EBRD lending programme boosts MSMEs’ access to scarce local currency finance in Early Transition Countries thanks to international donors.
The people of Mongolia are very attached to its long history and many of their old traditions are still very much alive. Gulmaira Akim is so proud of its folklore that she created a business out of it. Her micro enterprise produces handcrafts and souvenirs based on ancient designs.
“I started working during my university, when I used to sell traditional fabrics to tourists and pay for my studies,” she explained. “Then, in 2006 I got married and I started producing small goods such as purses and ornaments together with my husband”.
Today Ms Akim employs dozens of people, mostly women, in the rural Nalaikh province where her workshop is based. When she receives large orders she reaches out to more embroiderers who work from home.
“For me it is important to give back to the community and employ elderly people or women with no formal education,” she said.
Gulmaira Akim is the owner of one of the thousands of micro business in Mongolia that can improve their companies at zero FX risks with a loan in Tughrik, the Mongolian currency.
This EBRD Local Currency Programme in the Early Transition Countries (ETCs) is supported by the Swiss State Secretariat for Economic Affairs SECO, the US Treasury and the donors of the ETC Fund.
Mongolia’s wealth derives mostly from under its rich soil, through a large mining sector. Most finance and business operations are concentrated in the capital Ulaanbaatar, home to half of the country’s population.
So micro and small businesses such as Ms Akim’s are key for the development of rural areas as well as contributing to diversifying the economy and expanding the private sector.
But without adequate financial support, micro, small and medium-sized enterprises (MSMEs) would not be able to survive, let alone thrive.
On the other hand, Mongolian financial institutions are often not in a position to assume more risk and provide tailored products for this segment of potential clients.
One of the issues of lending to MSMEs is the high level of dollarisation, which, according to the latest Transition Report 2015-16, is significantly higher in the region where the EBRD invests than in other emerging market economies.
Loans denominated in foreign exchange expose small companies to the risks of depreciating local currencies. That is why the EBRD and its donors, including the Early Transition Countries (ETC) Fund*, the Swiss Secretariat for Economic Affairs SECO and the US Department of Treasury, are partnering to extend local currency loans to local participating banks to lend to MSMEs in local currency at affordable interest rates.
This special Local Currency Programme, which provides long-term EBRD finance to small businesses through local partner financial institutions, is active in Armenia, Georgia, Kyrgyz Republic, Moldova, Mongolia and Tajikistan.
The EBRD financing is combined with policy dialogue with national governments to improve domestic financial intermediation in local currencies, with the lending now replicated by other International Financial Institutions.
Through the Programme, partner banks have an opportunity not only to reach out to underserved markets but also to develop the skills required to manage foreign exchange risk.
So far, around 300 thousand micro and small companies in the six countries have been able to borrow a total of around US$ 325 million thanks to the donors.
Thanks to the Programme, Ms Akim obtained a loan of 10 million Mongolian Tugrik (worth about US$ 5,000) through XacBank. She used it to upgrade her sewing machines.
“As a result of this improvement, the quality of our product is higher and we could better meet our clients’ needs, so our sales boosted,” she said. Thanks to the loan she secured a Fairtrade shop in Ulaanbaatar as a fixed client.
Now she has many fewer worries about repaying her loan. And, for a change, the depreciation of the tugrik against the US dollar is a blessing for her business, since most buyers are foreigners visiting her stunning country, happy to buy relatively inexpensive and beautiful souvenirs.