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Russia’s KMB rises from the ashes

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From five tonnes of chocolate a month to 200.

Lending to small businesses can profit banks.

Oleg Tuntsev sweeps his hand around his small, bustling chocolate factory with unmistakable pride. “We started in 1999 with a loan of $5,000 and eight staff making five tonnes of chocolate a month. Now we have more than 200 people working for us, and we make 200 tonnes of chocolate and $500,000 profit per year.”

His company, Bravo, was helped by a loan from KMB, a bank set up with EBRD support in the tumultuous days of 1999 when Russia’s entire financial system was in crisis. Mr Tuntsev says: “When we started, it was very difficult to find anyone to lend to us. Now, we’re constantly called by banks for lending, leasing, any kind of financial service we might want.”

SMEs all the rage

It’s taken a long time for lending to small and medium-sized enterprises (SMEs) to take off in Russia, but now there is momentum in banking for small business. Says Chikako Kuno, EBRD’s Director for the Group for Small Business: “There’s heavy competition in corporate and consumer lending, so every big Russian bank is now making a bee-line for the SME sector which they’ve largely ignored in the past and where creditworthy clients still need financing.”

They could all learn a thing or two from KMB, which has been doing SME lending longer than any other bank in Russia. Ilnar Shaymardanov, head of KMB’s Kazan lending operations, says: “Now it’s very popular to work with SMEs. But when we started in 1999, we were unique. Despite our competitors’ newfound interest in SME lending, small businesses still tend to be underserved in terms of credit access, and KMB remains the trailblazer in this market.”

KMB has since proven to the rest of the market that the sector is profitable, and underlined that point last year when Italy’s Banca Intesa bought 75 per cent minus one share; the EBRD owns the remaining shares.

That’s quite a change from 1998 when foreigners and Russians alike were fleeing the financial sector after the rouble crisis caused bank after bank to fall. Rather than cut and run, however, the EBRD pulled what remained of its retail banking operations together and with the Soros Foundation, the German development agency DEG and the Dutch microfinance fund Stichting Triodos-Doen, it opened KMB in 1999 to focus on micro and SME lending.

Financing grassroot start-ups

Says Reiner Mueller-Hanke, KMB’s Chief Executive Officer: “With KMB, the EBRD has demonstrated its strong commitment to helping Russia's economy develop through small businesses. KMB's success proves that SME lending can indeed profit banks.”

KMB is one of 26 Russian banks that have benefited from the EBRD’s donor-backed Russian Small Business Fund through which 357,000 entrepreneurs have been financed for a total of $3.7 billion in loans. The RSBF provides capital to local banks and, as importantly, international expertise to encourage them to build their small business portfolios. The programme is supported by the European Union, Canada, France, Germany, Great Britain, Italy, Japan, Switzerland and the United States.

Why has SME lending caught on in Russia? Mr Shaymardanov says: “SME lending is lower risk than retail lending, yet offers higher margins. Our bad SME loans are less than one per cent of our portfolio, while bad retail loans, for some banks, can be as high as 20 per cent. Interest rates on SME loans can be as high as 20 per cent. Everyone knows the rates will go down soon because competition is increasing, so you could say we’re in the golden age of SME lending in Russia.”

After a two-year stint in Moscow, Mr Shamyardanov, a 29-year-old fast-rising manager, recently moved back to his native Kazan. The capital of Russia’s Tatarstan Republic is 800 kilometers east of Moscow and will be in the international limelight in May when it hosts the EBRD’s 2007 Annual Meeting.

Finding a niche

Mr Shamyardanov says the challenges and opportunities facing SMEs in Kazan are similar to elsewhere in Russia. On the one hand, the economy is growing fast, fuelled in particular by rising consumer demand which presents good opportunities for small firms like Bravo. On the other hand, the retail market is increasingly dominated by big financial groups. “That’s the story in many sectors of the economy,” Mr Shamyardanov says. “The challenge for SMEs is to find a sector where those big operators aren’t working.” Like chocolate, for example.

Printing is another sector offering opportunities to fleet-footed start-up firms, as the Kazan-based publishing house Logos has discovered. General Director Maksim Andreev says: “We’ve found a niche for ourselves publishing books ordered by various regional ministries, particularly the Ministry of Interior.” Ministries, local politicians and churches order glossy coffee table books on Kazan, as well as paying to print their memoirs (so-called ‘vanity’ publishing).

The business is obviously doing well. Mr Andreev has taken out a €200,000 leasing loan from KMB with which he bought several large colour printers. He also recently took out an SME loan from KMB, also for €200,000, with which he is building new headquarters.

Mr Andreev says the printing sector, in contrast to other sectors of the Russian economy, favours small businesses. “The technology is changing all the time, so we’re small enough to be able to update quickly.”

By Julian Evans, freelance writer
Photos: Yevgeni Kondakov and Mike Ellis
Contact: Group for Small Business

19 February 2007