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EBRD commitments in ETCs€ million (by year)

Early Transition CountriesEBRD country factsheet

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Since November 2004 the Early Transition Countries (ETC) Initiative has been coordinating donor and EBRD assistance in the Bank’s poorest countries of operations. The Initiative aims to alleviate poverty by financing mostly smaller projects in the private sector through, for example, the Bank’s Medium-sized Co-financing Facility or the TurnAround Management (TAM) and Business Advisory Services (BAS) programmes, and by developing municipal infrastructure and the legal environment in the ETCs.

Highlights

Mongolia became the eighth beneficiary country of the ETC Initiative in October 2006, when it became an EBRD country of operations.

The multi-donor ETC Fund is the flagship for delivering assistance. By the end of 2006, a total of €40.5 million for technical cooperation and €5 million for investment grant co-financing had been pledged to the Initiative.

The EBRD’s micro and small enterprise activities continued to grow in the ETCs in 2006, attracting 13 new partner banks. Between them they disbursed €1.3 billion in 597,946 sub-loans to some of the smallest entrepreneurs in the region.

More than 500,000 loans have been provided to small businesses.

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Armenia

Azerbaijan

Georgia

Kyrgyz Republic

Moldova

Mongolia

Tajikistan

Uzbekistan

Latest newsEBRD supports microfinance in Tajikistan US$ 4 million loan to The First MicroFinanceBank

The EBRD is extending its successful programme to support micro and small enterprises in Tajikistan by providing a US$ 4 million loan to The First MicroFinanceBank (FMFB). Although it is one of the youngest commercial banks in the country, FMFB has a broad regional outreach. The bank is particularly effective in extending credit to rural areas in which there is limited access to financial services.

The loan comes under the Tajikistan Micro and Small Enterprise Finance Facility (TMSEFF), established in 2003 and expanded in 2006, to provide loans to micro, small and medium-sized enterprises. Since the establishment of the facility more than 18,000 loans with an average value of US$ 3,000 have been provided by the end of 2006. Loans to female entrepreneurs

Although it is one of the youngest commercial banks in the country, FMFB has a broad regional outreach.

Although increased domestic spending has generated high economic growth in the ETCs, alleviating poverty and correcting regional disparities remain key objectives.

Since it was established, the ETC Initiative has been helping the EBRD’s poorest countries of operations– Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Mongolia, Tajikistan and Uzbekistan. This group has included Mongolia since October 2006, when it became an EBRD country of operations.

Although increased domestic spending has generated high economic growth in these countries, alleviating poverty and correcting regional disparities remain key objectives. Therefore the EBRD is focusing on improving institutions and overall infrastructure, especially in Central Asia, and reforming the banking sector to achieve better private sector access to finance.

Donors make the differenceThe multi-donor ETC Fund is the flagship for delivering assistance. Contributing countries are Canada, Finland, Ireland, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, Taipei China and the United Kingdom. Pledges more than tripled from €14.7 million in 2004 to reach €45.5 million by the end of 2006. Many donors, including the United States and the European Union, also support the ETC Initiative through bilateral funding channelled directly to specific ETC projects.

As part of the ETC Initiative, the EBRD also furthers its commitment to working with and learning from other international organisations and non-governmental groups, including community organisations.

Many still live in povertyThe ETCs have lagged behind the rest of the region in their transition to market economies and more than one out of every two people in these countries live below the poverty line. Economic development is hindered by a number of factors: national debt is extremely high in most of the ETCs; reform and improvement of key institutions – banks, courts, regulatory authorities, state enterprises and infrastructure – is slow, as is the transition to democracy and stability; business skills are lacking; domestic markets are small, distances large, borders are difficult to cross (whether by goods or people); and basic services from roads to telecommunications are in bad shape.

This poor investment climate, which discourages foreign investment, is being addressed by the new EBRD initiative in two ways:

at the micro level of individual project finance and advisory services to local enterprises and financial institutions

at the macro level of policy dialogue and institutional reform in selected sectors.

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Mongolia: a ger guarantees a loan In October 2006 Mongolia became the EBRD’s newest country of operations, an occasion marked by a €3.8 million loan to XacBank, a successful Mongolian bank. The investment was accompanied by technical assistance from the ETC Fund for €1 million. This facility encourages EBRD partner institutions to develop skills and diversify into new financial products.

With nearly three-quarters of its clients living in gers, traditional nomadic homes made of blankets, XacBank has started accepting these assets as security on loans it makes for micro business ventures.

This unconventional lending is helping to kick-start the Mongolian economy. Take Mrs Elbegzaya Sersenjav as an example: she moved with her daughter to Ulaanbaatar, Mongolia’s capital, after being widowed and decided the only way to make a proper living and fund a university education for her daughter was to start a small business. In 2003 she contacted XacBank. Her ger and home appliances were pledged against a €150 loan so she could launch her venture selling scarves and gloves in the city’s open-air market. Two further loans, each for twice the previous amount, helped to increase her profit and develop her business.

XacBank was funded in 1998 as a United Nations Development Programme MicroStart project, with an initial €750,000 to lend to poor people with business ideas. With interest income and investment from its founders the bank’s capital has grown to more than €7.5 million with total assets of almost €60 million in 2006. In nine years the number of XacBank’s clients has risen from 50 to 55,000, with 90 per cent of loans made to small businesses.

Micro, small and medium-sized enterprises offer the greatest opportunities for creating sustainable employment and prosperity.

Focusing on the private sectorThe ETC Initiative emphasises private sector development, particularly in micro, small and medium-sized enterprises. These businesses have been given much-needed access to finance through the Bank’s equity investments or loans to financial institutions that are then on-lent to small businesses.

The EBRD’s micro and small enterprise activities continued to grow in the ETCs in 2006, attracting 13 new partner banks. Between them they disbursed €1.3 billion in 597,946 sub-loans to some of the smallest entrepreneurs in the region.

These small and medium-sized enterprises offer the greatest opportunities for creating sustainable employment and prosperity. They can also positively affect a country’s transition to democracy: the owners have a stake in improving the way laws and regulations are made and implemented, and in reducing corruption.

The Initiative also promotes financing of smaller government infrastructure investments appropriate to the ability of local consumers to pay for improvements in these services (such as water and heating).

Donor funds encourage investmentThe ETC Initiative’s success depends on the coordinated efforts of the EBRD and donor governments and organisations that provide grants in support of the Bank’s ETC investments.

Many promising investment prospects are not developed enough to qualify for financing from the EBRD or other sources. Through the EBRD’s TAM and BAS programmes, donor funding pays for consultants to strengthen these projects by, for example, improving marketing, accounting or other skills; importing new technology and related skills; adopting new standards in production, labour management and the environment, and implementation and post-investment support.

Donors also pay advisers to help governments improve their national investment climates, particularly through the EBRD’s Legal Transition Programme. This may include clearing regulatory hurdles for banks dedicated to small business; improving commercial law and its application; and introducing laws to cover leasing arrangements so that small businesses can lease rather than buy equipment.

Donors may also co-finance investments that have a widespread economic and social impact. This is particularly true for water services, energy and transport systems.

Initiative boosts businesses, jobsDoes the EBRD, with its focus on boosting economic development by investing in the private sector, help to alleviate poverty in the poorest countries in its region of operations? The answer is undeniably yes, according to two studies revealed to donors backing the Bank’s ETC Initiative for those eight countries of the EBRD’s operations.

In theory, the EBRD helps the working poor by financing their employers’ growth. This should mean more jobs, or at least more secure jobs, with higher wages. Has the theory worked in practice?

To find out, the Bank’s Office of the Chief Economist and the University of Michigan surveyed 1,272 micro, small and medium-sized enterprises (MSMEs) in Bulgaria, Georgia, Ukraine and Russia’s Nizhny Novgorod region. MSMEs in the EBRD region typically have difficulty in accessing credit to finance growth.

Two-thirds of those surveyed had been financed in 2002 by local banks and other financial institutions through which the EBRD channels credit targeted at small businesses. The other third was a control group of businesses active in 2002.

In the preliminary analysis of the survey, the team discovered that, compared with the control group, firms with EBRD-backed financing had better survival rates, were 60 per cent more profitable, had lower labour costs because their staff was 30 per cent more productive, and created five per cent more jobs.

The EBRD-financed businesses were also more likely to get renewed financing, albeit from their local EBRD-backed bank rather than from elsewhere in the financial sector.

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Because of its strong rural focus, FMFB provides even smaller average loan sizes of around US$ 1,000.

ContactsETC Initiative TeamOne Exchange Square London EC2A 2JN United Kingdom Director: George Krivicky Tel: +44 20 7338 6035

Official Co-financingGary Bond Tel: +44 20 7338 6356 Email: bondg@ebrd.com

Business Group DirectorOlivier Descamps Southern and Eastern Europe and the Caucasus Tel: +44 20 7338 7164 Fax: +44 20 7338 6599

Project proposalsTel: +44 20 7338 7168 Fax: +44 20 7338 7380 Email: newbusiness@ebrd.com

www.ebrd.com

Yerevan Resident OfficeApartment 1 20 Bagramian Avenue 375019 Yerevan Armenia Tel: +3741 540 425 Fax: +3741 540 430

Baku Resident Office96 Nizami Street Landmark, 4th floor 370010 Baku Azerbaijan Tel: +99 412 4971 014 Fax: +99 412 4971 019

Tbilisi Resident Office38 Nino Chkheidze Str 380002 Tbilisi Georgia Tel: +995 32 920 512 Fax: +995 32 923 845

Bishkek Resident Office26 Geologicheskiy Pereoulok 720005 Bishkek Kyrgyz Republic Tel: +996 312 530 016 Fax: +996 312 666 284

Chisinau Resident OfficeRoom 309 31 August 1989 Street 98 MD 2012 Chisinau Moldova Tel: +373 2 210 000 Fax: +373 2 210 011

Dushanbe Resident Office85/22 Internatsionalnaya Street 734001 Dushanbe Tajikistan Tel: +992 372 213 543/240 572/240 235/210 763 Fax: +992 372 219 832

Tashkent Resident OfficeInternational and Banking Financial Centre 1 Turab Tula Street 4th Floor 700003 Tashkent Uzbekistan Tel: +998 711 39 40 14 Fax: +998 711 20 61 21

constitute 41 per cent of the portfolio. Because of its strong rural focus, FMFB provides even smaller average loan sizes of around US$ 1,000 and by working with this dedicated microfinance bank, the EBRD will be able to extend its outreach. The loan will also help to broaden the impact of EBRD funds – in 2006, FMFB itself disbursed almost 10,000 loans.

A central activity under the TMSEFF programme is capacity and institution building at the partner banks. The UK’s Department for International Development together with USAID and the European Union has provided technical assistance funds for institution building in the banking sector. Additionally, the Swiss government through Seco and the EBRD’s Early Transition Countries (ETC) Fund have contributed to the programme. Assistance to FMFB will be tailored to meet its needs, with technical assistance being provided by the ETC Fund.

Fernand Pillonel, head of the EBRD’s office in Tajikistan, said the loan to FMFB will enlarge the financial resources of the bank and help it to expand its lending activity further to the remotest regions of the country. This in turn will significantly increase the outreach of the microfinance facility and assist in satisfying growing demand for access to finance.

Jim Egan, CEO of FMFB, said that the confidence shown by the EBRD in lending to the bank is testimony to its successful activities in the Tajik banking sector. The unique mandate of FMFB will be greatly facilitated by the EBRD’s loan and will be used to finance future growth and expansion in both rural mountainous regions and urban centres.