Kazakhstan: Microfinance and Financial Sector Diagnostic Study

Date Published: 
Apr 2008

Examining poor performance of the microfinance sector in Kazakhstan

This paper attempts to give a macro-economic perspective by integrating microfinance into a dynamic general equilibrium model of income distribution. The model integrates key aspects of microfinance such as non- collateralized loans, concern over social issues and externality effects of group meetings.

The model describes an economy where agents choose between three alternative occupations - subsistence production, small-scale project investment and large-scale project investment. The paper studies outcomes of the model before and after introduction of microfinance.

The paper states that, in the absence of microfinance, the population is divided into those who are able to acquire large-scale, collateralized loans from the traditional banking sector and those who, being unable to do so, are forced into subsistence. It then demonstrates how introduction of microfinance can reduce inequalities by creating new opportunities with small-scale investments suitable for the poor. By taking on such investments, poor individuals can potentially move up to be able to access large-scale credit. Despite microfinance interest rates being much higher than traditional bank loan interest rates, microlending arrangements can reduce initial inequalities by creating incentives and opportunities for the poor to move beyond subsistence living.