conversion and the removal of barriers to trade. Such reforms will likely improve opportunities for both the PCBs and their clients. Special programs have been initiated for the development of SMEs, as small businesses effectively generate employment and income and are critical for Uzbekistan’s inclusive growth. The SME market is projected to continue to grow, and the PCBs will need to serve a growing range of job-creating small enterprises, especially small businesses in underserved areas with significant income and employment opportunities. More important, the PCBs find the operation to be profitable, with manageable risk; i.e., they have been able to expand lending to rural and women’s businesses while retaining good asset quality.22 40. On the basis of feedback from sub-borrowers, among others, the project (i) helped provide access to credit; (ii) improved access to medium-term financing of up to 3 years; (iii) supported women-owned and rural businesses; and (iv) helped improve borrowers’ capacity in management skills, financial literacy, and awareness of financial products. To support the government’s

20 State Statistics Committee. www.stat.uz. 21 With the support of the IFC, the government is expanding the coverage and improving the quality of the credit bureau

established in 2011. The Law on Collateral Registry supported the establishment of an electronic secured transactions registry, which began operation in 2014. Draft legal amendments were prepared for enactment in 2017 to facilitate the use of movable property as collateral.

22 Discussions with the government point toward a Third SMDP.

11

continuing efforts toward this end and the PCBs’ continued interest in growing their portfolios, particularly for small businesses, ADB approved the Small Business Finance Project for $100 million in 2016. HamkorBank and Ipak Yuli Bank are two of the four PCBs.23 E. Development Impact

41. The impact of the project is likely to be moderate to significant. The contribution to GDP of small businesses increased from 54.6% in 2011 to 56.0% by 2016. The share of active female entrepreneurs outside the city of Tashkent increased from 39.5% in 2011 to 40% in 2015. Under the project, 21,968 jobs were created through PCB subloans, of which 37.0% were for women, well above the GAP target of 25%. E-banking services were expanded: 90% of HamkorBank’s and 25% of Ipak Yuli Bank’s e-banking services were to customers outside the city of Tashkent. 42. The impact on the institutional development of the PCBs is also likely to be significant. The PCBs obtained practical experience in applying financial and other criteria to assess the eligibility for loans of rural small businesses and women’s businesses, in strict compliance with national legislation and the provisions of the loan and project agreements. Online systems for processing loan applications for small businesses was implemented by both PCBs. Relevant employees of the two PCBs were provided training in 2014 on the Regulation and Supervision of Electronic Banking. The PCBs have implemented environmental and social management systems that meet ADB requirements. The project complied with the requirements of Uzbekistan’s labor, environmental, health, safety, and social laws and regulations. It was under the Financial Intermediary (FI) category, treated as category C, with respect to ADB’s environment and social safeguards. The PCBs financed only those subprojects which had minimal or no adverse social or environmental risks. 43. The impact on gender is likely to be significant. The project built on lessons learned from the Second SMDP and earlier financial intermediation loans to Uzbekistan (footnotes 7, 8, and 9). More than 75% of the GAP targets were achieved, and GAP implementation could be preliminary rated as successful: nearly 30% of the new loans from PCBs were to women-owned small businesses outside the city of Tashkent; more than (35%) of e-banking users in the PCBs were women; and nearly 500 female entrepreneurs registered in Tashkent, Fergana, Namangan, Andijan, Samarkand, and Karshi. During the workshops about 400 female entrepreneurs were trained. Two seminars were also conducted for training of trainers on improving access to financing for female entrepreneurs and customers in rural areas. Refer to Appendix 6. F. Performance of Hamkorbank

44. The performance of Hamkorbank for the loan and TA are rated satisfactory. The bank has business strategies that reflect a strong track record and a commitment to serving rural and women-owned small businesses, as agreed in the loan agreement. It has a strong regional footprint, with 95% of its loans booked outside the capital. For effective monitoring and control of project implementation, Hamkorbank had established a project implementation unit from representatives of the Credit Department, the Microfinance Unit, and the Accounting subdepartment as well as the Risk Management Department. The PCB met all eligibility criteria for accessing the loan. The CBU confirmed that Hamkorbank met the CBU’s mandatory prudential standards and Uzbekistan laws and regulations on anti-money laundering and combating the financing of terrorism, as well as applicable CBU regulations. The PCB established the ESMS to

23 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical

Assistance Grant to the Republic of Uzbekistan for the Small Business Finance Project. Manila.

12

the satisfaction of ADB, and appointed and trained designated staff in the ESMS. As the project’s main targets were small businesses and private entrepreneurs, the bank staff learned specific eligibility and monitoring processes, in strict compliance with national legislation and provisions of the loan and project agreements. Timely meetings with authorized representatives of ADB helped in the monitoring process. There was no significant delay in the processing of requests. The bank was able to comply with the agreed loan disbursement schedule, and the proceeds of the credit line in the amount of US$25 million were successfully disbursed by the bank in 2014 prior to the established loan agreement closing date of 31 December 2017. Hamkorbank was in compliance with all financial covenants at each year-end during 2014–2016. The reviews indicated the overall compliance of all subloans disbursed during the period with ADB criteria for the subloans. Those subloans which did not meet the criteria were not credited by ADB. The PCB and its sub-borrowers adhered to the environmental and social safeguard requirements. See Appendix 6. G. Performance of Ipak Yuli Bank

45. The performance of the Ipak Yuli Bank for the loan and TA are rated satisfactory. The bank has business strategies that reflect a strong track record and a commitment to serving rural and women-owned small businesses. Its portfolio of small business loans accounted for 78% of the total loan portfolio and is targeted to grow at a compound annual rate of 20% by 2021. With 40% of its small business loans issued outside the capital, the bank plans to increase its rural coverage through the expansion of a regional branch network and e-banking. Ipak Yuli Bank, in which ADB holds 13.4% of the share capital, has 75% private ownership. For monitoring and control of project implementation, the PCB had established a project implementation unit consisting of representatives of the Department for Relations with International Financial Institutions, the Loan Portfolio Monitoring Division, and the Risk Management Division. The PCB met all eligibility criteria for accessing the loan. The CBU confirmed that Ipak Yuli Bank met the CBU’s mandatory prudential standards and Uzbekistan laws and regulations on anti-money laundering and combating the financing of terrorism, as well as applicable CBU regulations. The PCB established the ESMS to the satisfaction of ADB, and appointed and trained designated staff for the ESMS prior to submission of the first withdrawal application. Ipak Yuli Bank was strictly following all the appropriate provisions agreed upon in the loan agreement to ensure the diligent performance of loan obligations. As the main target groups of the project were small businesses and private entrepreneurs, the bank staff learned specific eligibility and monitoring processes, in strict compliance with national legislation and provisions of the loan and project agreements. The monitoring process was supported by timely meetings with authorized representatives of the ADB. There was no significant delay in the processing of requests. The bank was able to comply with the agreed loan disbursement schedule, and the proceeds of the credit line in the amount of US$25 million were successfully disbursed by the bank prior to the established loan agreement closing date of 31 December 2017. Ipak Yuli Bank was in compliance with all financial covenants at each year-end during 2014–2016. The reviews indicated overall compliance of all subloans disbursed during the period with ADB criteria for subloans. Those subloans which did not meet the criteria were not credited by ADB. The PCB and its sub-borrowers adhered to the environmental and social safeguard requirements. H. Performance of the Asian Development Bank

46. The performance of ADB is rated satisfactory for both the loan and the TA. Two review missions were undertaken during the project period. A joint venture arrangement between Headquarters and the Uzbekistan Resident Mission ensured that all issues related to loan and TA administration were addressed timely. manner.

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I. Overall Assessment

47. The project was successful. Feedback from sub-borrowers showed that the project (i) made positive contributions to meeting their requirements; (ii) helped fill the credit gap for women’s and rural small businesses; and (iii) helped build the institutional capacity of the PCBs to expand financial services to the target clientele while maintaining asset quality. The PCBs gained practical experience in project implementation techniques and procedures as well as project monitoring. The project helped support the government’s reforms to enable small businesses to be an engine of growth, diversification, and investment for the economy. The DMF was well designed and the performance targets, including GAP targets, were achievable.

Table 3: Overall Ratings

Criteria Rating

Relevance Relevant

Effectiveness Highly Effective

Efficiency Efficient

Sustainability Likely Sustainable

Overall Assessment Successful

Impact Satisfactory

Performance of Hamkorbank Satisfactory

Performance of Ipak Yuli Bank Satisfactory

Performance of ADB Satisfactory

VI. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons

48. There were no project-related issues. 49. The rationale for financial intermediation loans for small businesses is typically based on addressing market failures that limit access to credit and financial services by small businesses, including women’s businesses and rural small businesses. These interventions can contribute quite successfully to shrinking the credit gap, building the necessary capacity of participating financial institutions, and even generating employment in the SME sector. However, for financial intermediation loans and interventions to fulfill their objectives of contributing to overall economic growth and development, they should be complemented by policy-based operations that can help catalyze related and critical sectoral, policy, and institutional reforms. 50. Although data are collected for micro-assessments, the PCBs and the MOF should collect systematic data to assess the larger intended development impacts of financial intermediation loans. Concrete estimates of the credit gap should also be obtained during project design to ensure that the ADB intervention does not displace private sector funds, given the features of sovereign loans. Mechanisms that leverage sovereign loans to move sub-borrowers to more market-based finance should be developed.

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B. Recommendations

51. Enhanced preparatory work and more in-depth analysis, as well as monitoring during project implementation, are required so as to address lessons learned. Robust indicators and means or tools for measuring impact and outcome and collecting baseline data and monitoring need to be further developed. Obtaining a better understanding of the sector may require reaching down to the sub-borrower level, as was done during the midterm review of the project.

52. For financial intermediation loans to have a larger development impact, as is intended in most cases, they need to take a long-term and systemic approach. Lessons learned should be combined with thorough economic and sector work to guide policy discussions to help the government and ADB reach common ground on the policy issues and the most suitable intervention. The universe of PCBs should be expanded to include some of the better-performing private and state-owned PCBs that are willing to change. In addition, capacity-building TA support should be provided even before the project starts so as to make them viable candidates during the due diligence conducted for the selection of PCBs. The regulator (CBU) has expressed interest in being consulted more closely when such programs, in particular various loan covenants and requirements, are being discussed with the government. 53. It is advisable for ADB to remain actively engaged in the sector as ADB’s presence has helped the PCBs remain focused on providing continuing assistance to the MSME sector and improving the quality of such assistance. Future assistance could be predicated on the government continuing or even accelerating reforms in the financial sector—where warranted, with ADB support. A clear strategy with a road map and defined timelines and with broad-based support (discussed extensively with market players) may be useful in advancing sector reforms.24 Moreover, the reform process needs to be institutionalized with transparent procedures and a clear consultative process. Aside from policy reforms, ADB can meaningfully contribute to good governance and best practices among the PCBs and sub-borrowers. TA that has proven to be of positive value should be continued so as to build capacity, deepen knowledge, and ensure the sustainability of the intervention. 54. Lessons from finance projects point to the need to (i) engage in policy dialogue on regulatory and other impediments to SME development; (ii) set up a prudential supervisory and regulatory infrastructure for banks and other finance institutions that have both capacity and a commitment to reform; (iii) build capacity in PCBs to ensure sound appraisal and supervision of subprojects, credit and risk management policies, and corporate governance and financial disclosure policies; (iv) strengthen monitoring by requiring PCBs to provide quarterly progress reports; (v) limit the maximum subloan size to $1 million in future SME financial intermediation loans (FILs); (vi) rigorously review subloans financed by ADB and project implementation units to ensure that sub-borrower and subloan criteria are met; (vii) ensure that the project design is realistic and relevant; and (viii) include covenants allowing ADB to suspend loan disbursements.25 These observations remain relevant. 55. Future monitoring. To improve targeting in future projects, ADB should continue to pay close attention to the performance of subloans (as this has proven problematic in past loans); the characteristics of subloans (geographic distribution, gender, sector classification, loan tenors,

24 This has been implemented with some success in Cambodia where a 10-year financial sector strategy has been

prepared, revised every 3 years at the government’s initiative with ADB support through TA and cluster loans. 25 Sector Assessment (Summary): Micro, Small, and Medium-size Enterprise Development in ADB. 2012. Financial

Sector Development in Central and West Asia. Country Assessment Uzbekistan. Consultant’s report. Manila (TA 7709-REG). Unpublished. Available on request.

15

interest rates, terms such as collateral, cash or noncash transfers, drawdown in sum or in US dollar, etc.); the nature of market demand; indicated demand for loans to MSMEs on the basis of PCB projections and performance; and feedback from both PCBs and sub-borrowers on problems encountered. This information should be used to determine the type of support that may be needed for future interventions. 56. Covenants. Although most covenants appear appropriate, the loan delinquency covenant (i.e., loan delinquency ratio not exceeding 5% of gross loans) could have been more strongly defined to ensure that bad loans were recognized and action taken in a timely manner. 26 Considering that between 2016 and 2019, the CBU raised the minimum requirements for capital adequacy, future loans should establish capital adequacy ratio covenants in line with CBU requirements. 57. Further action or follow-up. No further follow-up related to the project is required. This project completion report has been prepared for the project by the executing agency in consultation with the PCBs. ADB should incorporate the lessons learned from past interventions in the design of future similar interventions. It should also consider complementing financial intermediation loans with policy-based interventions to catalyze critical sector-related reforms. Support for capacity building should continue in succeeding projects and should also include training of trainers to ensure that PCBs have a repository of trainers in the country to help them build on the knowledge and skills gained (para. 11) after the completion of the TA. 58. Timing of the project performance evaluation report (PPER). With no outstanding issues related to project performance, a PPER could be conducted as soon as practically possible.

26 Loan delinquency is defined as loans classified as losses and writtenoff. As per this definition, a bank with 99.5% of

its loan book classified as doubtful and 0.5% of its loans classified as losses would be in in compliance with ADB covenants even though in reality it is close to bankruptcy. The covenant could be strengthened in subsequent ADB SME finance projects by defining loan delinquency as PAR.90 days + all restructured loans (except loans where the loan currency is changed from foreign currency to Uzbek Sum). The covenant could be strengthened further by incorporating into the equation components of loan loss reserves (general + specific) and Tier 1 capital. Another strong performance covenant that could be added is PAR>90 +restructured loans - loan loss reserves/Tier 1 capital. This covenant will help ensure that the borrower maintains adequate level of provisions against NPLs relative to its capital and thereby prevent deterioration of asset quality leading to impairment of capital.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance

Indicators/Targets Achievements Assessment

Impact Viable rural small businesses with women’s participation

By 2020, contribution to GDP of small businesses increases to 60.0% (2011 baseline: 54.6%) By 2020, active female individual entrepreneurs outside the city of Tashkent increases to 42.0% (2011 baseline: 39.5%)a

As of 1 January 2017, small businesses contributed to 56.9% of GDP and about 40% of female individual entrepreneurs run businesses outside the city of Tashkent.

These performance targets are achievable within the specified timeline.

Outcome Increased financial access by rural small businesses with women’s participation

By 2017, at least 50% of the number of new loans from PCBs are received by small businesses in areas outside the city of Tashkent (baseline: 0, sex- disaggregated) By 2017, at least 30% of the number of new loans from PCBs are to women’s small businesses (baseline: 0, segregated by region)

By 2017, 5,952 new loans were issued by the PCBs of which 4,535 or 76.2% were onlent to rural small businesses and 1,878 or 31.6% of the new loans were onlent to women's small businesses

Achieved Hamkorbank: By 2017, issued 2,380 new loans of which 2,158 or 91% were to small businesses in areas outside of Tashkent city and out of them 696 or 32,25% to women’s small businesses. Ipak Yuli Bank: By 2017, issued 3,572 new loans of which 2,377 or 59% were to small businesses in areas outside of Tashkent city and out of them 1,182 or 33.1% to women’s small businesses.

Outputs 1. Strengthened capacity of PCBs to deliver financial services to women’s small businesses and rural small businesses

By 2017, at least 5,000 new microfinance loans issued by PCBs (baseline: 0, disaggregated by sex and by region)b

By 2017, two PCBs issued 5,098 microfinance loans, of which 3,865 (or 76%) to rural clients and 1,189 (or 33%) were to women

Achieved Hamkorbank: By 2017, issued 1,791 microfinance loans of which 1,630 (or 91%) to rural clients and 555 (or 31%) to women Ipak Yuli Bank: By 2017, issued 3,307

Appendix 1 17

Design Summary Performance

Indicators/Targets Achievements Assessment

2. Improved borrowing capacity of women’s small businesses and rural small businesses

By 2017, at least 100 new small business loans issued by PCBs (baseline: 0, disaggregated by sex and by region) By 2017, at least 3,000 potential subborrowers trained by PCBs and accessed subloans under the project, of which at least 30% are women

By 2017, the number of small businesses registered reaches 310,000 (2011 baseline: 247,000

By 2017, two PCBs issued 854 new small business loans, of which 671 (or 79%) to rural clients and 289 (or 34%) were to women. By 2017, the total of 8,028 business clients were trained by the PCBs and 4,625 subborrowers (or 58%) received loans. Of these subborrowers, 1,747 (or 38%) were women who were trained and accessed loans. 233,292 enterprises were registered as micro and small enterprises as of 1 January 2017, according to the official statistics1

microfinance loans of which 2,235 (or 67.6%) to rural clients and 1,106 (or 33.4%) to women Achieved Hamkorbank: By 2017, issued 589 new small business loans of which 527 (or 89%) to rural clients and 213 (or 36%) to women Ipak Yuli Bank: By 2017, issued 265 new small business loans of which 144 (or 54.3%) to rural clients and 76 (or 28.7%) to women Achieved Hamkorbank: By 2017, of 5,008 potential subborowers trained 2,283 accessed subloans under the project, of which 891 or 39.0% were women Ipak Yuli Bank: By 2017, of 3,020 potential subborowers trained 2,342 accessed subloans under the project, of which 856 or 36.6% were women Partially achieved

1 State Statistics Committee, www.stat.uz

18 Appendix 2

TECHNICAL ASSISTANCE COMPLETION REPORT

TA Number, Country, and Name: Amount Approved: US$ 500,000

TA 8480-UZB: Improving Rural and Women’s Small Businesses Access to Finance

Revised Amount: N/A

Executing Agency: Ministry of Finance

Source of Funding: TASF-V

Amount Undisbursed: US$ 163,838.67

Amount Utilized: US$ 336,161.33

TA Approval Date: 01 Oct 2013

TA Signing Date: 07 Nov 2013

Fielding of First Consultant: 15 April 2014

TA Completion Date Original:31 Dec 2015

Actual: 31 Dec 2016

Account Closing Date Original: 31 Mar 2016

Actual: 22 Mar 2017

Description The technical assistance (TA) for $500,000 was attached to the project to develop participating commercial banks (PCBs) capacity for financial services delivery and improve the entrepreneurial capacities of rural small businesses, including women’s businesses. Expected Impact, Outcome, and Outputs The TA will have three main outputs focused on (i) improving capacity of PCBs to lend to women’s small businesses and rural small businesses; (ii) improving capacity of women’s small businesses and rural small businesses; and (iii) strengthening the regulatory and supervisory framework for the development and supervision of e-banking, including Anti-Money-Laundering/Combating the Financing of Terrorism (AML/CFT). Additional training was also provided in credit appraisal skills and gender sensitization of PCBs staff, and the gender action plan was further developed. Delivery of Inputs and Conduct of Activities The TA was declared effective on 7 November 2013 and was implemented from 7 November 2013 to 31 December 2016. The TA envisaged 5 international consultants for 10 person-months and 3 national consultants for a total of 16 person-months. As all the skills mix and qualifications required from consultants are diverse and difficult to source from a single firm, the TA engaged individual qualified consultants. The international experts were: (i) micro and small enterprise finance specialist/team leader, (ii) micro and small enterprise credit and financial reporting specialist, (iii) impact evaluation specialist, (iv) electronic-banking regulation and supervision specialist, and (v) women micro and small enterprise development specialist. The national experts were: (i) micro and small enterprise finance specialist/project coordinator, (ii) environmental and social management system training expert, and (iii) impact evaluation specialist. A memo for minor change in implementation arrangements was approved on 23 July 2014 to allow recruitment of a national Environmental and Social Management System (ESMS) training expert for 1 person-month to provide training to PCBs on ESMS, including monitoring and mitigation of risks. TA implementation was closely coordinated with other related ADB interventions particularly PCBs’ compliance with covenants in other ADB projects and/or programs in which they were engaged.

The TA envisaged 25-month implementation period (November 2013 to December 2015). However, to help banks complete the planned activities, TA completion was extended by 1 year (up to December 2016).

The consultants’ overall performance was satisfactory. Evaluation of Outputs and Achievement of Outcome TA recipients i.e., the PCBs expressed satisfaction with the advisory services (inputs) provided. A study tour to the Philippines on financial inclusion was conducted from 5 to 9 September 2016 comprising middle managers from the Central Bank of Uzbekistan. TA was successful providing necessary support to build capacity of PCBs and its clients. The consultants accomplished their terms of reference and utilized their

Appendix 2 19

Prepared by: Priyanka Sood Designation and Division: Senior Financial Sector Specialist In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

technical knowledge and experience to provide relevant support to the PCBs and potential borrowers. Training to trainers and women borrowers was provided efficiently and effectively. Overall Assessment and Rating The TA is rated successful. TA was effectively and efficiently delivered, and targets were met or exceeded. Major Lessons Capacity building technical assistance provided in parallel with loan implementation is critical to the achievement of the overall intended impact of financial sector interventions. Recommendations and Follow-Up Actions ADB should continue to provide capacity building TA, including for the executing agency, Central Bank, and other concerned agencies of the government to strengthen internal capacity and to improve understanding of critical policy issues that impact financial sector development including banking sector development. This support should also include training of trainers to ensure that PCBs have a repository of trainers in the country itself to help build on the knowledge and skills gained after the completion of ADB TA. This would be value for money for ADB’s assistance and make available a well-trained set of professionals who could be effectively utilized in subsequent ADB interventions in this sector.

20 Appendix 3

IMPLEMENTATION AND INTERNAL OPERATIONS OF SUBPROJECTS – HAMKORBANK

I. Organization and Operations of Hamkorbank

A. Organization, Management, and Staffing

1. Joint-Stock Commercial Bank Hamkorbank, was founded in 1991. It was formerly the Joint-Stock Commercial Bank Andijanbank operating only in the Fergana Valley. The bank operates under general banking license No. 33 issued by CBU on 24 December 2007 and general license for foreign currency operations No.64. Both were renewed as licenses No.64 and No.72 respectively on 13 December 2014. The bank accepts deposits from the public and extends loans, makes transfer payments in Uzbekistan and abroad, and provides banking services for its commercial and retail customers. The bank’s lending activity is primarily focused on SMEs and private entrepreneurs. At the end of 2016 Hamkorbank had 32 full service branches, including five in Tashkent, and 27 regional branches, and 69 mini-banks (the smaller outlets established

mainly to service its retail customers). The bank had a total of 2,172 employees at year-end 2016.

2. The range of financial services provided by the Bank includes, among others, deposit operations, international money transfers, retail and corporate lending, trade and project finance operations, microfinance and leasing operations, cash management services and securities operations. Bank has wide network of correspondent relations with leading international financial institutions as well as enjoys the status of trusted partner in the financial services market of the country 3. On 26 February 2016, due to a dispute between the PCB and CBU, Moody’s downgraded Hamkorbank's Long-Term Local Currency Deposit rating to B2 from B1 and placed the rating on review for downgrade. At the same time, Moody's placed Hamkorbank's Long-Term Foreign Currency Deposit rating of B2 on review for downgrade. It also confirmed the bank's NP Short-Term Local- and Foreign-Currency Deposit ratings. The dispute with CBU related to its foreign exchange operations and resulted in the partial suspension on 10 February 2016 of the bank’s foreign exchange operations for a period of six months. All foreign exchange operations for legal entities were suspended, with the exception of the crediting of proceeds from exports to clients’ accounts, the transfer of these funds to other banks, payments under import contracts, loan repayments, and closing swap transactions. The servicing of international debt was also not affected. Suspended activities were, mainly, new foreign exchange operations with commercial clients, and prolongation of foreign exchange deposits for individuals and legal entities. On 3 June 2016 all restrictions imposed on Hamkorbank’s foreign currency operations were lifted. Concurrently, Moody's Ratings also confirmed Hamkorbank's baseline credit assessment (BCA) and adjusted BCA of b2, as well as the bank's long-term counterparty risk assessments of B1(cr). The short-term credit assessment was affirmed as Not-Prime (cr). Subsequently, in June 2016 based on year-end 2015 figures, Moody’s assigned Hamkorbank, a Long-Term Bank Deposit Rating (Local Currency) of B2 and Outlook Stable, and a Standalone Bank Financial Strength/Baseline Credit Rating of B2 Stable, and a Long-term Counterparty Risk Assessment of B1(cr). 1 4. Based on 2016 data, Moody’s assigned Baseline Credit Assessment (BCA) of b2, a Counterparty Risk Assessment (CR Assessment) of B1(cr) / Not Prime(cr), The B2/Not Prime global local- and foreign-currency deposit ratings to Hamkorbank. The bank's BCA was constrained by prolonged high lending growth which exerts pressure on its capital buffer and

1 https://www.moodys.com/research/Moodys-takes-rating-actions-on-five-Uzbek-banks--PR_372498

Appendix 3 21

potentially may give rise to asset quality issues. At the same time, the bank's BCA was supported by its strong profitability, as well as sound liquidity and funding profiles. 5. Over 2012–2016, the compound annual growth rate (CAGR) of Hamkorbank loan portfolio was 52%, the capital CAGR of 42% lagged somewhat behind. On 1 January 2017, Hamkorbank's aggregate credit exposure to borrowers operating in trade and service industries, mainly micro-, small- and medium-sized enterprises, stood at 18% of the bank's total gross loans, another 37% of loans were issued to individuals, of which a large proportion are individual entrepreneurs. Pre-provision profitability was 4.5% of average assets in 2016. 6. The key corporate governance bodies include the General Meeting of Shareholders, Supervisory Board (Council), the Management Board, and the Revision Commission which is mandatory at joint stock banks and is responsible both for oversight of the decisions of Supervisory Board and for reviewing the bank’s financial statements. 7. Hamkorbank shareholders are predominantly private individuals, though two international financial institutions also hold equity in the bank. IFC acquired 15.3% of the bank’s voting shares in 2010. FMO purchased another 15.3% in 2014. Both shareholdings were diluted to 13.8% as of year-end 2014 but were increased again to 15.0% (by the purchase of additional shares) as of end-2016. As a result, the bank’s shareholder structure is broad, combining international and national investors. The largest shareholder, as well as the bank’s founder, is a prominent, respected business figure in Fergana Valley. 8. Members of the Supervisory Board and the Management Board are appointed by the General Meeting of Shareholders. Hamkorbank’s Supervisory Board is dominated by independent directors with broad experience. In 2016, the bank had 9 members of Supervisory Board and there was a change in composition of the Supervisory Board to include a foreign member who represents interests of IFC. The Chairman of the Supervisory Board is the founder and the largest shareholder of the bank. Other members have extensive experience in investments management, international consulting and scientific field. The Supervisory Board is in charge of approval and periodic review of business strategy and policies of the Bank, approval of the organizational structure as well as responsible for ensuring that effective internal control system is functioning and continuously maintained. 9. In 2016, the bank had 7 members of Management Board. The Management Board was reelected in June 2016 with some members changed. The Chairman has 24 years of banking experience (within this bank). He has higher economic education and specialization in securities and treasury. One of the members – deputy CEO – had left the bank due to being appointed as a Chairman of NBU by the President of Uzbekistan. Other Management Board members also have extensive experience in the banking sector and with the bank. Their qualifications include corporate lending, risk management, projects analysis, accounting and finance.

B. Personnel Administration

10. Hamkorbank uses various financial and non-financial incentives and competitive compensation to encourage its staff performance and achievement of targets in its business plan.

11. The staff remuneration appears to be more competitive compared with the local market. In 2016 the bank paid in average SUM96.3 billion in salaries to 2,172 employees, which bring the average monthly salary in 2016 to SUM3.7 million (including taxes). In 2016, the average monthly

22 Appendix 3

salary in Uzbekistan was around SUM1.3 million though at SUM2.1 million in financial sector.2 In 2014 and 2015, the bank paid in average SUM70.7 billion in salaries to 1,756 employees, which bring the average monthly salary in 2015 to SUM3.3 million (including taxes). By comparison, as of December 2015, the average monthly salary in Uzbekistan was SUM1.5 million.3 12. All bank staff has fixed and variable salaries. Variable salary representing part of financial incentives is paid based on KPIs (key performance indicators) linked to business plan targets. Transition from old bonus system based on the classical microlending approach to the KPIs-based incentives system was performed in 2012 when former front-offices of microfinance department and corporate lending department were merged into new sales department. Since then staff in branches is divided into business-unit staff and none-business-unit staff. Variable salary of business-unit staff is calculated monthly based on bonus-cards. Business-unit staff includes sales staff and account managers of front-office, universal managers and consumer managers of retail sales department, as well as staff of mini-banks (smaller outlets). Bonus-cards include indicators linked to sales of loan products, income from loans, level of NPLs, and percentage of completion of individual plan of incremental growth of loans. Besides, a separate bonus is paid for observation of service quality standards. None-business-units staff is rewarded based on KPI-cards linked to indicators of load and quality as well as business plan targets. In addition, the bank employees get annual bonus linked to the bank’s profitability (profit sharing); 1 minimum salary per month for purchase of agricultural products; incidental payments for jubilee, wedding or death/disease of employee or his close relatives; compensations for food, uniform, training; other incentives. Non-financial incentives are also used in the bank and include rewarding in the form of cups, letters, gifts or prizes based on results of contests as “best branch”, “best mini-bank”, “best employee”. The results of contests are published on a corporate web-portal or in domestic newspapers, announced at general meetings.

13. Staff promotion is linked to KPIs, depends on experience and professional skills, absence of disciplinary actions for underperformance or unacceptable behavior. Interns to become sales managers are required to pass through mandatory 3-months internship program. For promotion of an employee a written recommendation of a branch manager or a branch HR-manager to the name of CEO in head office is required. 14. Hamkorbank develops annual training plans covering various technical-economic topics for staff of various departments (there are approved training plans for each year from 2014 to 2016). The plans are scheduled by months and dates and approved by Chairman of Management Board. The technical-economic topics cover credit process related topics as screening, financial analysis of a borrower, scoring, credit risk management, etc., accounting, internal audit and internal control issues, IT news, new products, AML issues, FX regulation, opening of account, legal literacy, taxes as well as changes in legislation and new CBU regulations. Those trainings are mostly provided by the own training center of Hamkorbank. In addition to its own trainings the Bank does send employees to providers of external trainings as the Central Bank of Uzbekistan, the Association of Banks in Uzbekistan, Bank Academy, Tashkent Finance Institute, Singapore Institute of Management in Tashkent, Centre for corporate management and international organizations as World Bank, IFC, ADB, EBRD and others, as well as trainings organized abroad, including by Association of Russian Banks, Big4 audit firms in the region, other foreign training providers. All employees of the key project units have undergone several workshops organized in the framework of Technical Assistance programs managed by German consulting company LFS Financial Systems GmbH, have closely worked with international rating agencies such as

2 State Statistics Committee of Republic of Uzbekistan. www.stat.uz 3 https://tradingeconomics.com/uzbekistan/wages

Appendix 3 23

Fitch ratings Ltd. and Moody’s Investors Service Ltd. Accounting and monitoring staff have undergone in several occasions training organized by ADB concerning requirements of Loan Disbursement Handbook of ADB. In March 2015 the bank staff participated at Global Money Week organized by Child and Youth Finance International. From February 2016, the bank risk managers participated in the IFC training and certification program “Integrated risk management”. One risk manager past GARP Financial Risk Manager exam. Short year-to-year comparison of number of training courses organized and employees trained is presented below:

Table 1: Number of trainings and staff participated in trainings over 2014–2016

Indicators 2014 2015 2016

Number of trainings and workshops organized in the head office

42 72 87

Number of staff-participants 1,034 1,693 1,705

Number of staff sent to training courses of external providers at the territory of Republic of Uzbekistan

70 90 82

Number of staff participated at 1-day courses and workshops organized by external providers at the territory of Republic of Uzbekistan

62 2 10

Number of staff sent abroad to training courses and workshops

56 32 33

C. Lending Operations

15. Hamkorbank is strictly following all the appropriate provisions agreed upon in the Loan Agreement. The bank has been refinancing loans effectively to sub-projects of microfinance entities and main directions of small loans programs include the development of small businesses, manufacturing import-substituting and export-oriented products based on processing of local raw materials and agricultural products, the development of home-based work among jobless female population of the country, as well as to increase in working capital of entrepreneurs that will effectively contribute to the economic and social prosperity as well as influencing to make sustainable development in SME sectors within country. Hamkorbank is using both, a credit technology based on an analysis of official numbers (based on CBU requirements—more documentation, no disbursements in cash) and the classical microfinance technology based on real numbers. The lending process used for microcredits to small business and private entrepreneurs is efficient and risk oriented. The interfaces between front office, approval authority and back office are defined. The branches (branch manager) have an approval limit on microcredits of up to 1,000 minimum salary (equivalent to $46,349 as of year-end 2016), i.e. the maximum size of microcredit according to legislation, depending on experience of the branch management and risk situation of the branch’s credit portfolio. For SME loans from 1,000 minimum salary up to $142,350 approval is made by Head of SME in the head office, and from $142,350 up to $266,906 approval is made by Director of Credit Department in the head office. 16. Credit process is highly standardized and its steps include:

a. Pre-examination, including marketing, interview, visiting the client, collection of business data and loan application;

b. Analysis, including credit analysis in detail, valuation of collateral, preparation of “Memorandum”, plausibility check;

c. Approval/contract, including credit approval by credit committee, preparation and concluding of credit contract;

24 Appendix 3

D. Disbursement

17. The economic and financial analysis, marketing, management of sub-borrower’s enterprise are inherited and preserved from J-USBP (Japan-Uzbekistan Small Business Programme) projects financed by EBRD. The credit analysis contains a financial and non-financial analysis, whereas the focus is on the analysis of the potential borrower’s free cash flow. The applied technology is efficient, easy to use and produces very good results. It is based on the following success factors:

a. Analysis of overall cash flow (business + family); b. No risky projections – only proven success (= cash flow of previous months); c. Linear extrapolation (no increase of revenues assumed); d. Debt service based on the business’ proven success easily payable (safety

margin). Debt Service Coverage Ratio (DSCR) for first-time loan shall be not less than 1.43, for second loan and further on – not less than 1.25;

e. Participation with own equity of client not less than 25%; f. Real figures (no trust in paper); g. On-site checking of the business; h. Fast reaction in case of delays; i. Short term.

18. Time to process loan applications for microcredits was 2 days 6 hours 30 minutes and for SME loans – 4 days 7 hours 5 minutes in 2014–2015. In 2016, this time has reduced to 2 days 2 hours 10 minutes for microcredits and 3 days 1 hour 5 minutes for SME loans.

19. Usual maturity of subloans is up to 5 years for investment purposes and up to 18 months for working capital. Subloans portfolio by maturity as of year-end of 2016 was as follows:

Table 2: Subloans portfolio by Maturity in 2016

Maturity (months) Number Loan balance as of year-

end 2016 (‘000 SUM) % of total

≤ 3 - - -

(3-6] - - -

(6-12] 112 2,494,273 1.6%

(12-24] 941 41,234,537 26.6%

(24-36] 663 79,998,056 51.7%

> 36 500 31,107,703 20.1%

Total 2,216 154,834,569 100.0%

20. Monitoring and control over the project implementation was undertaken by project implementation unit from representatives of Credit Department, Microfinance unit, Accounting sub-department as well as Risk Management Department of Hamkorbank. Subloans monitoring was conducted by back-office specialists on the use (purposeful use) of subloans for working capital within 30 days after disbursement, subloans for investment purposes – within 90 days after disbursement, subloans for production of exported goods—within 180 days after disbursement. This approach is supported by a type of MIS which has been created especially for this purpose. In daily practice these lists are printed out and distributed appropriately on a daily basis by the relevant clerks in the back-office. For ESMS purposes each subloan is required to get opinion from State Nature Protection Committee (the initial environmental examination report - ZVOS) prior to disbursement. ESMS Manager/Senior Coordinator from head office is entitled to conduct

Appendix 3 25

environmental and social monitoring of any subloan with “high” or “medium” risk with a site visit prior to approval by credit committee. Such monitoring report and conclusion is valid for a period of next 6 months. For class 3, class 4 or Category B subloans a quarterly monitoring is conducted to check that the subborrower is undertaking obligations on compliance with all applicable environmental safeguard requirements prescribed in ZVOS. Collateral monitoring with site visit is conducted once a year. Financial monitoring after the disbursement of a subloan is conducted based on financial statements of the subborower presented to tax bodies, also once a year using ratios analysis. 21. Administration of subloans was performed by Head and specialists of back-office in the branches and Head and specialists of Micro and Agrolending Division in the head office.

E. Other Operations

22. Hamkorbank had equity investments in subsidiaries, associates and available-for-sale during the period of 2014–2016. Subsidiaries represented 100% ownership by Hamkorbank and included 4 leasing companies, one insurance company, one investment company, one depositary and one press company. Investments in associates and investments in available-for-sale securities represented insignificant amounts and their share in total assets reduced from 0.03% (in 2014) to 0.01% (in 2016).

Table 3: Investments Available-for-Sale and Investments in Associates to Total

Assets, 2014–2016 2016 2015 2014

SUM million % SUM million % SUM million %

Available-for-Sale securities

420.1 0.01%

420.1 0.01%

325.7 0.02%

Investments in associates - - 93.9 0.003% 156.8 0.01%

Total 420.1 0.01% 514.0 0.013% 482.5 0.03%

23. The bank’s loan portfolio has since 2012 been almost entirely denominated in local currency. At the end of 2016, local currency loans accounted for 88% of total loans.

Table 4: Loan Portfolio Breakdown by Currency, 2014–2016

2016 2015 2014

SUM million % SUM million % SUM million %

local currency 2,159,929 88% 1,507,504 91% 1,069,302 91%

foreign currency 289,858 12% 154,116 9% 103,355 9%

Gross loans 2,449,787 100% 1,661,620 100% 1,172,657 100%

24. Hamkorbank’s off-balance sheet commitments were at moderate levels and continuously reduced from 14.7% in 2014 to 6.6% in 2016. They largely consisted of letters of credit and guarantees at 3.2% and 1.6% respectively of total assets at year-end of 2016.

26 Appendix 3

Table 5: Hamkorbank Ratio of Off Balance Sheet Commitments to Total Assets 2014–2016

Type of Commitment 2016 2015 2014

Commitments to extend credit 1.4% 1.8% 4.8%

Letters of credit 3.2% 4.2% 3.7%

Guarantees 1.6% 3.2% 5.2%

Operating leases 0.4% 0.7% 0.9%

Capital expenditure commitment 0.0% 0.0% 0.1%

Total 6.6% 9.9% 14.7%

II. Portfolio of Hamkorbank

25. In 2014–2016 Hamkorbank experienced 52% growth in assets mainly driven by loan book (CAGR 2014–2016 of 44%). Hamkorbank’s total loan portfolio stood at $758.1 million (equivalent) at the end of 2016. In SUM terms, the value of the loan portfolio has grown significantly since 2014, increasing more than two-fold resulting to an extent from the injection of capital from FMO. In spite of such rapid growth, however, the value of net loans to total assets remains low at 61.3% in 2016, indicating a significant share of total assets in non interest-earning assets.

Table 6: Hamkorbank Loan Portfolio 2014-2016 (SUM million)

Ratio 2016 2015 2014

Gross loans 2,449,787 1,661,620 1,172,657

Growth rate of gross loans 47.4% 41.7% 79.1%

Net loans to total assets 61.3% 55.1% 66.4%

Source: 2014-2016 audited financial statements

26. The loan book structure in 2014-2016 was quite stable with business loans at 71–74% of gross loans. The bank`s exposure to state and municipal organizations was insignificant not exceeding 8% of loan portfolio. Retail loans represented the rest.

Table 7: Hamkorbank Loan Portfolio 2014-2016

2016 2015 2014

SUM million % SUM million % SUM million %

Business loans 1,751,123 71% 1,228,688 74% 842,303 72%

Retail loans 507,393 21% 332,488 20% 232,166 20%

State and municipal organizations

191,271 8% 100,444 6% 98,188 8%

Gross loans 2,449,787 100% 1,661,620 100% 1,172,657 100% Source: 2014–2016 audited financial statements

27. Loan concentration in manufacturing gradually reduced from 36% to 30% while in retail and small trade increased from 34% to 37% over 2014–2016. Share of other sectors in the loan portfolio almost didn’t change during the given period.

Table 8: Hamkorbank Loan Portfolio Breakdown by Sector 2014-2016 2016 2015 2014

SUM million % SUM million % SUM million %

Manufacturing 730,794 30% 528,710 32% 421,956 36%

Trade and Services 434,715 18% 307,132 18% 213,017 18%

Appendix 3 27

2016 2015 2014

SUM million % SUM million % SUM million %

Agriculture 130,377 5% 75,626 5% 49,006 4%

Transportation 62,201 3% 41,600 3% 38,637 3%

Construction 90,977 4% 50,818 3% 32,232 3%

Other 96,186 4% 54,583 3% 21,036 2%

Retail and small traders

904,537 37% 603,152 36% 396,771 34%

Total 2,449,787 100% 1,661,620 100% 1,172,657 100%

Source: 2014-2016 audited financial statements

28. Hamkorbank has managed to maintain NPLs4 at very low levels. As a percentage of gross loans, they stood at 0.4% at year-end 2016. This was, however, an increase over 2015 when they were equal to 0.2% of gross loans. Nonetheless, it is an indication of the quality of Hamkorbank’s portfolio. The loan loss reserve as a percentage of NPLs, although also lower than in 2015, was also at a significant level (420%) at the end of 2016. The bank classifies loans and accrues provisions for impairment of loans in accordance with CBU Regulation Order “On classification of assets, creation and usage of reserves for probable losses on them by commercial banks” - Ministry of Justice Regulation No. 632 dated 11 February 1999. Based on the order the bank classifies loans into five categories and creates provisions accordingly: standard – 0%, sub-standard – 10%, unsatisfactory – 25%, doubtful – 50% and bad debt – 100%.

Table 9: Hamkorbank Loan Portfolio Quality 2014-2016

Year 2016 2015 2014

NPL, SUM million 10,554 3,323 17,149

NPL/GLP, % 0.4% 0.2% 1.0%

LLPs/NPL, % 420 % 765% 106%

Source: 2014-2016 audited financial statements

III. Financial Statements and Ratios

29. Balance sheets (see Attachment 1). In 2014–2016 Hamkorbank experienced 52% growth in assets mainly driven by loan book (CAGR 2014–2016 of 44%). Share of loan portfolio in total assets however decreased from 66.4% to 61.3% over this period. Increase in assets was both supported by capital injection in 2015 from FMO, robust financial results and growth of deposits and borrowings. Deposits are the principal source of Hamkorbank’s funding and their share in total funding has remained highly stable over the period 2012 to 2016. The value of deposits have more than doubled over 2014–2016. The share of borrowings in total funding however reduced from 18.5% in 2014 to 17.0% in 2016. Though it may likely increase in future as in 2016 the Hamkor Bank signed an agreement for a syndicated loan with DEG and FMO for $33 million and for a loan from ADB to borrow a further $45.0 million under Small Business Finance Project. The equity of the bank has grown almost two times since 2014 owing to a strong rise in net financial results however falling CAR because of significant growth of loan portfolio gives rise to a matter of concern. 30. Income statements (see Attachment 2). Hamkorbank’s profitability was growing year-to-year during 2014-2016. Its net income had risen 2.2 times since 2014. Net interest income remained the largest contributor to the bank's operating revenues at 72% in 2016 having

4 PAR>90 days + restructured loans+ doubtful+ loans in non-accrual status

28 Appendix 3

increased from 66% level of 2014, thanks to the expanded lending volumes. Net fees and commissions represent the second largest contributor to the bank's operating revenues at 22% in 2016, which is common for Uzbekistan. Due to dramatic rise in deposits the total interest expense during the given three years more than doubled. Provisioning for impairment losses on loans also increased 3.6 times over 2014–2016. The growth rates for operating expenses however were slower at 1.5 times since 2014 despite of significantly increased lending volumes. 31. Cash flow statements (see Attachment 3). The net increase in cash and cash equivalents was positive during the 2015–2016. The main sources of cash inflows over the period were the customer accounts, borrowed funds, interest and non-interest income. Over 2014–2016, the net inflows from customer accounts increased 2.0 times, interest received – 2.1 times and fees and commissions received – 1.5 times. Though the inflows from borrowed funds grew 1.2 times over 2014-2016 the outflow rate related to their repayments was much higher at 5.1 times over the same period. The largest usages of cash were for growth of loan portfolio, personnel and other operating expenses, and to smaller degree for lending to other banks and interest expenses. Payments to personnel and for operating expenses increased 1.6 times since 2014 while interest payments – 2.1 times. Investing in construction of bank offices and purchase of office and computer equipment led to increasing net cash outflows from investing activities during each of three years from 2014 to 2016. 32. Key ratios. Though in SUM terms Hamkorbank’s equity almost doubled over 2014–2016 owing to a large extent from the high financial results, the total CARs have declined since 2014, from 15.2% to 14.6%, the level still above the minimum CBU requirement of 12.5% as of year-end 2016 as the bank’s loan portfolio has grown significantly. The bank has managed to improve its both gross and net NPLs since 2014. NPLs accounted for 0.4% and 1.0% of the bank’s gross loan book at the end of 2016 and 2014 respectively. These are very low levels of NPLs in comparison with Hamkorbank’s peers and show the good quality of its assets. However, the bank’s currently adequate asset quality will likely remain challenged by rapid lending growth in recent years. The current liquidity ratio has continuously increased over 2014-2016 and reached the healthy level of more than three times of minimum requirement set by CBU. The bank’s net interest margin has been consistently above 10.0% and increased from 11.7% in 2014 to 13% in 2016. This is at a level higher than many peer banks.

Table 10: Hamkorbank Key Ratios 2014–2016 (%)

Year 2016 2015 2014

Capital adequacy ratio 14.6 13.6 15.2

NPL/GLP, % 0.4 0.2 1

Net NPL >90 days 0.0 0.1 0.0

Current liquidity ratio 110.3 71.9 59.8

Net interest margin 13 13.7 11.7

Source: 2014-2016 audited financial statements

IV. Covenants

33. Hamkorbank was in compliance with all loan covenants at each year-end over 2014–2016.

Appendix 3 29

Table 11: Hamkorbank Compliance with ADB Loan Covenants (%)

Ratio ADB

Covenants 2016 2015 2014

Capital adequacy ratio ≥ 12 14.6 13.6 15.2 Return on average assets ≥ 1 3.1 3.8 1.8 Loan to deposit ratio <100 85.3 81.8 81.8 Cost to income < 75 72.1 71.1 66.2 loan delinquency ≤ 5 0.6 0.7 0.3 Maximum limit on an individual related party) ≤ 25 0.0 0.1 0.1

Source: 2014-2016 audited financial statements.

30 Appendix 4

IMPLEMENTATION AND INTERNAL OPERATIONS OF SUBPROJECTS – IPAK YULI BANK

I. Organization and Operations of Ipak Yuli Bank

A. Organization, Management, and Staffing

1. Joint-Stock Innovation Commercial Bank Ipak Yuli Bank was incorporated in 1990. In June 2000, the bank was re-registered as a new legal entity under the same legal name, following its merger with Joint-Stock Commercial Bank Umar and Joint-Stock Commercial Bank Namangan. The bank is registered to carry out commercial banking activities and operates under general banking license No. 10 issued by CBU and general license for foreign currency operations No. 65, both of which were renewed on 29 August 2014. The bank's primary business consists of commercial banking, securities and foreign currency operations, and originating loans and guarantees. The bank accepts deposits from the public and makes loans and transfer payments in Uzbekistan and overseas. In April 2013, ADB became a shareholder of Ipak Yuli Bank and as of end 2016, it held 13.5% of shares. Ipak Yuli Bank has been cooperating with FMO since 2013 in the framework of an SME finance credit line for a total amount of $13 million. On 31 July 2015, Ipak Yuli Bank also signed Term Finance Agreement with a syndicate of lenders, including FMO, DEG and Triodos Bank, for a total amount of $35.0 million. At the end of 2016 Ipak Yuli bank had 14 full service branches, including 7 in Tashkent, and 7 regional branches, as well as 104 other smaller outlets. The bank had a total of 1,806 employees at year-end 2016. 2. Based on year-end 2016 figures, Moody’s assigned Ipak Yuli Bank, a Long-Term Bank Deposit Rating (Local Currency) and Outlook of B2 stable, and a Baseline Credit Rating of b2 stable. 3. Over 2013-2016, the compound annual growth rate (CAGR) of Ipak Yuli Bank loan portfolio was 46%. Ipak Yuli was actively expanding lending to small and private companies: this portfolio increased 27% in 2016 and stood at just under 74% of the bank's total gross loans at year-end 2016. As of the same reporting date, another 6% of gross loans comprised loans to individuals. Pre-provision profitability was 5.0% of average assets in 2016. 4. The key corporate governance bodies include the General Meeting of Shareholders, Supervisory Board (Council), the Management Board, and the Revision Commission which is mandatory at joint stock banks and is responsible both for oversight of the decisions of Supervisory Board and for reviewing the bank’s financial statements. Ipak Yuli Bank’s shareholders include government-controlled companies which accounted for 24.9% of shares as of year-end of 2016. In April 2013, ADB became a shareholder of Ipak Yuli Bank and as of year-end 2016, it held 13.5% of shares. The bank’s shareholder structure is broad, combining international, state and private investors whereby none of the shareholders owns a stake exceeding 20%. 5. Members of the Supervisory Board and the Management Board are appointed by the General Meeting of Shareholders. The Supervisory Board includes independent member and members representing minority interests as well members with extensive experience in banking. In 2016 the bank had 9 members of Supervisory Board: 4 of them acting as Board members since 2006–2009 and 5 of them—since 2013–2015. Board members are elected at the General Meeting of Shareholders for a one-year term and can be re-elected an unlimited number of times. The Chairman of the Supervisory Board is leading the Board since 2006 and has extensive experience in finance, banking and leasing. Other members have extensive experience in banking, investments management, insurance and audit. The Supervisory Board is in charge of approval

Appendix 4 31

and periodic review of business strategy and policies of the Bank, approval of the organizational structure as well as responsible for ensuring that effective internal control system is functioning and continuously maintained. 6. In 2016 the bank had 7 members of Management Board. The Acting Chairman has 23 years of banking experience (within this bank). He has higher economic education and specialization in finance and credit. He was appointed by the General Meeting of Shareholders of the Bank on 31 December 2014 as Acting CEO but has not been approved by the Central Bank of Uzbekistan (CBU). The Management Board has members with experience of working in senior management positions at reputable organizations. The Deputy Chairman, worked as Managing Partner at Deloitte in Tashkent prior to joining Ipak Yuli Bank. Other Management Board members also have extensive experience in the banking sector and with the bank. Their qualifications include finance and economics, corporate lending, treasury and FX operations, law, accounting. B. Personnel Administration

7. The staff remuneration appears to be more competitive compared with the local market. In 2016 the bank paid in average SUM86.3 billion in salaries to 1,806 employees, which bring the average monthly salary in 2016 to SUM3.98 million (including taxes). In 2016, the average monthly salary in Uzbekistan was around SUM1.3 million though at SUM2.1 million in financial sector1. In 2014 and 2015, the bank paid on average SUM64 billion in salaries to the average of 1,751 employees, which bring the average monthly salary in 2014–2015 to SUM3.1 million (including taxes). By comparison, as of December 2015, the average monthly salary in Uzbekistan was SUM1.5 million.2 8. Financial incentives for staff include bonuses by staff categories based on performance, personal additional payments (based on workload and years of experience), monthly bonuses based on performance for the preceding month, premiums paid on national holidays, annual bonus linked to the bank’s profitability (profit sharing); one-month salary per annum for purchase of agricultural products. Staff of Small and microfinance Division get monthly bonuses for achievement of indicators linked to sales of loan products, income from loans, level of NPLs, and percentage of completion of individual plan of incremental growth of loans. At the end of 2015 the bonus system was revised with assistance of ADB consultants with the aim to increase loans to women-entrepreneurs and non-trade small businesses. Non-financial incentives are also used in the bank and include rewarding in the form of cups, letters, gifts or prizes based on results of contests as “best branch”, “best mini-bank”, “best employee” as well as cards of admission to health preserving complexes and tickets to cultural events (concerts, etc.). 9. Staff promotion is linked to performance, experience, leadership skills, absence of disciplinary actions for underperformance or unacceptable behavior. Interns to become loan officer are required to pass through mandatory 3-months internship program. Further, after being hired as loan officer staff performance is evaluated once a year and based on achievement of sales plans for credit products, quality of his/her loan portfolio, and discipline a loan officer can be promoted to other higher job. To take the job of Head of Small and microfinance unit, in addition to the above criteria for promotion, the leadership skills, taking responsibility for team performance and the years of experience in lending are taken into consideration.

1 State Statistics Committee of Republic of Uzbekistan. www.stat.uz 2 https://tradingeconomics.com/uzbekistan/wages

32 Appendix 4

10. Ipak Yuli bank develops annual training plans covering various technical-economic topics for staff of various departments (there are approved training plans for each year from 2014 to 2016). The plans are scheduled by months and dates and approved by Chairman of Management Board. The technical-economic topics cover credit process related topics as screening, financial analysis of a borrower, scoring, credit risk management, etc., accounting, internal audit and internal control issues, IT news, new products, AML issues, FX regulation, opening of account, legal literacy, taxes as well as changes in legislation and new CBU regulations. In addition to its own trainings the Bank does send employees to providers of external trainings as the Central Bank of Uzbekistan, the Association of Banks in Uzbekistan, Bank Academy, Tashkent Finance Institute, Singapore Institute of Management in Tashkent, Centre for corporate management and international organizations as World Bank, IFC, ADB, EBRD and others, as well as trainings organized abroad, including by Association of Russian Banks, Big4 audit firms in the region, other foreign training providers. All employees of the key project units have undergone several workshops organized in the framework of Technical Assistance programs managed by German consulting company LFS Financial Systems GmbH, have closely worked with international rating agencies such as Fitch ratings Ltd. and Moody’s Investors Service Ltd., as well as possess extensive experience in executing externally financed projects. Accounting and monitoring staff have undergone in several occasions training organized by ADB concerning requirements of Loan Disbursement Handbook of ADB. Staff of the Accounting, Reporting and Consolidated Balance Division undergoes on IFRS organized by Banking Finance Academy, Tashkent Finance Institute and Singapore Institute of Management. Staff capacity building in risk management was supported through an ADB technical assistance program in 2014–2016. The focus of technical assistance on risk management was the enhancement of a scoring system for micro and consumer loans. With installation of strategic action program (SAP), the credit scoring will cover all clients. Under ADB technical assistance during 2014-2016, the credit managers and other staff participated in the trainings conducted by ADB consultants on various topics as “Improving access to financing for rural and women small businesses” (34 managers), “Making microfinance work: Managing for improved performance” (80 loan officers), “Small and microfinance of SME” (35 credit staff), “Improving access to financing for rural and women businesses” (18 staff). Short year-to-year comparison of number of training courses organized and employees trained is presented below:

Table 1: Number of trainings and staff participated in trainings over, 2014–2016

Indicators 2014 2015 2016

Number of staff-participants of trainings and workshops organized in the head office 442 532 415

Number of staff sent to training courses of external providers at the territory of Republic of Uzbekistan 224 316 205

Number of staff participated at 1-day courses and workshops organized by external providers at the territory of Republic of Uzbekistan

828 (207 staff once a quarter)

832 (208 staff once a quarter)

920 (208 staff once a quarter)

Number of staff sent abroad to training courses and workshops 11 8 2

Appendix 4 33

C. Lending Operations

11. In accordance with the lending policy of the Bank, directed to support production of consumer goods as well as establishment of long-term business relations with clients, special consideration was given to borrowers representing most progressive sectors of the industry. Main directions of the microcrediting program included the following: development of small manufactures producing import substituting and export oriented goods, based on the reprocessing of the local raw materials and agricultural produce, development of home employment among the unemployed female population of the country as well as replenishment of the working capital of private entrepreneurs. One of the characteristics of the microcrediting program of the Bank could be seen in close collaboration between borrower and loans specialist of the bank during the entire process of lending, from filling of the necessary documents until loan repayment, which significantly lowers associated credit risks. 12. Ipak Yuli bank is using both, a credit technology based on an analysis of official numbers (based on CBU requirements - more documentation, no disbursements in cash) and the classical microfinance technology based on real numbers. The lending process used for microcredits to small business and private entrepreneurs is efficient and risk oriented. The interfaces between front office, approval authority and back office are defined. The branches (branch credit committee) have an approval limit on microcredits of up to 1,000 minimum salary (equivalent to USD 46,349 as of year-end 2016), i.e. the maximum size of microcredit according to legislation, depending on experience of the branch management and risk situation of the branch’s credit portfolio. For SME loans up to SUM250 million ($88,969) approval is made by branch credit committee (however, this varies from branch to branch, f.e. Andijan branch has approval authority up to SUM150 million, while Navoi branch – up to SUM100 million); from SUM250 million up to SUM500 million ($177,937) approval is made by head office small (junior) credit committee; from SUM500 million up to 15% of total capital approval is made by head office large (senior) credit committee. 13. Credit process is highly standardized, and its steps include:

a. Pre-examination, including marketing, interview, visiting the client, collection of business data and loan application;

b. Analysis, including credit analysis in detail, valuation of collateral, preparation of “Memorandum”, plausibility check;

c. Approval/contract, including credit approval by credit committee, preparation and concluding of credit contract;

d. Disbursement. 14. The economic and financial analysis, marketing, management of sub-borrower’s enterprise are inherited and preserved from J-USBP (Japan-Uzbekistan Small Business Programme) projects financed by EBRD. The credit analysis contains a financial and non-financial analysis, whereas the focus is on the analysis of the potential borrower’s free cash flow. The applied technology is efficient, easy to use and produces very good results. It is based on the following success factors:

a. Analysis of overall cash flow (business + family); b. No risky projections – only proven success (= cash flow of previous months); c. Linear extrapolation (no increase of revenues assumed); d. Debt service based on the business’ proven success easily payable (safety

margin). Debt Service Coverage Ratio (DSCR) for first-time loan shall be not less than 1.43, for second loan and further on – not less than 1.25;

e. Participation with own equity of client not less than 25%;

34 Appendix 4

f. Real figures (no trust in paper); g. On-site checking of the business; h. Fast reaction in case of delays; i. Short term.

15. Under ADB technical assistance the bank developed and implemented scoring model for corporate clients during 2014-2015. In 2016, the bank started negotiations for installation of SAP Performance Management and CRM systems. With installation of SAP the credit scoring will cover all clients. 16. Time to process loan applications for subloans was around 3 days in 2014. However, introduction of credit scoring under ADB technical assistance allowed to reduce this time up to 2 days in 2015 and 1 day 4 hours in 2016 (in case, all necessary documents, including collateral documents are available). 17. Usual maturity of sublooans is up to 5 years for investment purposes and up to 18 months for working capital. Subloans portfolio by maturity as of year-end of 2016 was as follows:

Table 2: Subloans portfolio by Maturity in 2016

Maturity (months) Number Loan balance as of year-end 2016 (‘000

SUM)

% of total

≤ 3 2 21,104 0.0%

(4-6] 26 290,936 0.4%

(7-12] 494 7,553,793 10.6%

(13-24] 1,729 38,516,173 54.3%

(25-36] 817 24,296,671 34.2%

> 36 5 277,839 0.4%

Total 3,073 70,956,517 100.0%

18. Monitoring and control over the project implementation was undertaken by project implementation unit from representatives of Department for Relations with International Financial Institutions, Loan Portfolio Monitoring Division as well as Risk Management Division of Ipak Yuli Bank. Subloans monitoring include pre-disbursement screening for compliance with ADB credit line conditions, monitoring on the use (purposeful use) of subloans within 30 days after disbursement, quarterly monitoring of collateral and financial monitoring, quarterly environmental safeguard monitoring, and delinquent subloans monitoring. For ESMS purposes each subloan is required to get opinion from State Nature Protection Committee (the initial environmental examination report - ZVOS) prior to disbursement. ESMS Manager/Senior Coordinator from head office is entitled to conduct environmental and social monitoring of any subloan with “high” or “medium” risk with a site visit prior to approval by credit committee. Such monitoring report and conclusion is valid for a period of next 6 months. For class 3, class 4 or Category B subloans a quarterly monitoring is conducted to check that the subborrower is undertaking obligations on compliance with all applicable environmental safeguard requirements prescribed in ZVOS. Collateral monitoring with site visit and financial monitoring based on the financial statements of the subborower using ratios analysis were conducted once a quarter. Administration of subloans was performed by Small and Microfinance Division of the bank.

Appendix 4 35

D. Other Operations

19. The bank’s investments in securities comprised of investments in available-for sale securities. Investments in equity securities were increasing year-to-year since 2014. In 2016, the bank acquired additional interest in its cross-shareholder LLC “Baraka” through capitalization of dividends of SUM232 million and sold investments in two transportation companies SUM135 million. Debt securities acquired in 2016 consisted of subordinated bonds of commercial bank “Kapital Bank” with maturity until 2019. The share on investments in available-for-sale securities in total assets almost didn’t change since 2014 and stayed at 0.2% at year-end of 2016.

Table 3: Investments Available-for-Sale to Total Assets, 2014–2016

2016 2015 2014

SUM

million %

SUM million

% SUM

million %

Equity securities 2,980 0.1% 2,883 0.2% 1,626 0.1%

Debt securities 1,330 0.1% - - - -

Less provision for impairment (192) (225) (45)

Total investments available-for-sale 4,118 0.2% 2,658 0.2% 1,581 0.1%

20. The Ipak Yuli Bank loan portfolio is predominantly denominated in local currency. Local currency lending has however been decreasing since 2014 from 87% share in the portfolio at year-end 2014 to 77% at year-end 2016.

Table 4: Loan Portfolio Breakdown by Currency, 2014–2016

2016 2015 2014

SUM

million %

SUM million

% SUM

million %

local currency 1,019,023 77% 811,009 84% 602,090 87%

foreign currency 297,336 23% 160,230 17% 88,574 13%

Gross loans 1,316,359 100% 971,239 100% 690,664 100%

21. Ipak Yuli Bank’s off-balance sheet commitments in 2016 largely consisted of guarantees and letters of credit at 4.1% and 3.3% respectively of total assets.

Table 5: Ipak Yuli Bank Ratio of Off Balance Sheet Commitments to Total Assets, 2014-2016

Type of Commitment 2016 2015 2014

Commitments to extend credit 1.1% 1.3% 0.8%

Letters of credit 3.3% 6.3% 6.4%

Guarantees 4.1% 4.0% 4.8%

Total 8.5% 11.6% 12.0%

II. Portfolio of Ipak Yuli Bank

22. In 2014-2016, Ipak Yuli Bank experienced 34% growth in assets mainly driven by loan book (CAGR 2014-2016 of 38%). Ipak Yuli Bank’s total loan portfolio stood at $392.4 million (equivalent) at the end of 2016. In SUM terms, the value of the loan portfolio has grown by 91% since 2014. The growth in the loan portfolio was reflected in the continuous increase in net loans as a percentage of total assets, from 52% at the end of 2014 to 56% at the end of 2017. This

36 Appendix 4

remains low, however, compared with Ipak Yuli Bank’s peer banks and suggests that the bank has significant value tied up in non interest-earning assets.

Table 6: Ipak Yuli Bank Loan Portfolio 2014-2016 (SUM million)

Ratio 2016 2015 2014

Gross loans 1,316,359 971,239 690,664

Growth rate of gross loans 36% 41% 63%

Net loans to total assets 56% 53% 52%

Source: 2014-2016 audited financial statements.

23. Ipak Yuli Bank’s loan portfolio is dominated by SME loans, which however decreased from 78% of the portfolio in 2014 to 74% in 2016 while the share of corporate loans increased from 13% to 18% over the same period. The bank`s exposure to state and municipal organizations was insignificant not exceeding 3% of loan portfolio.

Table 7: Ipak Yuli Bank Loan Portfolio, 2014-2016

2016 2015 2014

SUM million % SUM million % SUM million %

Loans to small and private companies

971,993 74% 765,743 79% 538,926 78%

Corporate loans 231,895 18% 131,283 14% 87,686 13%

Loans to individuals 83,946 6% 59,817 6% 41,234 6%

Loans to state and municipal organizations

28,525 2% 14,396 1% 22,817 3%

Gross loans 1,316,359 100% 971,239 100% 690,664 100%

Source: 2014–2016 audited financial statements

24. Loan concentration in manufacturing gradually reduced from 39% to 37% while in retail and small trade increased from 35% to 36% over 2014–2016. Share of other sectors in the loan portfolio almost didn’t change during the given period.

Table 8: Ipak Yuli Bank Loan Portfolio Breakdown by Sector 2014–2016

2016 2015 2014

SUM million % SUM million % SUM million %

Manufacturing 483,684 37% 370,505 38% 268,620 39%

Trade 466,766 36% 341,731 35% 243,785 35%

Services 133,284 10% 92,882 10% 60,231 9%

Construction 65,998 5% 54,223 6% 26,108 4%

Agriculture 83,946 4% 59,817 3% 41,234 4%

Transportation 54,073 2% 31,497 2% 30,368 3%

Personal/Individual 28,606 6% 20,584 6% 20,317 6%

Total 1,316,359 100% 971,239 100% 690,664 100%

Source: 2014-2016 audited financial statements

25. Ipak Yuli Bank has managed to lower its NPLs3 in 2016 in comparison with its levels in 2014-2015. As a percentage of gross loans, they stood at 1.5% at year-end 2016. This is higher than the peer group of banks, though still below the 5.0% norm. The loan loss reserve as a

3 PAR>90 days + restructured loans+ doubtful+ loans in non-accrual status

Appendix 4 37

percentage of NPLs was also higher at 242.0% at the end of 2016 than its levels at year-ends of 2014 and 2015. The bank classifies loans and accrues provisions for impairment of loans in accordance with CBU Regulation Order “On classification of assets, creation and usage of reserves for probable losses on them by commercial banks” - Ministry of Justice Regulation No. 632 dated 11 February 1999. Based on the order the bank classifies loans into five categories and creates provisions accordingly: standard – 0%, sub-standard – 10%, unsatisfactory – 25%, doubtful – 50% and bad debt – 100%.

Table 9: Ipak Yuli Bank Loan Portfolio Quality 2014-2016

Year 2016 2015 2014

NPL, SUM million 19,976 23,539 15,848

NPL/GLP, % 1.5% 2.4% 2.3%

LLPs/NPL, % 242.0 % 164.2% 173.9%

Source: 2014-2016 audited financial statements

III. Financial Statements and Ratios

26. Balance sheets (see Attachment 4). In 2014–2016, Ipak Yuli Bank experienced 34% growth in assets mainly driven by loan book (CAGR 2014–2016 of 38%). Share of loan portfolio in total assets also increased from 52% to 56% over this period. The increase of the assets was supported by well diversified funding. The market borrowings were represented by the long-term funds from IFIs (such as the Asian Development Bank, Dutch Development Bank, FMO, the Islamic Corporation for Private Sector Development, Germany's Development Bank KfW and others) with limited refinancing risks. Borrowings equated to 17% of total funding in 2016 and were increasing year-by-year since 2014 (12%). Similar to the majority of Uzbek banks, the bulk of the bank's non-equity funding (77% at year-end 2016) is attributable to customer accounts. However, the share of deposits in total funding decreased from 81% level of 2015. The capital in SUM terms has risen 1.6 times since 2014 owing to capital injections from the existing shareholders in 2015, robust financial results and slowdown of risk-weighted assets growth. But taking in account the increasing minimum capital requirements set by CBU and the fact that during both 2015 and 2016 CARs were at levels close to the required minimum, if Ipak Yuli Bank will be unable to secure additional external capital injections and continues to predominantly rely on internal capital sources, this may either put strain on the bank's further business expansion or bring it closer to potential breach of statutory capital requirements. 27. Income statements (see Attachment 5). Ipak Yuli's profitability metrics are solid and bolstered by stable and recurring core earnings. The bank has steadily increased its net income since 2013, with high annual growth rates in SUM terms of 73.6% in 2016. Net interest income remained the largest contributor to the bank's operating revenues at 58% in 2016 (54%:2014), thanks to the expanded lending volumes. Net fees and commissions represent the second largest contributor to the bank's operating revenues—34% in 2016, which is common for Uzbekistan. On expense side, the fastest growing expenses were the operating expenses, which had risen 1.5 times over 2014-2016. The interest expense, fee/commission and other non-interest expense, provisions for loan losses increased 1.3, 1.4 and 1.4 times over the same period respectively. 28. Cash flow statements (see Attachment 6). The net increase in cash and cash equivalents as well as the cash flows from operating activities was positive during the 2015-2016. The main sources of cash inflows over the period were the customer accounts, borrowed funds, interest and non-interest income. Over 2014-2016, the net inflows from customer accounts increased 2.7 times, from borrowed funds – 1.4 times, interest received - 1.8 times and fees and commissions received – 1.3 times. The largest usages of cash were for growth of loan portfolio and personnel

38 Appendix 4

and other operating expenses. Cash spending for operating expenses increased 1.5 times since 2014. Investing in premises led to net cash outflows from investing activities at almost the same level during each of three given years. 29. Key ratios. The total CARs have declined year on year since 2013, and as of year-end 2015, total CAR was barely above the minimum CBU requirement of 10.0%. In 2016 the capital was supported by capitalization of dividends from income of prior years and CAR increased to 12.5% from the 10.1% level of 2015. Though it was slightly above the minimum CBU requirement of 11.5% for 2016, given that minimum CAR requirements will be increasing by one percentage point thereafter until 2019, the level of Ipak Yuli Bank’s capital is a matter of concern. The bank has managed to improve its both gross and net NPLs since 2015. Its asset quality metrics appear to be good with gross and net NPLs accounting for 1.5% and 0.5% of the bank’s gross loan book at the end of 2016 respectively. As of the same reporting date, the bank set aside loan loss reserves at 4% of gross loans. This provisioning policy appears reasonable to the moment, given the bank's recently enhanced credit underwriting standards. The bank has maintained a reasonable current liquidity ratio at more than twice of minimum requirement set by CBU. There has been a steady increase in Ipak Yuli Bank’s net interest margin since 2012 up to 2015; however, it fell in 2016 to 7.7% from 9.6% level of 2015. Nevertheless, this is still higher than the level achieved by peer banks.

Table 10: Ipak Yuli Bank Key Ratios 2014-2016 (%)

Year 2016 2015 2014

Capital adequacy ratio 12.5 10.1 13.8

NPL/GLP, % 1.5 2.4 2.3

Net NPL>90 days 0.5 1.1 0.8

Current liquidity ratio 63.5 59.3 65.3

Net interest margin 7.7 9.6 8.7

Source: 2014-2016 audited financial statements.

IV. Covenants

30. Ipak Yuli Bank was in compliance with all loan covenants at each year-end over 2014–2016.

Table 11: Ipak Yuli Bank Compliance with ADB Loan Covenants (%)

Ratio ADB

Covenants 2016 2015 2014

Capital adequacy ratio ≥ 12 12.5 10.1 13.8 Return on average assets ≥ 1 3.0 2.3 2.3 Loan to deposit ratio <100 82.6 75.1 74.2 Cost to income < 75 64.7 72.4 68.6 Loan delinquency ≤ 5 0.1 0.1 1.1 Maximum limit on an individual related party) ≤ 25 0.1 0.1 0.3

Appendix 5 39

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in Loan

Agreement Status of Compliance

Particular covenants In the carrying out of the Project, the Borrower shall perform, or cause to be performed, all the obligations set forth in Schedule 3 to this Loan Agreement and the Project Agreements.

Section 4.01 Complied with.

Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning: (a) the Qualified Subborrowers, the Qualified Subprojects and the Subloans; and (b) the administration, operations and financial condition of the PCBs.

Section 4.02 Complied with.

The Borrower shall enable ADB's representatives to inspect any Qualified Subborrower, any Qualified Subproject, the Goods and Works, and any relevant records and documents maintained by the PCBs.

Section 4.03 Complied with.

The Borrower shall promptly take all action, including the provision of funds, facilities, services and other resources, which shall be necessary on its part to enable the PCBs to perform its obligations under the Project Agreement, and shall not take or permit any action which would interfere with the performance of such obligations.

Section 4.04 Complied with.

The Borrower shall exercise its rights under the Subsidiary Loan Agreements in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.

Section 4.05 Complied with.

Procurement The procurement of Goods, Works and consulting services shall be subject to and governed by the Procurement Guidelines, and the Consulting Guidelines, respectively.

SCHEDULE 2, para 1

Complied with.

40 Appendix 5

Covenant Reference in Loan

Agreement Status of Compliance

The Borrower shall cause the PCBs to ensure that each Qualified Subborrower undertakes procurement of Goods, Works, and consulting services with due attention to economy and efficiency and in accordance with established private sector or commercial practices, acceptable to ADB.

SCHEDULE 2, para 3

Complied with.

The Borrower shall cause the PCBs to ensure that all Goods and Works procured by the Qualified Subborrower (including without limitation all computer hardware, software and systems, whether separately procured or incorporated within other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party.

SCHEDULE 2, para 4(a)

Complied with.

The Borrower shall cause the PCBs to ensure that all contracts entered into by the Qualified Subborrower for the procurement of Goods and Works contain appropriate representations, warranties and, if appropriate, indemnities from the contractor or supplier with respect to the matters referred to in subparagraph.

SCHEDULE 2, para 4(b)

Complied with.

The Borrower shall cause the PCBs to ensure that all ADB-financed contracts entered into by the Qualified Subborrower with consultants contain appropriate representations, warranties and, if appropriate, indemnities from the consultants to ensure that the Consulting Services provided do not violate or infringe any industrial property or intellectual property right or claim of any third party

SCHEDULE 2, para 5

Complied with.

Execution of Project; Financial Matters Implementation arrangements The Borrower and the PCBs shall ensure that the Project is implemented in accordance with the detailed arrangements set forth in the PAM. Any subsequent change to the PAM shall become effective only after approval of such change by the Borrower, the PCBs and ADB. In the event of any discrepancy between the PAM and the Loan Agreement and the

SCHEDULE 3, para 1

Substantially complied with. There was a delay in the project schedule due to the delay in drafting and signing of the subsidiary loan agreements (SLAs) between the government and two PCBs, as well as

Appendix 5 41

Covenant Reference in Loan

Agreement Status of Compliance

Project Agreements, the provisions of the Loan Agreement and the Project Agreements shall prevail.

obtaining the government’s legal opinion on the loan agreement. (main text, para 14)

Notwithstanding any other provision of the Loan Agreement, no withdrawal shall be made from the Loan Account for any PCB until such time as the PCB has established an ESMS to the satisfaction of ADB; and appointed a designated staff who is trained in implementing the ESMS.

SCHEDULE 3, para 2

Complied with.

Financial Covenants The Borrower shall cause the PCBs to ensure that they remain financially sound throughout the Project implementation period. Specifically, each PCB shall:

SCHEDULE 3, para 3

Complied with. Ipak Yuli Bank and Hamkorbank were in compliance with financial covenants. Their financial performance per the loan covenants for 2014–2016 is provided in Appendix 3.

(a) maintain a capital adequacy ratio of not less than 12%. For the purpose of this subparagraph, capital adequacy ratio means the ratio of regulatory capital to risk assets, expressed as a percentage. It is calculated using total regulatory capital as the numerator and risk- weighted assets as the denominator;

SCHEDULE 3, para 3 (a)

Complied with.

(b) maintain a return on average assets ratio of not less than 1%. For the purpose of this subparagraph, return on average assets ratio means the division of net profit by one half of the sum of the total assets at the end of the year in issue and the total assets at the end of the previous year, expressed as a percentage;

SCHEDULE 3, para 3 (b)

Complied with.

(c) maintain a loan to deposit ratio of under 100%. For the purpose of this subparagraph, loan to deposit ratio is calculated as the ratio of total gross loans to customers divided by total customer deposits, expressed as a percentage;

SCHEDULE 3, para 3 (c)

Complied with.

42 Appendix 5

Covenant Reference in Loan

Agreement Status of Compliance

(d) maintain a ratio of operating expenses to operating income (i.e. cost to income ratio) of under 75%. For the purpose of this subparagraph, cost to income ratio is calculated as the total of specified operating expenses plus specified non-operating expenses divided by the total of specified operating income plus specified non-operating income, expressed as a percentage;

SCHEDULE 3, para 3 (d)

Complied with.

(e) ensure that its loan delinquency does not exceed 5% of its total loan portfolio. For the purpose of this subparagraph, loan delinquency means the aggregate of loans classified as “loss” in the CBU definition of “loss” and loans written-off in a year (even if not classified as “loss” in the particular year’s financial statement);

SCHEDULE 3, para 3 (e)

Complied with.

(f) maintain a maximum limit on an individual related party exposure of no more than 25%. For the purpose of this subparagraph, this limit is calculated as an individual exposure to a related party divided by the gross loan portfolio, expressed as a percentage.

SCHEDULE 3, para 3 (f)

Complied with.

The Borrower shall cause the PCBs to ensure that each Qualified Subborrower meet and maintain the following criteria

SCHEDULE 3, para 4

Complied with.

(a) a debt to equity ratio not higher than 75:25 for the subproject which the Subloan is financing;

SCHEDULE 3, para 4 (a)

Complied with.

(b) a debt service coverage ratio not lower than 1.1 times;

SCHEDULE 3, para 4 (b)

Complied with.

(c) a proven track record. SCHEDULE 3, para 4 (c)

Complied with.

The Borrower shall cause the PCBs to ensure that Qualified Subprojects shall be for activities that:

SCHEDULE 3, para 5

Complied with.

(a) are not included in the list of prohibited investment activities provided in Appendix 5 of the SPS;

SCHEDULE 3, para 5 (a)

Complied with.

Appendix 5 43

Covenant Reference in Loan

Agreement Status of Compliance

(b) do not fall under category A for environment of the SPS or class 1 or 2 of the Borrower’s environmental impact assessment and have no involuntary resettlement or ethnic minority/indigenous peoples impact under the SPS.

SCHEDULE 3, para 5 (b)

Complied with.

The Borrower shall cause the PCBs to ensure that each Subloan:

SCHEDULE 3, para 6

Complied with.

(a) carry interest at an appropriate rate that takes into account the cost of funds, administrative costs and credit and foreign exchange risks (i.e. have a market-based interest rate) and have a repayment period not exceeding 5 years;

SCHEDULE 3, para 6 (a)

Complied with.

(b) does not exceed the maximum Subloan amount of $100,000 equivalent;

SCHEDULE 3, para 6 (b)

Complied with.

(c) is denominated in Dollar or Sum and such denomination shall be determined at the time the Subloan is made. The Subloan may be withdrawn in any legal form.

SCHEDULE 3, para 6 (c)

Complied with.

The Borrower shall cause the PCBs to ensure that: (a) at least 30% of the aggregate number of all Subloans made by each PCB shall be for:

(i) Qualified Subborrowers with a minimum of 50% women ownership; or

(ii) Qualified Suborrowers with a minimum of 50% women in their senior management; or

(iii) Qualified Subborowers with a minimum of 50% registered women employees; and

SCHEDULE 3, para 7 (a)

Complied with.

44 Appendix 5

Covenant Reference in Loan

Agreement Status of Compliance

(b) At least 50% of the aggregate number of all Subloan made by each PCB shall be for Qualified Subborowers registered or located outside the City of Tashkent. For the avoidance of doubt, the Subloans to Qualified Subborowers under subparagraph (a) hereinabove can also be counted as Subloans to Subborowers under the subparagraph (b), if the Qualified Subborowers under subparagraph (a) hereinabove are registered or located outside the City of Tashkent.

SCHEDULE 3, para 7 (b)

Complied with.

The Borrower shall cause the PCBs to ensure that: (a) the Subloan for each Qualified Subproject

shall cover up to 75% of the subproject costs. The remainder of such costs shall be met by equity contribution from the Qualified Subborrower. Each such Subloan shall comprise 50% of its loan amount from the PCB's funds and 50% of its loan amount from the proceeds of the Loan relent by the Borrower to the PCB; and

(b) the aggregate value of all Subloans to a Qualified Subborower does not exceed $100,000 equivalent.

SCHEDULE 3, para 8

Complied with.

Screening, Categorization, and Environmental and Social Assessment and Planning

The Borrower shall cause the PCBs to ensure that before any Qualified Subproject is approved for financing, the PCBs will:

SCHEDULE 3, para 9

Complied with.

(a) use the ESMS to screen and categorize the significance of potential environmental, ethnic minority/indigenous peoples or involuntary resettlement impacts associated with such Qualified Subproject

SCHEDULE 3, para 9 (a)

Complied with.

Appendix 5 45

Covenant Reference in Loan

Agreement Status of Compliance

(b) ensure that all Qualified Subprojects shall not involve (i) any environmental impact which can be categorized as Category A within the meaning of the SPS; and (ii) any involuntary resettlement or ethnic minority/indigenous peoples impact which can be categorized as Category A or B within the meaning of the SPS;

SCHEDULE 3, para 9 (b)

Complied with.

(c) ensure that an IEE and an EMP are prepared for such Qualified Subproject as required pursuant to the ESMS

SCHEDULE 3, para 9 (c)

Complied with.

Environment The Borrower shall cause the PCBs to ensure that the preparation, design, construction, implementation, operation and decommissioning of each Qualified Subproject comply with (a) all applicable laws and regulations of the Borrower relating to environment, health, and safety; (b) the Environmental Safeguards; (c) the ESMS; and (d) all measures and requirements set forth in the respective IEE and EMP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report.

SCHEDULE 3, para 10

Complied with.

Land Acquisition and Involuntary Resettlement No land acquisition or resettlement impact under the SPS is expected for the Project. In the event that there is any such impact, the Borrower shall cause the PCBs to ensure that they adhere to applicable laws and regulations of the Borrower and the SPS. If there is any discrepancy between the SPS and the Borrower’s laws and regulations, the SPS shall prevail.

SCHEDULE 3, para 11

Complied with. No land acquisition and resettlement took place in the Subloans of two PCBs.

Ethnic Minority/Indigenous Peoples No ethnic minority/indigenous peoples impact under the SPS is expected for the Project. In the event that there is any such impact, the Borrower shall cause the PCBs to ensure that they adhere to applicable laws and regulations of the Borrower and the SPS. If there is any discrepancy between the SPS and the Borrower’s laws and regulations, the SPS shall prevail.

SCHEDULE 3, para 12

Complied with.

46 Appendix 5

Covenant Reference in Loan

Agreement Status of Compliance

Human and Financial Resources to Implement Safeguards Requirements The Borrower shall cause the PCBs to ensure that (a) necessary budgetary and human resources are made available to fuly implement the ESMS; and (b) each Qualified Subborrower makes necessary budget and human resources to fully implement EMP for the Qualified Subproject, where applicable.

SCHEDULE 3, para 13

Complied with.

Safeguards Monitoring and Reporting The Borrower shall cause the PCBs to do following:

SCHEDULE 3, para 14

Complied with.

(a) submit semi-annual Safeguards Monitoring Reports to ADB;

SCHEDULE 3, para 14 (a)

Substantially complied with. This condition was emphasized during inception and review missions.

(b) if any unanticipated environmental and/or social risks and impacts arise during Qualified Subproject implementation promptly inform ADB of the occurrence of such risks or impacts, with detailed description of the event and proposed corrective action plan; and

SCHEDULE 3, para 14 (b)

Complied with.

(c) report any actual or potential breach of compliance with the measures and requirements set forth in the ESMS and any EMP promptly after becoming aware of the breach.

SCHEDULE 3, para 14 (c)

Complied with.

Labor Standards The Borrower shall cause the PCBs to ensure that the core labor standards and applicable laws and regulations of the Borrower, including workspace occupational safety norms, are complied with during Project implementation.

SCHEDULE 3, para 15

Complied with.

Appendix 5 47

Covenant Reference in Loan

Agreement Status of Compliance

Gender and Development The Borrower shall cause the PCBs to ensure that: (a) the gender action plan is implemented in accordance with its terms; and (b) key gender outcome and output targets (of at least 30% of the aggregate number of all Subloans are for: (i) Qualified Subborrowers with a minimum of 50% women ownership; or (ii) Qualified Suborrowers with a minimum of 50% women in their senior management; or (iii) Qualified Subborrowers with a minimum of 50% registered women employees) are monitored regularly and achieved.

SCHEDULE 3, para 16

Complied with. The PCBs adopted gender policies and established gender focal points to support their gender-sensitizing capacity. The gender action plan under the Project was monitored and implemented.

Governance and Anticorruption The Borrower and the PCBs shall: (a) comply with ADB’s Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Project; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation.

SCHEDULE 3, para 17

Complied with.

The Borrower shall cause the PCBs to ensure that all contracts in relation to the Project include provisions specifying the right of ADB to audit and examine the records and accounts of the contractors, suppliers, consultants, and other service providers as they relate to the Project.

SCHEDULE 3, para 18

Complied with.

Combating Money Laundering and Financing of Terrorism The Borrower shall ensure that the PCBs:

SCHEDULE 3, para 19

Complied with.

(a) comply with applicable laws and regulations of the Borrower on combating money laundering and financing of terrorism and ensure that Loan proceeds are not used, directly or indirectly, in money laundering or financing of terrorism

SCHEDULE 3, para 19 (a)

Complied with.

48 Appendix 5

Covenant Reference in Loan

Agreement Status of Compliance

(b) formulate and implement internal control procedures, including customer due diligence procedures, to prevent violation of subparagraph (a) hereinabove;

SCHEDULE 3, para 19 (b)

Complied with.

(c) promptly inform the Borrower and ADB if there is any violation or potential violation of subparagraph (a) hereinabove. In the event that ADB informs a PCB of its concern that there has been such an alleged violation, the PCB shall: (i) cooperate in good faith with ADB and its representatives so that ADB can determine whether such a violation has occurred; (ii) respond promptly and in reasonable detail to any query from ADB; and (iii) furnish documentary support for such response upon ADB’s request

SCHEDULE 3, para 19 (c)

Complied with.

(d) provide an update in their quarterly progress reports to ADB on any change in their management and shareholders.

SCHEDULE 3, para 19 (d)

Complied with.

Source: Asian Development Bank.

Appendix 6 49

GENDER ACTION PLAN: IMPLEMENTATION STATUS

1. To strengthen capacity of PCBs on delivering the financial services to small businesses run by women: 2384 microfinance loans were issued (including 783 to female borrowers /33%) by Hamkorbank and 3307 new microfinance loans (including 1106 to women /33%) and 189 small loans (including 76 to women/40%) by Ipak Yuli Bank during the implementation period. 2. Improved borrowing capacity of women’s small businesses has been reached by conducting training activities in two PCBs. In particular, in Hamkor Bank, trainings on: Gender sensitivity approaches for financing small and medium-sized enterprises; Credit Risk Management, Strategic Planning, Gender Action Plan and Impact Assessment; Seminars on "Opening bank accounts", Types of banking services, Legal literacy, Tax requirements, covering more than 600 women in four regions of the Republic of Uzbekistan: Andijan, Namangan, Fergana and Tashkent were held. In Ipak Yuli Bank consultants conducted relevant workshops for 4 members of the Management of the Bank (2 women and 2 men), 15 heads of department of the bank and their deputies (2 women and 13 men) and 64 bank’s employees (including 19 women). Three employees of the Bank were trained on the topic: Regulation and Supervision of Electronic Banking during 18–22 August 2014 in Manila, Philippines. In cooperation with the Business Women Association (BWA), seminars for women entrepreneurs conducted on a regular basis covering 100 women. The Training of Trainers (TOT) on non-financial services, on “Improving access of women entrepreneurs and customers in rural areas to financing” were held by Ipak Yuli during the implementation period. 3. Under the linked TA the following advisory support to PCBs was provided (i) development of a gender-sensitive credit appraisal guidelines and performance indicators; (ii) sensitization training of PCB staff on women entrepreneurship needs and tailored programs; (iii) annual customer surveys to assess the quality of financial services; and (iv) capacity building of PCBs to develop internal systems to deliver e-banking to female clientele. 4. These activities were resulted in the development, approval by the Board and implementation of the Bank’s Gender Policies (2015) which provide main gender directions for 2016-2020 to increase financial literacy of women and mainstream gender in the sector. 5. A comparison of the actual achievements against the original GAP target indicators (Table below) shows that more than 75% of them were achieved and GAP’ implementation could be preliminary rated as successful.

50 Appendix 6

Table 1: GENDER ACTION PLAN ACHIEVEMENTS

Activity Performance

Indicators/Targets Results achieved

Output 1: Strengthened capacity of PCBs to deliver financial services to women’s small businesses

PCBs adopt credit scoring technique for efficient small business lending

By 2017, documented evidence of scoring lending technique upgraded, sex-disaggregated

Achieved. Ipak Yuli Bank developed credit scoring model for legal entity clients in 2015 and implemented for corporate (legal entity) clients from 2016. Planned to implement for all types of clients after full integration of SAP. In Hamkorbank there was already an existing had credit scoring with sex-disaggregated data, which was developed and implemented prior to start of the project. Hence, there was no need to upgrade its credit scoring during the project.

PCBs conduct gender awareness seminars for PCB’s board, management and staff

By 2017, documented evidence of annual seminars conducted in each PCB and at least 50% of PCB’s board, management and staff trained, sex-disaggregated

Achieved. 30 Gender awareness seminars were conducted for more than 50% of board, management, and staff in each PCBs (Hamkorbank: 62.8%, Ipak Yuli Bank: 110 board, management and staff (lists of participants)

PCBs establish sex-disaggregated client database and collect gender-sensitive indicators (e.g. total loan amount and number of loans) for regular monitoring and reporting

By 2017, at least two monitoring indicators (e.g. total loan amount and number of loans) are gender-sensitive

Achieved. Hamkorbank: 17 gender-sensitive monitoring indicators, including total loan amount and number of loans, disaggregated by gender. Ipak Yuli Bank: monitoring indicators include, number of loans and total loan amount in small and microfinance portfolio, disaggregated by gender

PCBs undertake annual customer survey of women’s small businesses to assess challenges faced by women’s small businesses in accessing finance,

By 2017, documented evidence of annual surveys of women’s small businesses by each PCB, and at least one training plan developed by each PCB

Achieved. Customer surveys were conducted among individuals and legal entities in 2015, 6665 clients and 3250 clients in 2016 in Hamkor Bank. A package of new services for women was developed and approved by the

Appendix 6 51

Activity Performance

Indicators/Targets Results achieved

quality of financial services and products provided, new types of financial services and products demanded as well as training needs

Board (January 16, 2015, No. 20). 14 surveys of women’s small businesses were conducted in Hamkorbank; one survey in Ipak Yuli Bank. Hamkorbank: for 2014–2016 conducted 14 surveys of women’s small businesses, developed 30 training plans (in accordance with Gender Action Plan developed and adopted by Board of Directors on 10 December 2015). Ipak Yuli Bank: within TA assistance one customer survey conducted in 2015, which was used to modify the loan products menu. Availability of loans to women’s small businesses increased Hamkorbank: By 2017, out of 2,380 new loans 770 were to women, which represented 33% of total Ipak Yuli Bank: out of 3,572 new loans 1,172 were to women (33 % of total). The target was achieved in Hamkorbank, where, by 2017, a package of 14 new financial products were developed of which 8 new products (57%) support women’s small businesses. In Ipak Yuli Bank: By 2017, the concept of new services for women was developed and in testing phase

PCBs increase availability of loans to women’s small businesses

By 2017, at least 30% of the number of new loans are to women’s small businesses, By 2017, PCBs develop at least one financial service or product that supports women’s small businesses

Achieved (with an average 31%). During the period from 19 March 2014 to 31 December 2015, 3307 new microfinance loans have been issued under project, of which 2201 to men and 1106 to women (33%) in Ipak Yuli Bank.

52 Appendix 6

Activity Performance

Indicators/Targets Results achieved

During the period from 19 March 2014 to 31 December 2015, 265 new small loans have been issued under the project, of which 189 issued to men, 76 to women (29%) in Ipak Yuli Bank. By 31 December 2016 new microfinance loans issued 2384 including 783 female borrowers (33%) in Hamkor Bank Bank. By 31 December 2016 new small loans issued in the number of 589 including 167 females (28%) borrowers.

PCBs promote through marketing and training the use of e-banking by women’s small business

By 2017, PCBs provide e-banking services of which at least 30% of users are women

Achieved. The use of e-banking by women’s small business was promoted, with thousands using this in both banks. The target achieved in Hamkorbank, where, by 2017 number of bank clients who were using e-banking services provided by the bank was 92,297 of which 31,246 were women (33.9%) However, in Ipak Yuli Bank: by 2017 number of bank clients who were using e-banking services provided by the bank was 4,290, but this number was not gender-disaggregated and number of women-clients using e-banking services couldn’t be quantified

Output 2: Improved borrowing capacity of women’s small businesses

PCBs implement public awareness campaigns to promote women entrepreneurship and encourage women to access credit

By 2017, documented evidence of annual awareness campaigns

Achieved. In Ipak Yuli Bank the consultants conducted workshops in 2014 and 2015 for: 4 members of the Management of the Bank, of which 2 were women and 2 men. 15 heads of department of the bank and their deputies of which 2

Appendix 6 53

Activity Performance

Indicators/Targets Results achieved

women and 13 men. As well as, 64 other employees of the Bank of which 19 are women and 45 men were trained. Three employees of the Bank were trained on the topic: Regulation and Supervision of Electronic Banking» during 18-22 August 2014 in Manila, Philippines. In Hamkor Bank several seminars were held on "The role of banks in raising financial literacy of young people", covering 2000 young people, (aged 15 to 21 years). Hamkorbank: By 2017, developed PR-strategy for encouraging women to access credit and conducted 6 awareness conferences jointly with women’s Committee, Chamber of Commerce in regions (available on web-site of the bank) Ipak Yuli Bank: in cooperation with Association of Business Women seminars for women conducted (on regular basis) and about 100 women trained

PCBs conduct business and financial literacy workshops for women’s small businesses

By 2017, documented evidence of at least four workshops conducted by each PCB per year By 2017, documented evidence of at least 900 women trained

Achieved. During the period from 19 March 2014 to 31 December 2015, 3020 of potential sub-borrowers were trained, of which 1121 women, accounting for 37% in Ipak Yuli Bank. Seminars for women have been conducted in the cities of Tashkent, Samarkand and Karshi. During the workshops about 100 women entrepreneurs have been trained by Ipak Yuli. In February 2016, the seminar Training of trainers (TOT) on non-financial services, on the topic “Improving access of women entrepreneurs and customers in rural areas to financing” were held in Ipak Yuli Bank.

54 Appendix 6

Activity Performance

Indicators/Targets Results achieved

A total 1,726 women were trained on business and financial literacy