One of the more remote places to do business is Tajikistan, a mountainous republic in Central Asia. Recent events aren’t helping: an energy crisis appears to have set in motion a food shortage, and the IMF claims that the National Bank of Tajikistan misrepresented its creditworthiness to secure loans.
Still, the economy is growing, and we were excited to see it firsthand over spring break. All semester we had been working with a local bank, the First MicroFinanceBank of Tajikistan (FMFB), on assessing the viability of providing commercial loans to small and medium enterprises (SMEs). In mid-March Lukas Bauer ’09 and I traveled there to gather research that could help us identify the factors that would determine whether or not that could work.
After arriving in Dushanbe, the capital, we went first to the bazaar to meet with small-business owners. We found retailing practices that would usually cause great concern: bags of cash were transported hundreds of miles to pay suppliers; there was no maintenance of current accounts or accounting books; and monthly sales tracking (or any, for that matter) was conspicuously absent.
In the framework of commercial finance, these business practices would preclude an assessment of the chance of default, a necessary element to judging the risk that the bank would incur by providing a loan. However, the framework of microfinance allows lenders to protect portfolios through diversification: while a default of the size of most commercial loans could cripple the financier, the combination of multiple borrowers and the small size of individual loans protects the bank’s lending portfolio from collapse.
The next day we boarded a plane for Khorog, the capital of the Gorno-Badakhshan Autonomous Region (GBAO), the remote mountainous province that comprises nearly half of the country’s territory. In ninety breathtaking minutes we flew over the 20,000-plus foot Pamir range, observing the isolated villages and seasonally passable unpaved roads below (we would spend nineteen hours driving back). We were beginning to understand the complexity of the challenges faced by GBAO businesses.
Over the next three days we visited clients in the rural districts of Roshtkala and Rushan, discussing the finer points of locally significant activities such as Pamiri residential construction and chicken incubation. They pointed to real challenges facing their business, ranging from changing consumer preferences to across-the-board inflation on basic commodities.
We were awed by the lengths to which owners went to start their businesses. One dentist brought fragile equipment over steep mountain passes from China. Other aspiring industrialists drew deeply on capital loans to create outbound supply chains.
By the week’s end, we had a real sense of the needs of the customers. They called for more credit, lower interest rates, less up-front paperwork and most vociferously, longer loan durations. From the bank’s perspective, however, these requests had to be balanced with risk level, transparency and the costs such changes would pose.
Our challenge now is to resolve this disjunction. Over the next month, our team — Ossama Soliman ’08, Gervasio Guareschi ’09 and Michael Hsueh ’09, along with Lukas and myself — will be researching microfinance institutions around the world that make loans in similarly inhospitable terrain.
After final exams, part of our team will travel to Dushanbe to present our recommendations and plan the next steps with the bank.
Microfinance will not be a panacea for Tajikistan; even if the FMFB succeeds in meeting its clients’ financial needs, deeply rooted economic and political problems will still limit business opportunities.
Nevertheless, the bank has already demonstrated that the provision of finance markedly improves the odds that entrepreneurial endeavors will blossom into productive and profitable enterprises. We aim to convey the insight from more mature organizations that will enable the bank to both succeed commercially and make as broad a social impact as possible.
This consulting project was organized by the International Development Club and sponsored by the Social Enterprise Program.