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Credit Guarantee and Credit Evaluation System for SME Development in

Kazakhstan

Credit Guarantee and Credit Evaluation System for SM

E Development in Kazakhstan

2012

2012

9 7 8 8 9 8 0 6 3 6 2 7 3

9 4 3 2 0

ISBN 978-89-8063-627-3ISBN 978-89-8063-657-0(set)

Ministry of Strategy and Finance

Government Complex 2, Gwacheon, 427-725, Republic of Korea Tel. 82-2-2150-7732 www.mosf.go.kr

Korea Development Institute

130-740, P.O.Box 113 Hoegiro 47, Dongdaemun-gu, Seoul Tel. 82-2-958-4114 www.kdi.re.kr

Korea Credit Guarantee Institute

121-744, 122, Mapo-Daero, Mapo-gu, Seoul Tel. 82-2-710-4322 www.kodit.co.kr

Korea Institute for Development Strategy

135-080, 8th Floor, YookSeong BLD, 706-25 Yeoksam-dong, Gangnam-gu, Seoul Tel. 82-2-958-4114 www.kds.re.kr

Knowledge Sharing Program Center for International Development, KDI● P.O. Box 113 Hoegiro 47, Dongdaemun-gu, Seoul, 130-740● Tel. 02-958-4224

● cid.kdi.re.kr ● www.facebook.com/cidkdi

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Korea Development InstituteMINISTRY OF STRATEGYAND FINANCE

KSP보고서표지_카자흐스탄_영문.indd 1 2012-06-20 오후 9:48:07

Credit Guarantee and Credit Evaluation System for SME Development in Kazakhstan

Credit Guarantee and Credit Evaluation System for SME Development in Kazakhstan

Korea Credit Guarantee Fund (KODIT)

Korea Institute for Development Strategy (KDS)

Ministry of Strategy and Finance (MOSF), Republic of Korea

Korea Development Institute (KDI)

Ministry of Economic Development and Trade (MEDT), Republic of Kazakhstan

Ministry of Economic Development and Trade (MEDT),

Entrepreneurship Development Fund “DAMU” JSC

MoonJoong Tcha, Executive Director, Center for International Development (CID), KDI

Taihee Lee, Director, Division of KSP Consultation, CID, KDI

Jae In Choi, Research Associate, Division of Development Research, CID, KDI

Hyejin Kim, Senior Program Officer, Economic Development Division, KDS

Eui-Jong Kwon, Executive Director, KODIT

Chapter 1. Myung-Ho Yoo, Research Fellow, KDS

Chapter 2. Yong-Pyung Park, Team Manager, KODIT

Chapter 3. Jong-Goo Lee, Associate Manager, KODIT

Chapter 4. Eui-Jong Kwon, Executive Director, KODIT

Enkoline

Ewijeong Jeong, Researcher, Ecomomic Development Division, KDS

Elizabeth Paik, Researcher, Economic Development Division, KDS

Project Title

Prepared by

Supported by

Prepared for

In cooperation with

Program Directors

Program Officer

Project Manager

Authors

English Editors

Credit Guarantee and Credit Evaluation Systemfor SME Development in Kazakhstan

Government Publications Registration Number 11-1051000-000260-01

ISBN 978-89-8063-627-3 94320

ISBN 978-89-8063-657-0 (set)

Copyright ⓒ 2012 by Ministry of Strategy and Finance, the Republic of Korea

Credit Guarantee and Credit Evaluation System for SME Development

in Kazakhstan2012

Government PublicationsRegistration Number

11-1051000-000260-01

Knowledge Sharing Program

Korea Institute forDevelopment Strategy

MINISTRY OF STRATEGY AND FINANCE


Introduced in 2004, the aim of the Knowledge Sharing Program (KSP) is to contribute to the economic

and social development of partner countries by sharing Korea’s valuable development experience of Korea.

This program is run by the Ministry of Strategy and Finance (MOSF) and managed by the Korea

Development Institute (KDI). In 2011, a total of 26 countries from Central Asia, Africa, Southeast Asia and

Latin America became KSP partner countries, and this number has been growing. With the exception of

programs with nine countries that are directly managed by KDI, private research institutions and public

institutions have been selected to manage the programs in 17 countries through a public tender.

The KSP with Kazakhstan began in 2009, and the KDI made a policy suggestion on “Innovative-

Industrial Development Plan of Kazakhstan.” In 2010, Korea Institute for Development Strategy (KDS)

proposed a policy suggestion on “SME-centered Enterprise Development Strategy for Sustained Economic

Development of Kazakhstan.” Due to the success of the project in 2009 and 2010, the government of

Kazakhstan requested policy suggestions in 2011 on “the Introduction of a Credit Guarantee System for the

Revitalization of Financial Support to SMEs and the Establishment of a Credit Ratings System for Stable

System Operation.” Accordingly, the Korea Credit Guarantee Fund (KODIT) which has abundant experience

in the operation of the credit guarantee system and the KDS, which has a deep understanding of

conditions in Kazakhstan through the 2010 KSP and a strong network with the government of Kazakhstan,

formed a consortium and participated in the 2011 KSP with Kazakhstan.

The 2011 KSP began in June. On-site research into actual conditions in Kazakhstan was conducted

twice, in July and August. An interim reporting session was held in October in Seoul, and the findings of the

research were exhuined examined. During the interim reporting period, KODIT signed an MOU with the

Entrepreneurship Development Fund “DAMU” JSC (DAMU), a credit guarantee fund of Kazakhstan, for a

mid to long-term mutual cooperation. A final reporting workshop was held, along with a senior policy

dialogue between the two countries in December in Kazakhstan, to accelerate the execution of policy

suggestions.

This report aims to suggest the best policy alternative for Kazakhstan’s situation based on the research

Preface

undertaken by Korean and Kazakhstani researchers in the last eight months. However, considering the

internal and external economic environments and the development stage of financial market of

Kazakhstan, the country is expected to face numerous difficulties until a credit guarantee system that can

provide effective financial support to SMEs is firmly established. Therefore, the government of Kazakhstan

and related government institutions need to make continuous efforts to improve the system.

In general, the success of a KSP is greatly influenced by the concern and active participation of the

partner country. In the case of Kazakhstan, the project went smoothly, as the Entrepreneurship

Development Committee, which establishes policies related to SMEs; DAMU, which is in charge of credit

guarantees; and the Economic Research Institute (ERI), which supports the government's policy research, all

actively participated in the project which received full support from the Ministry of Economic Development

and Trade (MEDT). Kazakhstani researchers contributed to enhancing the level of research on Kazakhstan’s

SME support system and the financial system Kazakhstan, and providing substantial study data. We hope

research conducted through this KSP contributes to the development of SME financing policy and foster

friendship between the two countries.

I extend my sincere gratitude to the researchers from KODIT and KDS for doing their best to produce

good results. We also wish to thank Hon. Young-Ju Kim, the former Minister of Commerce, Industry and

Energy of Korea, for participating in the senior policy dialogue to share his precious experience related to

Korea's economic development despite his busy schedule, Hon. Byung-Hwa Lee, the Ambassador to

Kazakhstan, and the embassy staffs for helping Korean researchers to adapt to Kazakhstan.

In conclusion, I would like to note that the contents of this report are the subjective opinions of the

experts that participated in the program, and do not necessarily reflect the official views of KODIT and KDS.

Taik-Soo Ahn

Chairman and CEO

Korea Credit Guarantee Fund

Contents2011 KSP with Kazakhstan 15

Executive Summary 18

Chapter 1

Industry Structure and SME Support System in Kazakhstan

Summary 24

1. Economic Situation and Industry Structure in Kazakhstan 27

1.1 Economic Performance in the Past and the Future 27

1.2. New Economic Initiative for the Future in Kazakhstan; Customs Union among Belarus,Kazakhstan and the Russian Federation 28

1.3. Economic Prospects of Kazakhstan 29

1.4. Industry Structure in Kazakhstan 30

2. SMEs in Kazakhstan 37

2.1. Overview of SMEs in Kazakhstan 37

2.2. Relations between Large Corporations and SMEs in Kazakhstan 39

2.3. Rationale for the Development of SMEs in Kazakhstan 40

2.4. SME Support System in Kazakhstan 40

3. Main Issues of SMEs in Kazakhstan 44

Chapter 2

Development and Performance of the Credit Guarantee System in Korea

Summary 48

1. Outline of the Credit Guarantee System 50

1.1. Necessity of the Credit Guarantee System 50

1.2. Significance of the Credit Guarantee System 51

1.3. Performance Evaluation of a Credit Guarantee System 52

1.4. Other Issues to be Considered in the Operation of a Credit Guarantee System 53

1.5. Credit Guarantee Schemes 55

2. Outline of the Credit Guarantee System of Korea 59

2.1. Introduction of the Credit Guarantee System in Korea 59

2.2. Establishment of Credit Guarantee Institutions in Korea 60

2.3. Current State of the Credit Guarantee System in Korea 61

2.4. Characteristics of the Credit Guarantee System in Korea 64

3. Overview of KODIT 67

3.1. Framework of KODIT 67

3.2. Outline of KODIT's Services 68

3.3. Operational Details of Credit Guarantees 71

3.4. KODIT’s Advancement Process 74

4. Performance of KODIT’s Operations 80

4.1. Current State of KODIT 80

4.2. Inducement to Increase of SME Loans (see Appendix 1) 82

4.3. Contribution to the Reduction of Capital Requirements of Financial Institutions 83

4.4. Contribution to the Mitigation of Economic Fluctuation 84

Chapter 3

Credit Guarantee System of Kazakhstan

Summary 86

1. Introduction 88

2. Current Credit Guarantee System of Kazakhstan 90

2.1. Overview of the Credit Guarantee Agency: DAMU 90

2.2. Overview of the Credit Guarantee System of DAMU 91

2.3. Procedure of the Credit Guarantee System of DAMU 92

2.4. Issues in the Credit Guarantee System of DAMU 95

3. Efforts of the Government of Kazakhstan to Improve the Credit Guarantee System 97

3.1. Needs for System Improvement 97

3.2. Establishment of Basic Principles 97

3.3. Details of System Improvement by MEDT 98

4. Credit Information and Guarantee Evaluation System of Kazakhstan 102

4.1. Overview of the Credit Information Management 102

4.2. Status of the Credit Information System 104

4.3. Importance of Credit Infrastructure to Banks 107

4.4. Credit Evaluation System 108

5. Assessment on the Credit Guarantee System of Kazakhstan 109

5.1. Assessment on the Credit Guarantee Policy 109

5.2. Assessment on the Specific Issues in the Credit Guarantee System 110

5.3. Assessment on the Credit Ratings Infrastructure 113

5.4. Conclusion 114

Chapter 4

Suggestions for the Operation of a Credit Guarantee System and a Credit Ratings System

Summary 116

1. Introduction 118

2. Suggestions for the Establishment of the Credit Guarantee Institution 120

2.1. Overview 120

2.2. Establishment of Legal Grounds 121

2.3. Organizational Structure and Human Resources 122

2.4. Establishment of a Supervisory System 124

3. Suggestions for the Credit Guarantee Program 124

3.1. Clarification of the Policy Goal 124

3.2. Expansion of Guarantee Eligibility 125

4. Suggestions for the Operational Details of the Credit Guarantee System 128

4.1. Guarantee Investigation and Evaluation Mechanism 128

4.2. Guarantee Fees 135

4.3. Partial Guarantee and Coverage Ratio 137

4.4. Acquisition of Collaterals 138

Contents

4.5. Efficient Operation of Guarantee Procedures 139

4.6. Swift Payment for Non-performing Guaranteed Loans 141

5. Plans for the Introduction of a Credit Ratings System 143

5.1. Concept of a Credit Ratings System 143

5.2. Suggestions for the Introduction 143

5.3. Suggestions for the Application of a Credit Ratings System 147

6. Roadmap and Conclusion 148

6.1. A Roadmap for the Long-term Sustainability of the Credit Guarantee System in Kazakhstan 148

6.2. Conclusion 149

Appendix

Introduction to Financial Supporting Systems for SMEs in Korea 154

2011 KSP in Kazakhstan (in Russian) 156

Executive Summary (in Russian) 159

Contents | LIST of Tables

<Table 1-1> Industry Structure in Kazakhstan 31

<Table 1-2> Number of Commercial Banks and their Recent Status in Kazakhstan 34

<Table 1-3> Key Indices of Major Commercial Banks in Kazakhstan 35

<Table 1-4> Overdue Loans of Banks in Kazakhstan 37

<Table 1-5> Role of SMEs in Kazakhstan 38

<Table 2-1> Characteristics by types of Credit Guarantee System 58

<Table 2-2> Major Economic Indicators Before the Establishment of KODIT (1961-1975) 59

<Table 2-3> Public Credit Guarantee Institutions in Korea (as of 2011) 62

<Table 2-4> Types and Contents of External Appraisals 65

<Table 2-5> Current State of Contributions by Contributors 66

<Table 2-6> Major Business and Services of KODIT 69

<Table 2-7> Examples of Restriction on Utilization of Guarantee Support 70

<Table 2-8> Coverage Ratio of KODIT 72

<Table 2-9> Structure of Guarantee Fees of KODIT 72

<Table 2-10> Examples of Types of Default Events 73

<Table 2-11> Major Management Indicators of KODIT (1976-1979) 75




<Table 2-15> Long-term Plan for Guarantee Operations under the 6.23 Measures and Actual State ofGuarantee Operations 79



<Table 2-18> SME Lending by Financial Institutions 83

<Table 3-1> Details of the Credit Guarantee Systems of DAMU 92

<Table 3-2> Summary of the New Credit Guarantee System 101

<Table 3-3> Credit Information Collected by KFB 106

<Table 3-4> Change in the Credit Ratings of the Top 3 Commercial Banks of Kazakhstan 107

<Table 3-5> Documents Required to Apply for Credit Guarantee to DAMU 109

<Table 4-1> Key Contents of the Korea Credit Guarantee Fund Act 121

<Table 4-2> Organizational Changes of KODIT 123

<Table 4-3> Credit Guarantee Supply for New and Existing Customers (2011) 126

<Table 4-4> Default and Collection Rates of KODIT by Loan Usage (2011) 127

<Table 4-5> Number of Evaluation Cases by Approval Authority (2010) 132

<Table 4-6> Approval Authority of KODIT by Credit Ratings and Guarantee Amount 133

<Table 4-7> Evaluation Checklist of KODIT (for Working Capital & Small Amount) 134

<Table 4-8> Average Guarantee Fee Rate of KODIT 136

<Table 4-9> Average Loan Interests and Guarantee Fees (2010) 136

<Table 4-10> Average Guarantee Coverage Ratio of KODIT 137

<Table 4-11> Online Document Requirements in Korea 141

<Table 4-12> A Roadmap for the Sustainable Operation of the Credit Guarantee System in Kazakhstan 148

<Figure 1-1> Export Structure of Kazakhstan 2009 32

<Figure 1-2> Number of Commercial Banks in Kazakhstan until 2000 33

<Figure 1-3> Structure of Banks by Assets 34

<Figure 1-4> Lending Distribution by Banks 35

<Figure 1-5> High, and Mostly Rising Levels of NPLs (2008~2011) 36

<Figure 1-6> Number of Active SMEs in Each Region (2009-2011) 38

<Figure 2-1> Outline of the Mutual Credit Guarantee System 56

<Figure 2-2> Outline of the Asian-type Credit Guarantee System 57

<Figure 2-3> Outline of the American-type Credit Guarantee System 58

<Figure 2-4> Structure of the Credit Guarantee System in Korea 61

<Figure 2-5> Change of Ratio of Outstanding Balance of Credit Guarantees to GDP in Korea 63

<Figure 2-6> Organizational Chart of KODIT 67

<Figure 2-7> Outline of Credit Guarantee Services 68

<Figure 2-8> Flow Chart of Credit Guarantee Services 70

<Figure 2-9> Flow of Business Processes Following the Occurrence of a Default 74

<Figure 2-10> Trend of Outstanding Balance of Guarantees 81

<Figure 2-11> Trend in the Default Ratio 82

<Figure 2-12> Credit Guarantee Increase Rates and GDP Growth Rates 84

<Figure 3-1> Details of SME Support Systems of DAMU 90

<Figure 3-2> General Credit Guarantee Procedure 92

<Figure 3-3> Primary Participants in the Credit Guarantee System of DAMU 93

<Figure 3-4> Guarantee Procedure of DAMU 94

<Figure 3-5> Operating Scheme of the Guarantee Fund 99

<Figure 3-6> Procedure of the New Credit Guarantee Fund 102

<Figure 3-7> Flow Chart of Credit Information Exchange in Korea 104

<Figure 4-1> Outstanding Guarantee of KODIT by Usage of Loans (2011) 127

<Figure 4-2> Summary of the Credit Ratings System Development 144

Contents | LIST of Figures

ADB Asian Development Bank

BIS Bank for International Settlement

BOK Bank of Korea

CAR Capital Adequacy Ratio

CB Credit Bureau

CBO Collateralized Bond Obligation

CBR Credit Bureau Report

CCRS Corporate Credit Ratings System

CEO Chief Executive Officer

CGCT Credit Guarantee Corporation of Tokyo

CID Center for International Development

CMAR Center for Marketing and Analytical Research

CR Credit Rating

DAMU Entrepreneurship Development Fund “DAMU” JSC

EBRD European Bank for Reconstruction and Development

ERI Economic Research Institute JSC

ETTC Engineering and Technology Transfer Center JSC

FCB First Credit Bureau

FDI Foreign Direct Investment

FSC Financial Services Commission

GDP Gross Domestic Product

IBK Industrial Bank of Korea

IFI International Financial Institution

IFK JSC Investment Fund of Kazakhstan

IFRS International Financial Reporting Standards

IT Information Technology

JSC Joint Stock Company

KAZNEX INVEST Kazakhstan National Export and Investment Agency

KAZINVEST Kazakhstan Investment Promotion Center

KCM Kazyna Capital Management JSC

KDI Korea Development Institute

KDS Korea Institute for Development Strategy

KFB Korea Federation of Banks

KODIT Korea Credit Guarantee Fund

Acronyms and Abbreviations

KoFC Korea Finance Corporation

KOREGs Regional Credit Guarantee Foundations

KOTEC Korea Technology Credit Guarantee Fund

KRW Korean Won

KSP Knowledge Sharing Program

KZT Kazakhstan Tenge

LTD Loan-to-Deposit

MEDT Ministry of Economy and Trade

MOPAS Ministry of Public Administration and Security

MOSF Ministry of Strategy and Finance

MOU Memorandum of Understanding

NBK National Bank of Kazakhstan

NPL Non-Performing Loan

NIF National Innovation Fund JSC

NWF National Welfare Fund

P-CBO Primary Collateralized Bond Obligations

PCR Public Credit Registry

PD Probability of Default

PM Program Manager

PPP Public Private Partnership

PUM Netherlands Service Experts

R&D Research and Development

RCC Regional Coordinating Council

SBC Small and Medium Business Corporation

SBSS Small Business Scoring System

SES Senior Experten Service

SMEF SME Development Fund

SMB Small and Medium Business

SMBA Small and Medium Business Administration

SMEs Small and Medium Enterprises

SPC Special Purpose Company

STB Second Tier Bank

VAT Value Added Tax

USD United States Dollar

2011 KSP with Kazakhstan·015

In 2011, the Ministry of Economic Development and Trade (MEDT) of the Republicof Kazakhstan and the Ministry of Strategy and Finance (MOSF) of the Republic ofKorea agreed to continue to the second year of Small and Medium Enterprise (SME)Development Knowledge Sharing Program (KSP) with Kazakhstan.

Based on the discussion at the Final Reporting Workshop of the 2010 KSP, held inAstana, and the Senior Policy Dialogue between the former Minister of Industry,Energy and Commerce of Korea, Hon. Young-Ju Kim, and the Vice Minister ofEconomic Development and Trade of Kazakhstan, Hon. Marat Kussainov, fromJanuary 21st to 25th, 2011; as well as the written Demand Survey Form submitted viathe Embassy of Korea in Astana, Kazakhstan, the topic for the 2011 KSP withKazakhstan is decided as “Credit Guarantee and Credit Evaluation System for SMEDevelopment in Kazakhstan.”

Supported by the MOSF and Korea Development Institute (KDI), a consortiumbetween Korea Credit Guarantee Fund (KODIT) and Korea Institute for DevelopmentStrategy (KDS) has been designated as the implementing body for the 2011 KSP withKazakhstan. The consulting team for the 2011 KSP with Kazakhstan was organized asfollows:

2011 KSP with Kazakhstan

016·Credit Guarantee and Credit Evaluation System for SME Development in Kazakhstan

A delegation of Korean experts headed by Dr. Eui-Jong KWON, the ProgramManager (PM) for the 2011 KSP with Kazakhstan, visited Almaty and Astana fromJuly 5th to 11th 2011 to implement the Demand Survey and Pilot Study.

During the visit the KSP delegation held meetings with MEDT and SME relatedinstitutions, such as the Economic Research Institute JSC (ERI) under MEDT and theEntrepreneurship Development Fund “DAMU” JSC (DAMU), in order to identify thespecific demand and policy priorities of Kazakhstan on the predefined topic. Throughthe discussion between MEDT and the Korean delegation, the aforementioned topicwas finalized and specified.

In addition, DAMU was assigned as the counterpart organization in Kazakhstanfor the 2011 KSP. Thus, an Memorandum of Understanding (MOU) was signed by Dr.Eui-Jong Kwon, the representative of KODIT & KDS consortium, and Ms. IbragimovaLyazzat Erkinovna, the chair woman of DAMU, pledging the continuous cooperationof both groups for the successful implementation of the 2011 KSP.

From August 30th to September 5th, 2011, the Korean experts conducted anadditional pilot study in Almaty and Astana. Four local consultants (two experts fromMEDT, one expert from DAMU and 1 expert from ERI) were engaged in the Terms ofReference for further cooperation on the research for the 2011 KSP with the Koreanexperts. Visits to the headquarters of DAMU and the Almaty branch office of DAMU,ERI, and PPP-center under MEDT were arranged. The Korean experts also attendedmeetings with the National Bank of Kazakhstan (NBK) as well as the loan and creditguarantee managers of commercial banks such as Alliance Bank and Halyn Bank.

After those meetings, the Korean delegation and the local consultants designatedby MEDT for co-research for the 2011 KSP had discussions on the ‘New CreditGuarantee Fund’ of Kazakhstan, which is currently in the process of preparation byMEDT. The government of Kazakhstan is trying to learn from the experience ofKorea to improve their credit guarantee system for SME development.

Consultation Topics Korean Researcher Kazakhstani Researcher

Suggestions for the Operation of Credit Mr. Nulran Shokbarbayev

Guarantee System and Credit Ratings SystemDr. Eui-Jong Kwon

Mr. Ilyas Ursanov

Development and Performance of the Credit

Guarantee System in KoreaMr. Yong-Pyung Park

Credit Guarantee System of Kazakhstan Mr. Jong-Goo Lee Mr. Islambek Kairabekov

Industry Structure and SME Support System

in KazakhstanMr. Myung-Ho Yoo Ms. Malika Bilyasheva

2011 KSP with Kazakhstan·017

For the Interim Reporting and Policy Practitioner’s Workshop in Seoul, tendelegates were invited from Kazakhstan. The delegation was headed by Mr. KairatAitekenov, the chairman of the Entrepreneurship Development Committee to MEDTand the chairman of the board of directors of DAMU. At the Interim ReportingSession, two local consultants presented their findings on the 2011 KSP topic, and theKorean experts made two presentations on research and policy recommendations.Many frank discussions were held, and valuable comments were made on eachpresentation. The delegation also visited several places during their visit, such asMOSF, the Small and Medium Business Corporation (SBC), and Pohang SteelCompany steel factory, gaining direct knowledge.

At the final phase of the 2011 KSP, the Final Reporting Workshop and the SeniorPolicy Dialogue were held in Kazakhstan from December 5th to 10th, 2011. TheKorean delegation was headed by Hon. Young-Ju Kim, the former minister ofCommerce, Industry and Energy of Korea. On December 6th, the Final ReportingWorkshop was held in Astana, and was attended by more than fourty public officersand experts from the government and national institutions such as MEDT, NBK, ERI,PPP-center and DAMU, who shared the results of the 2011 KSP. On December 7th, theVice-Minister of MEDT, Hon. Marat Kussainov, was seated with the former Ministerof Korea, Hon. Young-Ju Kim for a dialogue on the topic of the 2011 KSP, focusingon the policy recommendation from the result of the KSP. This was the second timeVice-Minister Hon. Kussainov and former Minister Hon. Young-Ju Kim had met sincethe 2010 KSP dialogue in January 2011. They have agreed to seek furthercooperation and a strengthened relationship between the two countries, throughand beyond the scope of KSP.

Hyejin KimProgram Officer for 2011 KSP with Kazakhstan


Kazakhstan, which is the 9th largest country in the world in terms of land mass andabundant in natural resources, is one of the fastest developing countries among theCommonwealth of Independent States. From 2000 to just before the global financialcrisis in 2008, Kazakhstan recorded an annual Gross Domestic Product (GDP) growthrate of around 10%. Rising prices for oil, natural gas and uranium drew globalattention and thus global investments in the country, which provided rich liquidity tothe economy. The recent economic condition of Kazakhstan is also explained by itsbooming real estate market. However, considering that the oil and gas industryaccount for about 40% of GDP and 75% of exports, the resource industry mayparadoxically have a negative impact on the economy of Kazakhstan in the long run.In particular, the bust of the real estate market bubble during the 2008 globalfinancial crisis, and the ensuing economic recession and continuing inflation show thevulnerabilities of the economy.

While the resource industry receives substantial government support and foreigninvestments, other industries have achieved little development. Although theagriculture industry has great potential in producing wheat, corn and starch based onthe vast land mass, other sectors, particularly the manufacturing industry, have fragilefoundations. Despite the vast land area of Kazakhstan, its population is only about 16million, which is not enough to constitute a sufficient domestic market. In addition,just like other economies in transition, Kazakhstan has poor conditions for SMEs toprosper, such as a lack of entrepreneurship and poor support systems for SMEs.

Currently, the financial market is also too fragile to provide sufficient funding for

Executive Summary

Eui-Jong Kwon (KODIT)

Executive Summary·019

SMEs. Backed by the boom in real estate development, banks grew dramatically untilthe mid-2000s, but have been struggling since the global financial crisis broke out. In2009, four commercial banks announced default and barely escaped from the crisis,even with the government providing subsidies to bail them out. However, theaverage Non-Performing Loan (NPL) rate of the banking sector still exceeds 30%, andtheir credit ratings are at or under speculation grades. Accordingly, they are virtuallyunable to borrow money from abroad. Moreover, banks maintain a collateral-basedloan system, and suffer from a chronic shortage of deposits to repay overseasborrowings. As a result, the monetary supply for industries in Kazakhstan has almostdried up.

Since the establishment of “Strategy 2030” in the late 1990s, the government ofKazakhstan has implemented a variety of strategies, including “Business Roadmap2020” in 2010, to foster strategic sectors and companies in those sectors.Nevertheless, the strategies have failed to deliver tangible results in terms offostering SMEs. After the global financial crisis, the government focused its supporton financing start-ups of non-resource industries, and on creating jobs in this way. Inparticular, the main pillars of “Business Roadmap 2020” are a credit guaranteeprogram and an interest support program to promote the establishment of newcompanies and the expansion of investments.

The credit guarantee system of Kazakhstan was first operated by DAMU inSeptember 2010. Considering that DAMU is a comprehensive SME support institution,100% owned by the sovereign fund, Samruk-Kazyna National Welfare Fund (NWF),and is responsible for various corporate support policies, it is the best agency tooperate the credit guarantee system. Despite DAMU's efforts, the results of theoperation of the credit guarantee program over the last year have largely beendisappointing. As of the 3rd quarter of 2011, only about 14 million USD had beenprovided to 17 companies. Therefore, the government of Kazakhstan asked Korea toprovide policy suggestions, as it thought Korea’s experience in operating the creditguarantee system was a best practice to benchmark.

This study aims to provide policy advice based on Korea's 50 years of experienceoperating its own credit guarantee system, so that Kazakhstan can develop anapplicable credit guarantee system. However, it would stretch credibility to suggestthat the good results achieved by the Korean government's credit guarantee systemcould be successfully replicated by Kazakhstan if it were to adopt the same system.Accordingly, efforts to find an adequate system for Kazakhstan should precede otherefforts. To this end, a research agenda was selected through in-depth discussionsamong researchers so that the best model of the credit guarantee system and creditratings system could be established that fit the overall economic conditions ofKazakhstan. Above all, the researchers analyzed industries, financial sector and SMEs


of Kazakhstan, introduced the theoretical background to the credit guarantee systemof Korea, analyzed the current credit guarantee system of Kazakhstan, and finallyprovided policy suggestions that could help to firmly establish an improved system inKazakhstan. Meanwhile, the Korean researchers participated not only in thetheoretical research activities, but also in the process of establishing actual Kazakhgovernment policies, providing advice on actual policy issues in Kazakhstan.

Chapter 1 discusses the industry structure and SME support system of Kazakhstan.Many problems in the business environment for SMEs were identified. In particular,the financial support system for SMEs has significant issues, such as a lack of a creditloan system due to collateral-based loan practices, long-term liabilities, and no systemto finance start-ups or SMEs. However, financial institutions themselves are alsoexposed to many problems, and thus are not able to provide sufficient funding toother industries. As such, they are also in dire need of government financial support.In the non-financial sector, the government is trying to provide education andconsulting services via state-sponsored agencies like DAMU Research andDevelopment (R&D) funding through the National Innovation Fund (NIF), andsupport for sales activities, like sales channel support, through the Center forMarketing and Analytical Research (CMAR). Despite this, no tangible outcome hasbeen delivered. Under such circumstances, for the policy support to bear fruit, thecondition for SMEs needs to be upgraded.

Chapter 2 discusses the development and operation results of the Korean creditguarantee system of Korea. In general, a credit guarantee system is an effectivepolicy that not only helps foster SMEs, but also expands the loan market for thepurpose of advancing the financial market and easing social conflict by supportingthe economically vulnerable sectors. In addition, the system promotes credit loans, sothat it induces companies and banks to change their attitude toward financing.However, it was noted that without measures to prevent moral hazard of companiesand banks, increases in subrogation claims may undermine the fiscal substantiality ofthe credit guarantee agency, imposing financial burdens on the government. Koreahas operated KODIT since its foundation in 1976. KODIT is regarded as one of theexemplary cases in terms of guarantee size, support effects and financial soundness.This success was possible thanks to the Korean government’s strong will and thestrenuous efforts of KODIT to reform and improve relevant policies. In the course ofovercoming a series of financial crises after the 1997 Asian financial crisis, thegovernment radically expanded the guarantee size so that the private market couldbe normalized as promptly as possible. As such, the Korean system and the operatingexperience will be a good reference for Kazakhstan. Nevertheless, Kazakhstan mustunderstand and consider the differences between the two countries, both in terms ofeconomic development stage and socio-cultural factors.

Executive Summary·021

Chapter 3 discusses the status of the credit guarantee system of Kazakhstan. Asstated previously, DAMU has operated the credit guarantee system since 2010.However, the system has delivered only lackluster performance and failed to gain theattention of banks and companies. Most significantly, the credit guarantee service ofDAMU covers only a limited number of companies for their new facility investments,thereby having a limited demand. In addition, the overly complex procedures are oneof the major reasons why the program has not been popularized. The governmenthas already recognized that it is urgent to improve the system to invigorate creditguarantee services, and is making enormous efforts to solve the problem. Thegovernment plans to establish a new, independent credit guarantee institution toreplace DAMU, streamline the procedure and expand the eligibility. Equallyimportant is to reduce subrogation risks through thorough credit ratings and creditguarantee evaluation. However, financial institutions in Kazakhstan have littleexperience in credit loans, and have barely secured a credit informationinfrastructure. For this reason it is virtually impossible to complete a credit ratingssystem in the near future. Therefore, to improve the credit ratings system over thelong term, it is necessary to collect, manage and accumulate credit information.

Chapter 4 provides suggestions for the govemment of Kazakhstan on creditguarantee and credit ratings systems based on the aforementioned discussions. Inorder to establish and settle a credit guarantee agency and settle the institution, it isnecessary to examine and plan every detail, and to meticulously execute the plansfrom the beginning. Most of all, it is important to define the policy goal of the creditguarantee agency, and enact laws or regulations regarding the goal. To stablyoperate the agency, the operation framework must be determined, including how tofinance the fund and to what extent the government will be involved in thesupervision. Then, the eligibility, such as eligible companies and financing coverage,should be decided. Also, it must be decided who should conduct the guaranteeevaluation process, whether it is banks or the credit guarantee agency. In addition tothe macro aspects, details regarding actual operation were also examined:streamlining the credit guarantee service procedure and subrogation claimprocedures, and deciding a reasonable level of guarantee fees and the partialguarantee portion that is critical to banks' acceptance of the guarantee statements.Although the establishment of a risk management system, including the creditratings system, to minimize subrogation losses, may discourage guarantee supplies, itis crucial to ease the financial burden of the government and thus enhance the long-term sustainability of the credit guarantee agency. For example, even though thecredit guarantee agency considers only corporate credit ratings when deciding mostguarantee provisions, it may need to obtain partial collateral in consideration of thehigh default risks of SMEs in Kazakhstan. Furthermore, as examined previously, whileit is true that immediately introducing a credit guarantee system is not a feasibleoption, it is still possible to adopt a basic scoring system that is applicable to the


current credit information infrastructure. Efforts to adopt a scoring system andestablish a credit ratings infrastructure are critical to the long-term development ofthe credit ratings system.

Finally, this study presented a roadmap spanning from the establishment of acredit guarantee fund to each operation stage. The roadmap includes details relatedto the establishment, operation, mid- and long-term risk management and futuregrowth of the credit guarantee system, by period. In addition, all stakeholders,including the government, the credit guarantee agency, banks and DAMU, mustactively participate in the credit guarantee services so that they can address therelated challenges in a cooperative manner.

Credit Guarantee and Credit Evaluation System

for SME Development in Kazakhstan

Industry Structure and SME SupportSystem in Kazakhstan

Chapter1

1. Economic Situation and Industry Structure in Kazakhstan

2. SMEs in Kazakhstan

3. Main Issues of SMEs in Kazakhstan


Summary

Chapter 1 will introduce the industry structure of Kazakhstan and discuss thestatus of the SME support system in Kazakhstan. This will be followed in Chapter 2 bya discussion of the development and operation of the credit guarantee system ofKorea, and by an examination of the status of the credit guarantee system ofKazakhstan in Chapter 3. Finally, based on the analysis from Chapters 1 to 3, overallsuggestions for the government of Kazakhstan on credit guarantee and an creditratings systems will be made in Chapter 4.

Kazakhstan is the 9th largest country in the world in terms of land size, while itspopulation is comparatively small, at 1.6 million. It is a mineral resource rich nation,with a large amount of oil reserves (9th largest in the world) and uranium reserves(2nd largest in the world).

Also, Kazakhstan has significant potential for agriculture based on its large-scaleterritories, with international agricultural exports of wheat, maize and starch. Incontrast, it has a weak manufacturing industry.

The portion of the economy represented by the construction industry increasedwhen the capital changed from Almaty to Astana in 1997. However, the constructionindustry has been in depression as a result of the sub-prime mortgage financial crisis.

Industry Structure and SME SupportSystem in Kazakhstan

Myung-Ho Yoo (KDS)

Malika Bilyasheva (Entrepreneurship Development Committee)

Chapter 1 _ Industry Structure and SME Support System in Kazakhstan·025

The finance industry in Kazakhstan, the banking industry in particular, has seenrapid growth. The total assets of the banking industry increased by 400% in thethree-year period from 2005 to 2007. With this growth in the banking industry, theGDP of Kazakhstan grew by 10% from 2000 to 2007, just before the global economiccrisis. However, this growth of the banking industry was not based on the nationaleconomy such as an increase of savings, but on the excessive expansion of the assetscale through overseas loans. Consequently, the banking industry faced a crisis whenmajor banks went into default on loans during the global credit crunch.

To put it simply, industry in Kazakhstan can be characterized as having a polarizedstructure, with a major portion of resource-based large enterprises and a minorportion of manufacturing-based SMEs, causing an imbalance in the economicstructure.

With this polarized industrial structure, Kazakhstan was hit by the global financialcrisis in 2007/2008. The government of Kazakhstan recognized that diversification ofindustries was required to minimize the risks resulting from its excessively resource-dependent economic structure. This led the government to adopt a policy ofindustrial diversification in order to achieve sustainable, stable and long-termeconomic development in Kazakhstan, with a focus on the expansion anddiversification of the SME sector. In principle, this approach was selected becauseSMEs play an important role in establishing the foundation for the stability of anation’s economy, activating the development of the economy, expanding theexport base, and advancing the industry structure.

This is the reason why the government of Kazakhstan is trying to develop SMEsfurther, even with their relatively small current contribution to employment andGDP.

Looking closely at the status of SMEs in Kazakhstan, SMEs occupy 93~94% of theregistered companies in number. However, each SME is micro-sized. Moreover, theportion of manufacturing companies among SMEs is very small, at around 3%. Interms of their contribution to the entire economy and employment, SMEs inKazakhstan occupy about 29% of GDP and contribute to less than 35% of totalemployment.1)

SMEs in Kazakhstan show problems typical of a Transition Economy, including alack of entrepreneurship, a small-scale national market, and a lack of a governmentsupport system for SMEs.

1) The contribution of SMEs to employment in Kazakhstan varies based on the data source; it is about 31%according to DAMU and 26% according to ERI.


Furthermore, SMEs in Kazakhstan suffered from the global financial crisis in 2008due to the tightened access to the financing market, since most of the commercialbanks in Kazakhstan froze or decreased their lending activities to SMEs because ofthe liquidity crisis with the increased NPL level.

Specifically, after the global financial crisis, the financing capacity of commercialbanks in Kazakhstan diminished due to the increased NPL level. Consequently, theroom for SME loans was diminished, causing SMEs to face restricted access topotential loans from commercial banks.2)

Furthermore, considering the financial institutions dealing with SME financing,SME financing in Kazakhstan today has structural problems, such as a lack of amanagement system and operation infrastructure. There is a lack of a riskmanagement and internal control system, reliability issues with the information oncompany financing held by financial institutions, and limitations to the loan suretysystem.

The following is a list of the major problems with SME financing in Kazakhstan.• Lack of a long-term loan system• Collateral loan-focused practice• Lack of company credit-based loan system: lack of company finance

information for credit loan• Lack of business start-up loans; lack of financial development of projects and

venture companies• Lack of investment promotion at the company level• Lack of business angels network

To address the problems mentioned above, the government of Kazakhstan isplanning support policies such as “Business Roadmap 2020” and “Strategy ofInnovative-Industrial Development 2003~2015,” enhancing the contribution of SMEsto the current economy and employment through medium and long-term capacitybuilding of SMEs and related SME financing.

In this context, in the following chapters the credit guarantee system, one of themost successful SME-financing systems in Korea, will be discussed and analyzed indetail, and the current system of Kazakhstan will be analyzed to derive overallsuggestions for the government of Kazakhstan on credit guarantee and credit ratingssystems.

2) This is one of the important reasons why the government of Kazakhstan is trying to offer more lendingopportunities to SMEs, by benchmarking the credit guarantee system of Korea.


1. Economic Situation and Industry Structurein Kazakhstan

1.1 Economic Performance in the Past and the Future

Kazakhstan, the largest landlocked country in the world, is the site of the mostsignificant new oil discovery in recent years. The oil sector has been dominating theeconomy, accounting for about one-fourth of GDP, about 60% of total exports, andaround 40% of total budget revenues. Major foreign investment in this sector helpedfuel strong GDP growth between 2000 and 2007, averaging approximately 10% ayear.

As the economy was experiencing rapid growth, banks in Kazakhstan borrowedheavily from abroad, amassing external debt amounting to roughly 44% of GDP tofinance a rapid expansion of credit, largely concentrated in construction and realestate markets. When the global financial crisis hit capital stopped flowing into thecountry credit growth came to a halt, in 2008, and property prices slumped. To makematters worse, with oil prices plummeting, Kazakhstan faced a drop in the value ofits exports, from 76.4 billion USD in 2008 to 48.2 billion USD in 2009.

The combination of weakened economic growth, currency-induced creditexposure and the increased uncertainty of global and domestic markets, led tosignificant difficulties in the banking system in Kazakhstan. Four banks in Kazakhstanwere forced to restructure their external obligations and the NPL level began to risesharply.

Thanks to the government’s ample resources and low public debt, the authoritieswere able to respond swiftly to the crisis. Drawing upon savings in the National OilFund, which was established by the government in 2001 to save oil income for futuregenerations and to reduce dependency on the budget when shocks arise, theauthorities helped stabilize banks with a large-scale policy package. The governmenttook equity stakes in four large distressed banks; public entities transferred depositsfrom elsewhere into the troubled banks; and sectors in which NPLs wereconcentrated (mainly real estate and construction industry) received funding onpreferential terms.

Because public debt is less than 20% of GDP, the government was able to usefiscal measures to counter the crisis impact, increasing budgetary outlays for pensions,public sector wages and social benefits. Monetary policy was likewise supportive in2009, with low interest rates and easy access to liquidity contributing to improvementin bank liquidity. And the Kazakhstan Tenge (KZT), the currency of Kazakhstan, wasdevalued by 20% in early 2009, easing pressures on reserves and restoring


competitiveness with the Russion Federation, its largest neighbor and key tradingpartner.

With this quick response to the crisis, the government of Kazakhstan took animportant initiative to improve its industry structure. The government recognizedthat the enforcement of an industrial diversification strategy, which was initiated adecade ago, should not be delayed any longer. Accordingly, the governmentestablished ambitious and comprehensive industrial diversification strategies such as“Strategy of Innovative-Industrial Development 2003~2015” and “Strategy 2020,”which it has tried to promote.

Specifically, in an implementable attempt to grow its non-natural resource sectors,including the manufacturing industry, the government of Kazakhstan has approved acomprehensive program, “Business Roadmap 2020,” which explicitly seeks to increasethe share of manufacturing production by no less than 12.5% of GDP, and of non-natural resource exports to no less than 40% of total exports. The program spells outactivities to support new business initiatives, improve the current conditions ofenterprises and strengthen the entrepreneurial potential of Kazakhstan.

1.2. New Economic Initiative for the Future in Kazakhstan; Customs Union among Belarus, Kazakhstan and the Russian Federation

The countries of Belarus, Kazakhstan and the Russian Federation formed acustoms union in 2010. This union removed duties on goods originating in memberstates, and enforces a common external tariff for trade with third countries. It alsoestablished a common customs territory where terminology, customs code andcustoms duties were unified. The union took effect on January 1st, 2010 with aunified customs rate.

At the first stage, the three countries removed most duties on trade amongstthemselves. On July 1st, 2010, single customs code was launched between Kazakhstanand the Russian Federation, coming into force a few days later in Belarus. The secondstage led to the adoption of common external tariffs. In the third stage, customsclearance and control procedures at the Kazakhstan - Russian Federation border werescheduled to be abolished by July 1st, 2011. (Such measures were implemented at theBelarus-Russian Federation border in July 2010.) By January 2012, a single economicspace will have been achieved among the three countries.

The tariff regime is based heavily on the regime effective in the RussianFederation, and Kazakhstan had to raise tariffs on around 45% of all imported items.The average common customs tariff rate is 10.6%, whereas previously, simple tariff


applied to the most-favored-nation of Kazakhstan was only 6.16%. The value-addedtax (VAT) rate applied to third countries is 17%. Import customs duties from goodsoriginating outside the union will be distributed among the three countriesaccording to an agreed-upon formula of 87.97% for the Russian Federation, 7.33%for Kazakhstan and 4.70% for Belarus.

1.3. Economic Prospects of Kazakhstan

The recovery of agriculture from the severe contraction in 2010, capitalexpenditure by the government on priority projects in its program for 2010-2014, asustained global recovery and an increase in oil demand and prices have helped inprevious years and will continue to help push the growth momentum in 2012 andmoving forward. At the same time, the continued fragility of banks and steep oil andfood price rises may undermine the global economy and work against the economicgrowth of Kazakhstan.

The construction industry will continue to face weaknesses as a result of a lack ofcredit and the inability of the private sector to raise funds in international markets onattractive terms. Private consumption and total investment have been and areexpected to see continued growth in 2011 and 2012. Credit availability is expected tobe an important factor if higher growth rates are to be achieved. In addition, higheroil prices and external demand will help to boost consumption as well as investmentin the oil sector. The government is considering several programs that will help tosupport private consumption and investment over the projection horizon andbeyond.

One of those programs, “Employment 2020”, targets the self-employed,particularly those in rural areas. It will provide assistance for the economicallydepressed region in the form of subsidized property leases and day care for children.

Another program, for entrepreneurs and exporters in priority sectors, “BusinessRoadmap 2020,” will provide assistance in the form of subsidized interest rates,guarantees for bank credits, grants, co-financing of investment projects andrescheduling of certain tax payments.

An increase in oil exports coupled with a doubling of the oil export duty to 40USD/ton is adding to the state budget. A concurrent shift from a flat personal incometax rate to a progressive income tax (with rates at 10-20%) will also lift revenue, sowill a decision to delay a reduction in the corporate income tax rate (currently at20%) until 2013. Both social and capital expenditure on priority projects will climb up.

Though the trading band for the exchange rate was widened in February 2010,


the National Bank of Kazakhstan (NBK) has intervened to prevent the Tenge fromappreciating sharply. On February 28th, 2011, it abolished the corridor for KZT to USDexchange rate and introduced a managed float regime. It is unlikely that the Tengewill be allowed to breach 141 KZT/USD as further appreciation, the Tenge will beallowed to breach 141 KZT/USD as further appreciation, which could result in a loss ofcompetitiveness combined with the inflation differential with advanced couritrieswhich could result in a loss of competitiveness.

Exports will markedly increase further due to higher oil prices and strongerdemand for oil. It is expected that the trade surplus will be offset by the deficit onother components of the current account.

1.4. Industry Structure in Kazakhstan

The economy of Kazakhstan still remains highly resource-dependent, withmanufacturing and agriculture accounting for 10.9% and 6.2% of GDP respectively.In contrast, minerals, oil and gas accounted for 73% of exports and more than 30%of GDP3).

Even with the government’s concern over this unbalanced industrial structure, thesituation in 2012 remains basically the same in terms of its high dependency onnatural resources. For this reason, Kazakhstan remains highly vulnerable to externalcommodity price fluctuations4).

3) SME-Centered Enterprise Development Strategy for the Sustained Development of Kazakhstan, 2010KSP with Kazakhstan, KDS

4) SME-Centered Enterprise Development Strategy for the Sustained Development of Kazakhstan, 2010KSP with Kazakhstan, KDS


1.4.1. Natural Resource-Based Industry

The major factor in the economic growth of Kazakhstan has been its abundantnatural resources. Kazakhstan has diverse and abundant natural resources, includingmost of the chemical elements in Mendeleev’s periodic table. Today, Kazakhstan has2.8 billion tons of oil and condensate reserves (estimated 200 tons of additionalreserves) and 2 trillion cubic meters of natural gas (estimated 6 trillion cubic meters ofundeveloped reserves). Furthermore, it has the largest tungsten reserves in the world,and its chromium reserves are the second-largest in the world.5) Kazakhstan has ahigher ratio of undeveloped resources to identified resources than any country in theworld.

The amount of merchandise exports has increased more than seven-fold since2000, from 9.29 billion USD in 2000 to 71.97 billion USD in 2008. In this rapid increaseof exports, the proportion of crude oil is about 70%, and the proportion of mineralresources is about 17%. Therefore, it is no exaggeration to say that Kazakhstan’sexports of natural resources have led to Kazakhstan achieving export revitalizationand economic growth.

<Table 1-1> Industry Structure in Kazakhstan

(Unit: % to GDP)

Category 2009200820042003

5) Kim Jung-Kwan (2006)

Agriculture 7.9 7.1 5.3 6.2

Industry 29.1 29.3 32.2 30.6

- Mining 12.1 13.6 18.7 17.9

- Manufacturing 14.2 13.3 11.8 10.9

Utilities 2.8 2.4 1.7 1.8

Construction 6.9 6.1 8.1 7.9

Service 51.9 53.3 52.1 53.9

- Transportation/Communications 12.4 11.8 11.0 11.0

- Finance 3.2 2.9 5.3 5.0

- Real Estate 14.3 15.3 14.9 15.9

- Other Services 22.0 23.3 20.9 22.0

Others 5.1 4.2 2.3 1.48

Source: Agency of Statistics of the Republic of Kazakhstan


Even during this period, however, the economy of Kazakhstan has faced problemssimilar to those of other oil exporting countries. The economy of Kazakhstan isstrongly dominated by the extractive sectors, and the rapid overall economic growthhas not translated into meaningful results in non-extractive exports. The constructionand finance sectors produced almost half of all growth momentum in Kazakhstanduring the period from 2004 to 2007. This was certainly far from a sustainablepattern of economic growth. The regulatory regime remained rigid, in particular,with regards to multiple inspections and the awarding of land property rights.Foreign Direct Investment (FDI) remained concentrated in oil and gas industries.

Furthermore, non-transparent ownership structures in other industrial sectorsdeterred FDI from foreign countries. Appreciation of a real effective exchange rate of13% in the period from 2004 to 2007 weakened the competitiveness of domesticmanufacturing in Kazakhstan. This effect, however, was less pronounced than insome other oil exporting countries, whose currencies appreciated by more than KZTduring the same period. (World Bank, 2008)

1.4.2. Banking Industry

1) Overview of the Banking Sector

Since 1993, the banking system in Kazakhstan has been formally arranged intotwo tiers, with NBK comprising the first tier and all commercial banks, both privateand state-owned, comprising the second tier. NBK acts as a regulator of monetary

<Figure 1-1> Export Structure of Kazakhstan 2009

Source: EIU


and credit policy, and is accountable directly to the President of Kazakhstan. It is anindependent financial institution, and its major objectives include control andprudential regulation of the banking sector and maintenance of a stable nationalcurrency. It is independent within the scope of its activity identified by currentlegislation. Neither the government nor the Parliament or local authorities areauthorized to interfere with the operations of NBK. However, NBK coordinates itsactivities with the Cabinet of Ministers. It acts as a bank, a financial adviser or anagent of government bodies.

The management bodies of the NBK are the Council and the Board of Directors.

2) Commercial Banks

At the start of 2001, there were 48 banks, down from 71 at the end of 1998 andfrom over 200 at the peak in 1993. The 11 banks included in the first tier group wererequired to reach international standards by 1998. An audit is being conducted toverify whether these 11 banks have complied with these obligations. In addition, 24banks belonging to the second tier group were expected to accomplish the sametransition by the end of 2000. Further consolidation is expected as many remainingbanks will have been unable to comply with the increased minimum capitalrequirement of 1 billion KZT (about 6.9 million USD) by the end of 2000.

The total assets of the banking industry have increased by 400% in the three yearsfrom 2005 to 2007.

However, the economy of Kazakhstan was hit by the global financial crisis of2008, which blocked the access of banks in Kazakhstan to cheap external financing.

200

180

160

140

120

100

80

60

40

20

01994 1995 1996 1997 1998 1999 2000

<Figure 1-2>Number of Commercial Banks in Kazakhstan until 2000

Souce: ERI


Since September 2008, the deepening of the global economic crisis has had furthernegative impacts on the banking sector in Kazakhstan, which has seen a thoroughrestructuring, including the closing down of under-performing commercial banks.

With the financial crisis, Kazakhstan currently has 39 commercial banks and thetotal assets of those banks at the beginning of May 2011 amounted to 12.4 trillionKZT.

In terms of the dynamics of those commercial banks, almost 71% of assets arecontrolled by the five largest banks, as shown below.

<Table 1-2>Number of Commercial Banks and their Recent Status in Kazakhstan

(Unit: million KZT)

Name 01.01.2009 01.01.2010 01.05.2011

Number of STBs 38 38 39

Assets 11,889,316 11,554,904 12,448,933

Liabilities 10,440,963 12,535,636 11,106,665

Equity 1,458,352 -980,731 1,342,268

Source: Agency of Statistics of the Republic of Kazakhstan

<Figure 1-3> Structure of Banks by Assets

Source: ERI


In terms of the lending size, BTA Bank ranks as the top lender, followed by ATFBank, but it also suffers from the NPL issue as well.

Consequently, the banking industry faced a crisis as major banks went into defaulton loans during the global credit crunch.

As financial institutions in Kazakhstan have relied on short-term overseasborrowings for 50% of their financing, disproportionately provided loans to realestate developers and construction companies and mostly accepted real estate ascollateral up until the global financial crisis, NPL surged when the crisis broke out. Inaddition, the government policy to maintain high foreign exchange rates in responseto the crisis put banks under greater pressure of repayment of overseas borrowings,

<Table 1-3> Key Indices of Major Commercial Banks in Kazakhstan

(Unit: 100 million KZT, %)

Type Kazkommertzbank Halyk Bank BTA Bank

Asset 26,881 20,979 18,957

Deposit 15,068 14,158 06,833

Loan 21,748 10,893 07,876

LTD Ratio 144.3 76.9 115.3

Source: Eximbank of Korea

13%

13%

25%

17%

6%

9% 10%7%

ATF BankEurasian BankAlliance BankNurbank

BTA BankBank CenterCreditKazkommertsbankKaspi Bank

BAT

ATFBTA

25%

ATF

<Figure 1-4> Lending Distribution by Banks*

* Based on SME lendingSource: ERI


leading to a liquidity crisis. In fact, four commercial banks6) declared default, startingwith Alliance Bank in March 2009, and BTA Bank suspended repayment of 15 billionUSD of foreign debts, including Eurobonds and syndicate loans, in April 2009.

The defaulting banks are currently in a normalization process backed bygovernment funding or contributions. Recently, the Financial Supervision Authorityof Kazakhstan announced that NPLs have steadily decreased since 2010. Still, onaverage, NPLs accounted for 31.8% of bank loans as of June 2011, which is fairly highcompared to other countries of the former Russian Federation and Eastern Europe.Thus, it is expected to take a substantial amount of time to fully normalize thefinancial industry of Kazakhstan.

Massive NPLs of banks, although the loans were mostly collateralized, resulted notonly from sudden drops in asset values, but also from the poorly functioningcollateral system of the financial institutions and demonstrated that both individualand corporate borrowers had weak intentions to repay their debts. Facing the doublecrisis of domestic problems and the external shock of the global financial crisis, banksin Kazakhstan had more difficulties in financing from home and abroad and saw adecline in customer deposits despite the high interest rate.

28

24

20

16

12

8

4

0

2008200920102011(latest)

ARM

(%)

AZE GEO TJK2 CEE1 KGZ KAZ

(NPLs on 90-day basis; percent of total loans)

<Figure 1-5> High, and Mostly Rising Levels of NPLs (2008~2011)

Source: National Authorities1) Simple average of NPLs for Albania, Bosnia, Bulgaria, Croatia, Hungary, Lithuania, Latvia, Macedonia,

Montenegro, Poland, Rumania, Russia, Serbia, Turkey and Ukraine2) 30-day basis

6) Because of their high proportions of NPLs, Alliance Bank (March 2009), BTA Bank (April 2009), AstanaBank (May 2009), Temir Bank (November 2009) announced bankruptcy. Capital investment fromgovernment organizations such as Samruk-Kazyna NWF played a major role in the restructuringprocesses of those banks.


Accordingly, banks have no choice but to scale down their lending, adoptconservative loan policies to manage risks, and avoid providing financial support forSMEs, which mostly had a low credit level and insufficient collateral. Consequently,the capital base for future SME loans was diminished, causing SMEs to face restrictedaccess to potential loans from commercial banks.

As such, trends in the financial industry inevitably act as obstacles to thegovernment’s effort to nurture SMEs and reorganize the nation's industrial structure,the government of Kazakhstan is keenly aware of the need to normalize corporatefinancing through policy funds.

Of the policy funding tools generally used to support SME financing, such as directfinancing by the government, interest rate subsidy, credit guarantees and capitalinvestment, the government of Kazakhstan has actively implemented an interest ratesubsidy and a credit guarantee program to nurture SMEs, rather than capitalinvestments, considering its less developed direct financial market which utilizes theissuance of bonds and stocks for financing. This is one of the most important reasonswhy the government of Kazakhstan is trying to conduct a benchmarking study of thecredit guarantee system of Korea, in an attempt to thaw the frozen lending financialmarkets in the commercial banking sector.

2. SMEs in Kazakhstan

2.1. Overview of SMEs in Kazakhstan

SMEs constitute 93% of total registered firms and account for 29% of GDP and26% of total employment. The roadmap makes explicit the importance of fosteringthe development of SMEs so as to ensure a larger contribution by these businesses tooutput and employment.

The number of people employed by SMEs as of August 1st, 2011 amounted to2,465,521, of which 1,336,137 were employed by small businesses, 697,062 wereprivate entrepreneurs, and 432,322 were farmers. From 2009 to 2011 the number of

<Table 1-4> Overdue Loans of Banks in Kazakhstan

(Unit: billion KZT)

Kazakommertsbank Halyk Bank BTA Bank Total

Total Loans (A) 2,263 1,251 1,637 9,233

Overdue Loans (B) 631 282 846 2,935

Ratio (B/A) 27.9% 22.5% 51.7% 31.8%

Source: Bank of Kazakhstan (as of June 1, 2011)


employed people increased by 574,015.

<Table 1-5> Role of SMEs in Kazakhstan

TypeNumber of Businesses

(%) (%) (%)

Number of Employees Production

Small Firms 66,350 9.8 642,799 26.1 808,190 24.9

Medium-sized Firms 8,255 1.2 693,338 28.1 2,107,285 65.0

Sole Proprietor 430,804 63.5 697,062 28.3 285,325 8.8

Agriculture 172,547 25.5 432,322 17.5 42,819 1.3

Total 677,956 100.0 2,465,521 100.0 3,243,619 100.0

SMEs' Contribution 32%to GDP 93% 31%

SMEs' Contribution to GDP in Korea 99% 88% 48%

Source: DAMU (as of June, 2011)

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Aktubin

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Atyrau

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Zapa

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skay

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amby

lskay

a

Karag

andin

skay

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iskay

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kaya

Uzhno

Kaz

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tansk

aya

Pavlo

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Seve

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azak

hstan

skay

a

Astana

Almaty

Vosto

chno

Kaz

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Kyzy

lordin

skay

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2009 2010 2011

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

<Figure 1-6>Number of Active SMEs in Each Region (2009-2011)

Source: ERI


2.2. Relations between Large Corporations and SMEsin Kazakhstan

Building an effective mechanism for interaction between SMEs and largebusinesses is a major policy focus of entrepreneurship development in Kazakhstan.

For SMEs, entering into supply relationships with large businesses means:

• transitioning to a more stable, formal and “demanding” format of marketrelations

•obtaining additional resources and expertise to improve their competitiveness•gaining greater potential to achieve the effect of external economic activities in

terms of disseminating information and best practices in production.

The industrialization policy of a state aims at stimulating the development ofindustries with higher added-value, forming subsidiary, maintenance and processingunits for SMEs through outsourcing and increasing local content in major projects,and creating clusters by combining the efforts of SMEs around the major backbonecompanies.

To attract the resources of large enterprises to small business development inforeign countries, a system of contractual relations between SMEs and largebusinesses (the “franchise”) is widely used. However, at the moment, franchisesrepresent only 3.5% of the SME segment in Kazakhstan. The reason for this isimperfect legislation and a lack of awareness of the benefits of this scheme ofbusiness organization.

As such, the development of cooperation between SMEs and large enterprisesshould be carried out through:• further development of the franchise for the interaction of SMEs and large

businesses• formation around the large-scale production of cluster-network structures

based on SMEs and outsourcing• involvement of SMEs to produce products with high added-value, as well as the

supply of goods and services of backbone enterprises•procurement of raw materials from SMEs by large enterprises• assistance in acquiring the equipment needed by SMEs at preferential terms•organization of the production of high value added products by SMEs around

large enterprises through public-private partnerships (PPP)

As part of the formation around the newly created large-scale production of thecluster-network structures for SMEs, special attention should be paid to the


development of subcontracting and outsourcing. The cluster approach will improvethe efficiency of production as a whole, aiding the production of large enterprises viathe core business of SMEs.

2.3. Rationale for the Development of SMEs in Kazakhstan

As indicated previously, Kazakhstan remains highly resource-dependent, whichmakes the overall economy highly vulnerable to external commodity pricefluctuations.

As explained in Section 1.1, the industrial sector of Kazakhstan is characterized bya polarized structure, with a majority of resource-based large enterprises and aminority portion of manufacturing-based SMEs, which creates an imbalance in theeconomic structure.

With this polarized industrial structure, Kazakhstan was hit by the global financialcrisis in 2008. The government of Kazakhstan recognized that industrialdiversification was required to minimize the risks resulting from its excessivelyresource-dependent economic structure. This led the government towards initiativesto pursue industrial diversification in order to achieve sustainable, stable and long-term economic development in Kazakhstan, with a focus on the expansion anddiversification of the SME sector. Principally, this is because SMEs play an importantrole in establishing a foundation for economic stability, activating the developmentof the economy, expanding the export base and advancing the industrial structure.

This is why the government of Kazakhstan is trying to develop SMEs further, evenwith their relatively small economic contribution in terms of employment and GDPcontribution.

2.4. SME Support System in Kazakhstan

The government of Kazakhstan and the public sector have developed andimplemented various policies to support macroeconomic development with abalanced industry structure through the enhancement of the SME sector.

1) DAMU Entrepreneurship Development Fund JSC (DAMU)

DAMU is a national development institute and a wholly-owned subsidiary ofSamruk-Kazyna NWF. The mission of DAMU is to facilitate the quality developmentof SMEs and microfinance institutions as an integrator and operator of financial andconsulting services. DAMU provides loan and guarantees to SMEs, but it has not been


playing an active role as SME financial support institute. Until the first half of 2011,DAMU guaranteed 18 cases, amounting to 126.5 million KZT. After the globalfinancial crisis, DAMU received loans from the Asian Development Bank (ADB), asfixed rate midterm loan, to endorse SMEs. As a non-financial support institution,DAMU provides SMEs with consulting services to entrepreneurs and office workers asshort-term training. By establishing non-financial entrepreneur support centers inprovinces, DAMU promotes network effectiveness and standardization. DAMU alsoplans to establish call centers and a business portal to expand the role in provincesand establish a statistic data service.

2) Engineering and Technology Transfer Center JSC (ETTC)

ETTC began its activities on November 1st 2003. The mission of ETTC is to createand systematize the competitive market of technologies in Kazakhstan as anintegrated part of the innovative development of the government of Kazakhstan.The industrial priority areas for ETTC are the following:

• Information and Communications Technology•Biotechnology•Advanced materials•Manufacturing•Chemical and petrochemicals•Construction and building materials• Ecology• Power industry and power saving

3) National Export and Investment Agency (KAZNEX INVEST)

As a government corporation created under the direction of the Ministry ofIndustry and New Technologies of Kazakhstan, KAZNEX INVEST enhances thedomestic environment for FDI and exports by providing comprehensive support forforeign investors, exporters, buyers and investment project initiators. KAZNEX INVESTholds meetings, forums and exhibitions worldwide with active participation ofgovernment representatives, government associations and private companies inorder to reach political and business agreements. In addition to this, it providesinformation on investment projects and analytical support to improve investmentconditions in Kazakhstan.

4) Kazakhstan Investment Promotion Center JSC (KAZINVEST)

The agency provides practical assistance to foreign and local companies with theaim of creating an attractive and favorable investment environment for investors


worldwide. The main areas of activity of KAZINVEST include:

•Research and development on investment opportunities in different regionsand sectors of the economy of Kazakhstan

•Creation of a system for assistance to investors and domestic companies•Collection, exchange and distribution of information in the area of investment

activities•Organization of presentations, conferences and exhibitions• Provision of consulting, intermediary and legal services on the whole range of

issues in the area of investment activities

5) National Innovation Fund JSC (NIF)

NIF was established in 2003 to support innovation activity and improve technologycompetitiveness in Kazakhstan. NIF assists the government by promoting the high-technology and science-absorbing industries. It aims to increase innovative activity inthese industries by creating a research and information support system, conductingevents and programs, financing innovative projects and promoting venture capitalfinancing7).

NIF was replaced by the “National Agency for Technological Development”,which was founded with 100% state participation in the share capital. The agencywas created to assist in the coordination process of innovation development andprovision of government support measures. The main activities include:

• Informational and analytical support for innovation •Development of the commercialization system •Development of an effective innovation infrastructure •Administration of service tools designed to support innovation • Investment support for innovative projects • Promotion of innovation process8)

6) JSC Investment Fund of Kazakhstan (IFK)

IFK aims to facilitate the implementation of industrial and innovation policy inKazakhstan by giving financial support to private sector initiatives in non-primarysectors of the economy and by enhancing the realization and attraction ofinvestment into prospective projects. The objectives of IFK are to enhance thefollowing:

7) http://www.kazakhstan.org.sg/uploads/fckeditor/File/Information%20letter.pdf8) http://www.nif.kz/en/about_us/information/


•participation in equity investments into newly organized and operatingorganizations dealing with profound processing of raw materials, producingcompetitive production using new technologies and also, rendering industrialservices to the perspective organizations in the industry field;

•promotion of private investments into non-primary sectors of the economythrough co-financing investment projects (equity investments) andparticipation in the management of these projects;

• assistance in increasing the investment activity of organizations of Kazakhstanabroad by jointly financing investment projects outside of Kazakhstan thatprovide industrial cooperation between domestic and foreign organizationsdeveloping adjacent manufactures9).

7) Kazyna Capital Management JSC (KCM)

As a private equity fund, KCM was established to promote and develop anefficient private equity market in Kazakhstan, especially for the development of non-extractive sectors of the economy. KCM implements state programs in order to createan infrastructure for private equity to attract flows of investment from domestic andforeign funds.

KCM’s investment portfolio includes the following funds: Aureos Central AsiaFund, Falah Growth Fund, Kazakhstan Growth Fund, Macquarie RenaissanceInfrastructure Fund, CITIC Kazyna Investment Fund, ADM Kazakhstan CapitalRestructuring Fund, Kazakhstan Hong Kong Development Fund, Kazakhstan-Tajikistan Fund, Wolfensohn Capital Partners.

8) JSC KazAgroInnovation

KazAgroInnovation aims to improve coordination in the activity of scientificorganizations and strategic direction for the agrarian science sector by promotingcommercialization of scientific developments, the transfer of scientific ideas and theirintroduction and application in practice. The main strategic aim of agrarian science isto create a platform for sustainable technological development of agro-industrialcomplexes in Kazakhstan. KazAgroInnovation provides training and consulting toSMEs on modern agro-science technology and the enhancement of export capacity,regulation building, exported goods and analytical review. CurrentlyKazAgroInnovation has concentrated on enhancing the significance of agrarianscience in the international scientific community.10)

9) http://www.ifk.kz/index.cfm?uid=12008&docid=7110) http://www.agroinnovations.kz/company/normativebase#


9) Small Business Entrepreneurship Development Fund (SMEF)

Created in 1997 by a Governmental Decree, SMEF was originally under thedirection of the Ministry of Industry and Trade. In 2006, management of SMEF wastransferred to Kazyna. SMEF was established to encourage the emergence andeconomic growth of SBEs and to ensure that government SBE-support funds werespent effectively. Since the end of 2007, the status of SMEF changed to DAMU. As aconsequence, the mandate was expanded to cover SMEs and asset management forgovernment allocation.

3. Main Issues of SMEs in Kazakhstan

SMEs in Kazakhstan show the problems typical of a Transition Economy such as alack of entrepreneurship, a small scale national market and the lack of an SMEsupport system from the government. Furthermore, SMEs in Kazakhstan sufferedseverely due to the financial crisis in 2008, since most of the commercial banks werereluctant to issue loans in order to keep a tightened ‘debt to equity ratio’.

As discussed previously, the financing capacity of commercial banks in Kazakhstanhas diminished. Consequently, the problems relating to SME loans have beenworsened. Considering that most of the SME loans in Kazakhstan are focused onfacility loans, difficulty in SME financing leads to problems in additional futureinvestment into facilities related to prospective production in SMEs.

In terms of financial institutions dealing with SME financing, SME financing hasvarious structural problems, such as the lack of a management system and operationinfrastructure. This includes the lack of risk management and an internal controlsystem, issues related to the reliability of information on company financing, held byfinancial institutions, and the limitations of the loan surety system.

In addition to these, the following are the major problems in SME financing inKazakhstan.

• Lack of a long-term loan system•Collateral loan-focused practice• Lack of company credit-based loan system: lack of company finance

information for credit loans• Lack of business start-up loans; lack of financial development for projects and

venture companies• Lack of investment promotion at the company level• Lack of business angels network


To address the problems mentioned above, the government of Kazakhstan isplanning support policies such as “Business Roadmap 2020” and the “Strategy ofInnovative-Industrial Development 2003~2015,” enhancing contributions to theeconomy and employment through medium and long-term capacity building ofSMEs and related SME financing.

In this context, the credit guarantee system, one of the most successful SME-financing systems in Korea, will be discussed in the following chapters, and analyzedin detail, including an analysis of the current system of Kazakhstan to derive overallsuggestions for the government of Kazakhstan on credit guarantee and credit ratingssystems.

Credit Guarantee and Credit Evaluation System for

SME Development in Kazakhstan


Chapter2

1. Outline of the Credit Guarantee System

2. Outline of the Credit Guarantee System of Korea

3. Overview of KODIT

4. Performance of KODIT’s Operations


Summary

It is well known that companies, particularly SMEs, have a significant influence onthe development of a nation’s economy. Accordingly, when the financial system failsto work properly, companies are deprived of opportunities that allow them tocontribute to economic development, leading to a vicious cycle that underminesgrowth. In fact, regardless of the economic development level of a country, weaklinks, like start-ups and SMEs, are likely to be blocked from access to the officialfinancing system. Thus, a credit guarantee system is a popular policy tool to addressthe credit restriction problem of weak economic participants.

A credit guarantee system is a policy tool to alleviate or eliminate default risks ofborrowers in order to encourage primary financial institutions to provide loans toeconomic entities that they have typically shied away from financing. In addition tothe aforementioned role of expanding loans to SMEs, the functions of the systeminclude easing interest requirements and social tensions, and protecting the sociallydisadvantaged. The system has two primary goals, although they differ from countryto country. One is to alleviate banks’ reluctance to provide loans to SMEs, and enablethem to consistently operate SME loan programs. The other is to emphasize businessperformance and future cash flow of SMEs rather than collateral in the course ofcredit guarantee evaluation, in order to encourage companies to concentrate on loanrepayment schedule, timely tax payment and improvement of revenue structure,rather than non-productive activities such as investment in real estate.


Yong-Pyung Park (KODIT)

Chapter 2 _ Development and Performance of the Credit Guarantee System in Korea·049

An adequate performance evaluation is essential in order to efficiently operate acredit guarantee system. Performance evaluations are generally based on threeperspectives. One is outreach, which measures the guarantee amount, such asguarantee balance and the number of guarantee recipients. Another is additionality,a qualitative measurement for guarantees, which assesses the size of additional creditcreation to companies that are unlikely to have been able to afford loans without thehelp of credit guarantees. The other is financial soundness measurement, includingdefault rates and subrogation rates.

Although a credit guarantee system is a useful mechanism that can solve manyproblems in the financial system, there are some issues to be considered in theoperation of the system. Above all, it is important to prevent moral hazard. Moralhazard can occur among all participants- credit guarantee agenies, financialinstitutions and SMEs. As moral hazard can trigger problems that undermine publicconfidence in the credit guarantee system, the government needs to minimize itthrough proper actions. Besides concerns have been raised that excessive reliance oncredit guarantees may do harm to the private financial market. Accordingly, thegovernment needs to maintain an appropriate level of the credit guarantee system.

The credit guarantee system of Korea has been held up as an exemplary case. In1961, when the first five-year economic development plan was launched, the creditguarantee reserve system was introduced to support the plan. Later in 1976, KODITwas established, followed by the Korea Technology Finance Corporation (KOTEC) in1989 and Regional Credit Guarantee Foundations (KOREGs) in 1996, forming Korea’spublic credit guarantee system as it is today. These bodies not only receivecontributions from the central and local governments, but also from financialinstitutions under special acts. In addition, each institution provides specialized creditguarantee services in different realms in order to avoid overlaps in guarantee supportor waste of resources. KODIT focuses on start-ups, export companies and greenindustry, while KOTEC concentrates on technology-intensive companies and venturefirms, and KOREGs focus on micro enterprises in their regions.

The strict supervision and evaluation of the government on the credit guaranteeagencies is one of the success factors of the Korean system. In particular, theevaluation results determine incentives for employees, promotion or demotion ofmanagement, and even the very existence of an agency. Another characteristicunique to the Korean system is the contributions from financial institutions and largecompanies, on top of that from the government. As contributions from financialinstitutions are required by the special act, they are one of the major revenue sourcesof credit guarantee agencies. In addition, large companies sign agreements toprovide contributions with credit guarantee agencies to alleviate credit crunch forsubcontractors.


KODIT, established in 1976 by the Korea Credit Guarantee Fund Act, is the firstpublic credit guarantee agency in Korea. It has grown into one of the largest creditguarantee agencies in the world. Its operation policy, including guarantee eligibility,guarantee coverage ratio, guarantee fees and default management, is regarded as aglobal standard. For the 35 years since its establishment, KODIT has played asignificant role in the economic development of Korea.

The credit guarantee system of Korea has evolved along with the nation’seconomic development. Whenever the economy faced a crisis, credit guaranteeagencies have played the role of an emergency response squad, minimizing theimpact of economic recession by swiftly expanding the infusion of credit to theeconomy. In addition, the credit guarantee system changed the attitudes of financialinstitutions toward the provision of loans to SMEs. Loans to SMEs, which onlyaccounted for 35% of the total loan provision of financial institutions, rose to 44% asof the end of 2010. The system is also important in securing the stability of thefinancial market. As Basel II adjusted downward risk weights of loans guaranteed bycredit guarantee agencies, financial institutions were greatly relieved from the capitalrequirements burden. In doing so, commercial banks became able to advance intoriskier markets, including SME financing. Finally, the credit guarantee system isdrawing attention as a counter-cyclical management policy. The credit guaranteesystem has been operated in response to economic cycles in Korea. In other words,when the economy is in a period of rapid growth, the guarantee size is reduced, andvice versa. As such, the credit guarantee has become one of the most reliable policymeasures to respond to economic fluctuations.

1. Outline of the Credit Guarantee System

1.1. Necessity of the Credit Guarantee System

It is difficult to expect the growth of the national economy without a properlyfunctioning financial industry. When SMEs, start-up or individuals are restricted interms of their capacity to obtain financing from formal financial institutions, they aredeprived of opportunities to contribute to the national economy. Limitations on theweak in terms of economic strength, particularly SMEs and start-up, to access toformal financing, tend to occur in advanced and developing countries alike. Thereasons for discrimination against SMEs and start-ups in lending markets include thecomparatively higher transaction costs, asymmetry of information, higher risks, andlack of collateral. Therefore, SMEs are exposed to various risks, such as worsenedprofitability, due to their dependence on private financing with its higher interestrates, and are also exposed to the risk of default due to failure to raise the requiredfunds in a timely manner.


SMEs in a developing country are faced with more serious hurdles because ofineffective financing systems. Financial institutions in developing countries avoid SMElending due to the higher risks, making it practically impossible for SMEs to access toformal financing. Even in advanced countries, SMEs are compelled to pay muchhigher interest rates. When loans to SMEs are available, most are earmarked as short-term funds, so in most cases the use of financing for long-term investments forfacilities is almost impossible. Loan assessments are also mainly conducted based oncollateral and only the classes with vested privilege tend to enjoy the benefits offinancing.

1.2. Significance of the Credit Guarantee System

1.2.1. Definition

The credit guarantee system is one in which a credit guarantee issuer guaranteesthe repayment of a loan to be extended to a borrower, thus helping a financialinstitution to provide a loan to a borrower that has previously been denied or hasnever sought financing before. It alleviates the risks of default by an enterprise thathas difficulties using formal financing due to a lack of collateral, and thus activatesloans to such enterprises. The credit guarantee system is regarded as one of the bestways to resolve credit restrictions for the economically weak, and accordingly is verypopular, not only in advanced countries but also in developing ones.

1.2.2. Purpose

The credit guarantee system has a variety of purposes. The purpose that attractsthe most attention is expanding loans to SMEs. Other purposes include mitigatinglending conditions such as interest rates, lessening economic and social tensions, andprotecting the weak.

A credit guarantee system ultimately aims to induce long-term changes in thebehavior of the participants in the system, such as private financial institutions andSMEs. As explained above, banks in developing countries do not have sufficientexperience and expertise, and are not very positive about lending to startupenterprises and SMEs. The credit guarantee system stops banks from avoiding lendingto SMEs, and induces them to find ways to create sustainable profits from SMElending. The system also aims to change the attitude of SMEs. Credit guarantees areprovided through review of earnings, future cash flows, etc., rather than collaterals,and encourage banks to discontinue past collateral or relationship-focused lendingpractices. Therefore, a credit guarantee induces enterprises to focus on avoidance ofloan arrears, payment of taxes within the payment period, improvement of incomestructure, etc.


1.3. Performance Evaluation of a Credit Guarantee System

Through proper performance evaluation, the efficiency of a credit guaranteesystem can be increased, and the proper policy direction for guarantee operationmay be presented. In most of the countries where a credit guarantee system isoperated, performance evaluation is conducted in three aspects: outreach,additionality, and financial sustainability.

1.3.1. Outreach

A credit guarantee institution uses various indicators, such as amount ofguarantees newly provided, outstanding balance of guarantees, number ofenterprises supported and number of guarantees provided. In addition, indicatorssuch as the weight of credit guarantees in GDP and the weight of guaranteed loansin SME loans are also used to facilitate international comparisons of the outreach ofcredit guarantees.

1.3.2. Additionality

Additionality is an indicator used to measure the qualitative factors of creditguarantee supply, and refers to the size of additional credit for enterprises thatwould have been unable to get a loan without the help of a credit guarantee system.This is generally measured through surveys.

As a credit guarantee creates added-value and contributes to the growth of thenational economy, additionality can also be measured from the perspective of theguaranteed enterprises. Thus, additionality of a credit guarantee is sometimes judgedthrough measurement of the value-added production amount and profitability ofthe enterprises supported with a credit guarantee, or through a comparative analysisof the financial performance of enterprises with or without the support of a creditguarantee.

1.3.3. Financial Sustainability

A credit guarantee institution should manage financial sustainability indicators soas to prevent a drain on financial resources for a credit guarantee due to an increaseof credit guarantee defaults and subrogation payment. Typical sustainabilityindicators include credit guarantee default ratio and subrogation payment ratio. Alsoused is the capital turnover, which is defined as the multiple calculated by dividingthe outstanding balance of guarantees by the equity capital. A credit guaranteeinstitution should build a risk management system to manage these indicators


systematically so that it can raise its long-term sustainability.

1.4. Other Issues to be Considered in the Operation of a Credit Guarantee System

Although a credit guarantee system is a useful means to help resolve variousfinancing problems, there are various matters to be considered in the operation ofthe system. First, moral hazard should be prevented for the participants in the creditguarantee system. Second, an excessive supply of credit guarantee might distortprivate markets.

1.4.1. Prevention of Moral Hazard

Moral hazard can occur to all of the participants in the credit guarantee system-the credit guarantee institutions, financial institutions and enterprises provided withguarantee support. As moral hazard can result in many distressed firms and lower thecredibility of the credit guarantee system, it can become a matter of success or failurefor the credit guarantee system. The government should establish a system forpreventing moral hazard, and should continuously supervise and monitor theparticipants in the system.

1) Credit Guarantee Institutions

In general, demand exceeds supply in lending markets of developing countries.Demand for credit guarantees, in particular, exceeds supply significantly, and thismay expose credit guarantee institutions to moral hazard. There also exists apossibility of corruption, in that credit guarantee institutions might abuse theirdominant position over their clients. There is also the possibility that a guaranteedecision will be made not by experts with professional assessment capability but bypolitical considerations. To prevent such problems from occurring, the followingefforts should be made:

First, an objective and transparent system for credit analysis and assessmentshould be established, so that guarantee decisions can be made independently byexperts.

Second, the pool of human resources with the professional assessment capabilityto select enterprises with growth potential should be expanded. It is also necessary toestablish an educational program for credit analysis and assessment, and to develop asystem for sharing the expertise acquired during the course of doing jobs. Ethicseducation for employees is also important.


Third, the possibility of employee moral hazard should be blocked through aninternal audit system, and independent and objective supervision and monitoring bythe supervisory organization and external audit institutions should also be carried outin parallel.

2) Financial Institutions

Moral hazard occurs in financial institutions when they depend on creditguarantees excessively or take advantage of credit guarantees in a malicious way. Ingeneral, moral hazard of financial institutions tends to occur when credit guaranteeinstitutions take the entire risk of a guaranteed loan. When financial institutions donot bear any liability for guaranteed loans, they do not pay sufficient attention tocredit analysis and assessment. There is a high probability that this kind of attitudewill lead to a high ratio of guarantee default. To solve this problem, a partial creditguarantee system is implemented in most countries, under which credit guaranteeinstitutions and financial institutions share the risks of a guaranteed loan together.The intention here is to induce integrated loan assessment by financial institutions byexposing them to the risk of default.

3) Guaranteed Enterprises

Moral hazard of the enterprises provided with a guarantee is also very dangerous.Submitting fraudulent accounting materials to obtain a credit guarantee or receivinga loan without the intention to repay it will unavoidably result in a high default ratio.To prevent moral hazard of the enterprises provided with guarantee support, thefollowing methods are normally used. First, collateral should be obtained at the timeof providing a credit guarantee. This is an essential safety device, particularly whenthe notion prevails that a credit guarantee is like a government subsidy and is notnecessarily to be repaid. The second is to differentiate credit guarantee fee ratesaccording to the credit ratings of enterprises. However, excessively high guaranteefee rates may lead to a guarantee portfolio of enterprises whose credit ratings arelow, or which have business plans of a speculative nature, and this will eventuallyhurt the financial soundness of a credit guarantee institution. This should also beavoided. The third is to let debtors be thoroughly aware that their action of defaultwould deprive them of future opportunities to participate in the national economy,and to let this be realized through the cooperation of all the parties concerned,including financial institutions, credit bureaus (CBs), tax office, etc.


1.4.2. Possibility of Market Distortion Due to Intervention by thePublic Sector

There is an argument that, despite the useful functions of credit guarantees, anexcessive supply would raise the possibility of distortion of private financial markets.If financial institutions depend on credit guarantees too much, they will not makeefforts to explore new markets for themselves, and this in turn will hinder theadvancement of private financial markets.

There is another argument that credit guarantees could delay the restructuring ofSMEs. For instance, a guaranteed loan could help a marginal enterprise that deservesto be ousted from the market to survive, compromising the self-cleansing function ofthe market. KODIT is making various efforts to prevent these side effects in advance.First, when KODIT sets its annual target of credit guarantees, it takes care to ensurethat guarantees are not supplied excessively. Second, KODIT tries to prevent anenterprise’s use of a credit guarantee for an extended period of time, through, forexample, the introduction of a credit guarantee product that features the repaymentof principal in installments for a certain period, and the compulsory inducement ofrepayment among enterprises using the guarantee loan for longer than a certainperiod of time, say ten years.

1.5. Credit Guarantee Schemes

Stakeholders in the credit guarantee system can be classified into credit guaranteeinstitutions that operate the guarantees, financial institutions and SMEs which arethe objects of the credit guarantee; credit guarantee systems can be classified by typeinto ‘mutual credit guarantee system,’ ‘Asian-type credit guarantee system’ and‘American-type credit guarantee system,’ depending on how the credit guaranteesystem is operated by the various stakeholders.

1.5.1. Mutual Credit Guarantee Scheme

In a mutual credit guarantee system, member enterprises establish a mutual creditguarantee union as the operating body. The union raises the funds for creditguarantee through contributions or investments by member enterprises, andprovides a credit guarantee for the members. Originating from the mutual assistancesystem of medieval guilds, this system is mainly operated in European countries suchas Italy, Spain and Switzerland, and is the oldest form of modern credit guaranteesystem.

Under the structure of a mutual credit guarantee system, SMEs engaging in thesame trade or doing business in the same locality establish an entity to represent their


common interests, and the entity provides a credit guarantee for individual memberenterprises, thereby helping them resolve problems in financing. In the relationshipbetween the SMEs and the credit guarantee institutions, the problem of ‘asymmetryof information’ can be mitigated, because the credit guarantee institutions know theobjects of guarantee as well as their members.

1.5.2. Asian-type Credit Guarantee Scheme

Under an Asian-type credit guarantee system, the financial resources of creditguarantee institutions are mainly dependent on contributions or investments by thegovernment, and independent credit guarantee institutions operate the system andprovide credit guarantee support for unspecified enterprises. This system is used inAsian countries such as Korea, Japan and Taiwan. Under this system, the relationshipamong credit guarantee institutions, financial institutions and SMEs is clearlyestablished, and credit guarantee institutions make their own policies and operatecredit guarantees as independent institutions.

Under the Asian-type credit guarantee system, credit guarantee institutionsdepend on contributions or investments by the government to build their financialresources, and the final liability of credit guarantee obligations is also borne by thegovernment. Accordingly, this system has a more credible and powerful guaranteefunction compared to other types of credit guarantee systems, and is mainly utilized

<Figure 2-1> Outline of the Mutual Credit Guarantee System


as part of economic and financial policies because of the high degree of governmentintervention. Credit guarantee institutions need to have a relatively largeorganization in order to fulfill the functions of their own analysis and evaluation, andby their nature have a large-scale guarantee operation.

1.5.3. American-type Credit Guarantee System

In an American-type credit guarantee system, unlike the mutual credit guaranteesystem or the Asian-type credit guarantee system, there is no independent creditguarantee institution. This system is operated in the form of a government program,with the contributions or investments made by the government as its financialresources. Eligibility for credit guarantee services, limits on guarantees and otherguarantee conditions are predetermined, and entrusted financial institutions provideguarantees for loans that meet the requirements and are compensated for theirlosses arising from such guarantees. This system is used in countries like the UnitedStates of America, the United Kingdom and Canada, which have a strong tradition ofa market economy and mature financial markets, and in Central and South Americancountries, which introduced the system with the support of these advanced countries.

Under the American-type credit guarantee system, the government focuses onindirect management, such as management of the government budget, selection offinancial institutions and management of credit guarantee limits. But under this

<Figure 2-2> Outline of the Asian-type Credit Guarantee System


system, the practical guarantee operations are entrusted to financial institutions. Asthe system is operated not by independent institutions but as part of a governmentprogram, it is difficult to operate the system systematically, and awareness of thesystem among SMEs is low. On the other hand, the costs of operating the system arerelatively low.

<Figure 2-3> Outline of the American-type Credit Guarantee System

<Table 2-1> Characteristics by types of Credit Guarantee System

ClassificationMutual Guarantee

SystemAsian-type

Guarantee SystemAmerican-type

Guarantee System

Operating Body Association of Independent Bankenterprises guarantee institution

Guarantee by a credit guarantee Guarantee by Guarantee by

Form of Guarantee institution and a credit guarantee the governmentcounter-guarantee institutionby the government

Subject to Guarantee Member enterprises Unspecified enterprises Unspecified enterprises

Credibility Low High Medium

Guarantee Amount Small Large Medium

Guarantee Utilization Medium High Low

Operating Regions Europe Asia America


2. Outline of the Credit Guarantee Systemof Korea

2.1. Introduction of the Credit Guarantee System in Korea

In the 1960s, the Korean government implemented various SME policies foreconomic development. One example of these policies was the establishment of theIndustrial Bank of Korea (IBK) in August 1961 which specialized in financing supportfor SMEs. At that time, IBK implemented a credit guarantee reserve system topromote SME lending. Under this system, when specific loans were extended, 3% perannum of the loans were collected and accumulated in the credit guarantee reserve,and this reserve was used to cover part of the losses when such loans were writtenoff. The credit guarantee reserve was not meant to directly provide credit guaranteesto SMEs, but it is regarded as the seeds of the credit guarantee system in Korea, inthat it was the first system established with the goal of supporting SME lending.

In March 1967, the government enacted the SME Credit Guarantee Act tosupplement the system of the credit guarantee reserve and consolidate the creditguarantee system. Under this Act, guarantees were directly provided for SME credits,and IBK handled the credit guarantee business exclusively.

In the 1970s, it was difficult for banks to satisfy the demand for SME loans, whichhad increased sharply due to a drop in actual interest rates and the rapid growth ofthe national economy. Thus, there was a phenomenon in which SMEs, which haddifficulty raising funds compared with large enterprises, became more and moredependent on private money markets. The number of enterprises in defaultincreased as a result of borrowing private funds with higher interest rates, and thegovernment enacted a Presidential Emergency Decree in August 1972 to help SMEsto normalize their operations. Under this Decree, the credit guarantee system wassignificantly expanded through a widening of the scope of industries eligible for

<Table 2-2>Major Economic Indicators Before the Establishment of KODIT (1961-1975)

Description Name 1961 1965 1970 1975

Lending Rate Nominal 17.5 26.0 24.0 15.5

(%) Real 9.5 14.0 8.1 -9.8

Consumer Price

Inflation Rate (%)8.0 12.0 15.9 25.3

Nominal GDP

(billion KRW)29.4 80.6 268.4 979.3


guarantee support and a significant amplification of financial resources for the creditguarantee fund with contributions from financial institutions.

2.2. Establishment of Credit Guarantee Institutionsin Korea

Although the credit guarantee system in Korea had seen many advancements bythe mid-1970s, a few problems persisted, such as the moral hazard that occurred dueto non-separation of lending institutions and credit guarantee institutions and thepassive operation of guarantees by management institutions. This led thegovernment to enact the Korea Credit Guarantee Fund Act in December 1974 toinvigorate the credit guarantee system, and to establish KODIT in June 1976 tospecialize in credit guarantee services, thus laying the foundation for the currentcredit guarantee system in Korea. Following the establishment of KODIT as anindependent guarantee institution, the credit guarantee system in Korea advancedby leaps and bounds. The outstanding balance of guarantees at the time of KODIT'sestablishment, 15 years after the introduction of the credit guarantee reserve system,was only 101.6 billion Korean Won (KRW), but grew to 1 trillion KRW in four and ahalf years after the establishment of KODIT. This could be attributed to the fact thata credit guarantee system operated by an independent institution enabled moreactive handling of guarantees, and that the independent operation of creditguarantee services led to improvements of various aspects and a sharp rise inproductivity.

Entering the latter half of the 1980s, there were earnest efforts to shift the policydirection away from government-led economic policies and towards policies thatemphasized private sector-led market autonomy. In particular, a consensus wasreached that it was necessary to nurture technology-intensive SMEs in order tostrengthen the constitution of the national economy. Thus, legal grounds for creditguarantee support to technology-intensive SMEs were laid by the enactment inDecember 1986 of the Act on Financing Support for New-technology Projects, andKODIT began to handle technology credit guarantee services as the entrustedinstitution under the Act. After that, KOTEC was established as an independentcorporation, and took charge of technology credit guarantee services for technology-intensive SMEs.

In the early 1990s, as concern over local autonomy started to grow, the role oflocal governments also began to be emphasized. Following the establishment ofGyeonggi Credit Guarantee Foundation by Gyeonggi Province in 1996, many localgovernments scrambled to establish KOREGs, and as of the end of November 2011,sixteen of these in total are in operation. KOREGs mainly handle small-amountguarantees for small and micro-enterprises.


2.3. Current State of the Credit Guarantee System in Korea

2.3.1. Structure of the Credit Guarantee System and GuaranteeInstitutions

The public credit guarantee system in Korea is operated by KODIT, KOTEC andKOREGs. These three institutions not only receive direct contributions from central orlocal governments but also periodic contributions from financial institutions underspecial laws. Government agencies such as MOSF, the Financial Services Commission(FSC) and the Small and Medium Business Administration (SMBA) ensure, throughsupervision and monitoring, that public funds are used properly.

The government ensures that the business areas for each credit guaranteeinstitution are divided so that financial resources for guarantee support are notoverlapped or wasted. Each credit guarantee institution offers guarantee services forits specialized business area, not only to avoid guarantee overlap, but also toaccumulate expertise in an area of specialization. KODIT mainly provides creditguarantees for start-ups, export-oriented enterprises, green growth enterprises and

<Figure 2-4> Structure of the Credit Guarantee System in Korea


management-innovative enterprises, while KOTEC mainly supports technology-intensive enterprises and venture enterprises. KOREGs mainly provide small-amountcredit guarantees for micro-enterprises located in their provinces. KOREGs aredifferent from KODIT and KOTEC in the method of operation. First, while KODIT andKOTEC receive contributions from the central government, contributions to KOREGsare made by municipalities. Second, the services of KODIT and KOTEC cover across thenation, but a KOREG's service cannot be offered outside of its municipality. Third,KOREGs have formed the National Federation of KOREGs, and receive re-guaranteesupport from it.

<Table 2-3> Public Credit Guarantee Institutions in Korea (as of 2011)

Classification KOREGsKOTECKODIT

Establishment 1976 1989 1996

Legal Foundation

Supervision

Target Enterprises

Major Businesses

Source of Fund

Maximum LeverageRatio 20 times 15 times

Employees 2,139 1,068 817

Capital Fund 6,798 billion KRW 2,842 billion KRW 2,539 billion KRW

Outstanding Balance of Guarantees 45,487 billion KRW 17,351 billion KRW 13,609 billion KRW

Korea CreditGuarantee Fund Act

FSC

•Start-ups •Export-oriented

enterprises•Green-growth

enterprises•Management-

innovative enterprises•Other

•Credit guarantee•Primary Collateralized

Bond Obligations (P-CBO) •Infrastructure credit

guarantee•Credit insurance•Management

consultation•Other

•Government, financialinstitutions(0.225% ofoutstanding balanceof loans)

•Technology-intensiveenterprises•Venture enterprises•Other

•Technology guarantee•Technology

assessment •Technology/

managementconsultation

•Government, financialinstitutions(0.135% ofoutstanding balanceof loans)

•Small businesses inthe municipality•Small merchants

and industrialists•Micro-businesses

•Credit guarantee

•Government, municipality,financial institutions(0.02% of outstandingbalance of loans)

Korea Technology CreditGuarantee Fund Act

FSC

Regional CreditGuarantee FoundationsAct

SMBA


2.3.2. Recent Trends in Korean Credit Guarantee Markets

While coping with the Asian foreign exchange crisis, Korea experienced extremechanges in the national economy. Although Korea overcame the foreign exchangecrisis in a relatively short period of time, the new economic environment presentedchallenges that were totally different from those of the past. SME policies and thecredit guarantee system also had to change. For these reasons, the governmentannounced measures to reform the SME financing support system in 2005–the 6.23Measures. The core of the 6.23 Measures was that SME support policies were to bemodified so as to conform to market principles. The credit guarantee system was alsoshifted from a policy of quantitative expansion of the guarantee amount for all SMEsto a policy of qualitative support for SMEs with growth potential through a selectionand concentration strategy. As a result of this change in policy direction, the ratio ofoutstanding credit guarantees relative to GDP declined from 7.5% in 2001 to 4.6% bythe end of 2007.

However many SMEs in Korea faced a liquidity crisis in the wake of the globalfinancial crisis triggered by the subprime mortgage collapse in the United States atthe end of 2008 and the global recession thereafter, and the government againencouraged the expansion of guarantees to cope with this problem. It is expectedthat credit guarantees will decline again as the national economy shows signs ofrecovery.

0.02% 0.05% 0.11%

2.14%

1.17%

2.31%

2.34%

0.17%

2.07%

0.23% 0.27% 0.30% 0.32% 0.39% 0.44% 0.47%

3.26%3.59%

1.02%

1.48%1.61%1.23%

1.05%

0.58%

1.15%1.23%1.33%1.63%

2.18%2.48%

2.29%

3.71% 3.75%

4.51%4.27%

4.06%

6.01%

6.75%7.07%

7.51%

5.32%4.93%

4.59%4.91%

3.98%3.66%

6.65%6.17%

4.80%

5.98%

4.43%

5.95%

6.82%

3.49%

2.97% 3.10%

8%

7%

6%

5%

4%

3%

2%

1%

0%

80

70

60

50

40

30

20

10

0'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Ratio of total outstandingguarantee relative to GDP

KOTEC KOREGs

KOREGsKOTECKODIT

KODIT

Ratio relative to GDPOutstanding Guarantees(trillion. KRW)

<Figure 2-5> Change of Ratio of Outstanding Balance of Credit Guarantees to GDP in Korea

Source: KODIT Report 2011-3, "Macro-analysis of Effects of Credit Guarantee in 2010"


2.4. Characteristics of the Credit Guarantee System in Korea

2.4.1. Supervision and Appraisal of Credit Guarantee Institutions

Proper monitoring and supervision of credit guarantee institutions is one of theimportant factors that can determine the success or failure of a credit guaranteesystem. Accordingly, the government appraises and supervises the overallmanagement performance of credit guarantee institutions, including business plan,organization and personnel, and performance of guarantee services, to preventmoral hazard and induce the efficient operation of the credit guarantee system. Thegovernment agencies supervising credit guarantee institutions in Korea and theirduties are as follows: SMBA deals with the contributions budget; the FinancialServices Commission handles the annual credit guarantee supply plan and itsoperation; and MOSF controls the approved number of employees and the operatingbudget. It may seem inefficient that there are many supervisory institutions, but eachof these institutions supervises credit guarantee institutions effectively from theirperspective regarding their specialized fields.

The results of appraisal for public institutions have the most significant effects oncredit guarantee institutions. Important matters such as maintenance or dissolutionof an institution, change of top management, performance-related incentive pay forofficers and employees, and expenses budget are decided according to the appraisalresults. There are two types of appraisal: appraisal of top management and appraisalof an institution. The appraisal of an institution is divided into appraisal ofmanagement performance, appraisal of fund operation and appraisal for decidingthe maintenance or abolition of a fund.

In addition, credit guarantee institutions are subject to an audit by the Board ofAudit and Inspection, which audits the performance of civil servants and publicinstitutions. The National Assembly also conducts an audit of the operations of creditguarantee institutions in connection with the performance of credit guaranteeservices.


2.4.2. Formation of Financial Resources

Above all, a solid financial foundation is needed for the operation of a creditguarantee system. Such a foundation not only determines the capacity of a creditguarantee institution to supply credit guarantees, but also fulfills the function ofgiving a credit guarantee institution credibility as the financial resources forsubrogation payments. In general, a credit guarantee institution receives financialsupports from the government, etc. to cover any losses arising from fulfilling itspublic functions, such as complementing a market failure and providing lendingsupport for policy sectors. The credit guarantee institutions in Korea also receiveexternal contributions to build their capital fund. Such contributions come from thegovernment, financial institutions, enterprises, etc.

1) Government

Article 41 of the Korea Credit Guarantee Fund Act provides that any lossesincurred by KODIT shall ultimately be covered by the government. This means thatthe government guarantees that KODIT will never be insolvent, and thereby plays adecisive role in enhancing the credibility of the credit guarantee system. Governmentcontributions are decided according to the financial state of KODIT, and they tend toincrease during an economic crisis and decrease during economic prosperity.Government contributions in 2009, when the global financial crisis hit the nation,amounted to 168 billion KRW, but there were no contributions from the governmentin 2010 and 2011, when the economy stabilized and the financial state of KODITimproved.

<Table 2-4> Types and Contents of External Appraisals

Description Contents

Appraisal of

Institution

Appraisal of

Top Management

Appraisal of management

Appraisal of fundoperation

Appraisal to determine themaintenance or abolitionof fund

Appraisal of CEO

Appraisal of outsidedirectors

Appraisal of auditor

Appraisal of major business activities,efficiency of management, earnings, etc.

Appraisal of management of investment

Appraisal of appropriateness of policies, redundancy of projects, etc.

Appraisal of CEO's performance results of management plan

Contribution to the meetings of board of directors and operation of organization, etc.

Appraisal of appropriateness of auditing activities, etc.


2) Financial Institutions

Contribution by financial institutions is one of the major characteristics of thecredit guarantee system of Korea. These contributions are stipulated in the KoreaCredit Guarantee Fund Act. They are calculated by multiplying the outstandingbalance of specific loans by a certain rate every month. Contribution rates changeaccording to the economic situation, and the currently applicable rates are 0.225%for KODIT, 0.135% for KOTEC and 0.02% for KOREGs.

3) Enterprises

Contributions from enterprises have not been active because there has been nolegal basis to compel enterprises to make contributions. However, a breakthroughwas recently found in this area. KODIT has been inducing large enterprises to offercontributions by implementing a system of “guarantees provided according tomutual agreement,” under which large enterprises offer special contributions toKODIT, and KODIT in return provides credit guarantees to subcontractorsrecommended by them.

<Table 2-5> Current State of Contributions by Contributors

Year

KODIT

Gov’t.(Central)

Banks,etc.

Total

KOTEC

Gov’t.(Central)

Banks,etc.

Total

KOREGs

Gov’t.(Local)

Banks,etc.

Total

1997 4,000 3,307 7,307 2,000 1,701 3,701 390 152 542

1998 28,810 3,515 32,325 15,027 1,776 16,803 441 108 549

1999 10,011 2,929 12,940 4,258 1,507 5,765 1,771 470 2,241

2000 5,100 3,237 8,337 2,700 1,666 4,366 1,483 319 1,802

2001 12,230 3,343 15,573 2,770 1,701 4,471 1,383 37 1,420

2002 5,250 3,576 8,826 3,150 1,806 4,956 1,185 276 1,461

2003 6,560 4,243 10,803 2,940 2,132 5,072 1,429 142 1,571

2004 5,210 4,562 9,772 6,190 2,298 8,488 864 37 901

2005 3,000 3,080 6.080 3,500 6,102 9,602 1,284 40 1,324

2006 3,000 5,370 8,370 6,000 2,013 8,013 763 255 1,018

2007 1,300 6,942 8,243 2,000 4,013 6,013 963 488 1,451

2008 925 7,804 8,729 1,575 4,384 5,959 655 562 1,217

2009 19,800 13,675 33,475 7,200 6,817 14,017 3,990 970 4,960

2010 0 8,460 8,460 0 4,598 4,598 970 654 1,624

Source: KODIT, KOTEC, KOREG


3. Overview of KODIT

3.1. Framework of KODIT

3.1.1. Legal Status of KODIT

KODIT is a not-for-profit special corporation established under the Korea CreditGuarantee Fund Act, and unlike ordinary corporations, the concept of equity interestis not applicable to KODIT. KODIT’s capital fund consists of contributions from thegovernment, financial institutions and the like, which are the same as donations to afoundation. As such, contributors are not entitled to ask for dividends, and do nothave the right to request distribution of the remaining property in the event of thedissolution or liquidation of KODIT.

3.1.2. Organization of KODIT

At the time of its establishment, KODIT started with a headquarters consisting offour departments, one office and fourteen sections, but no branch offices. With thesubsequent increase in its business volume and changes in the managementenvironment thereafter, the organization structure of KODIT kept on changing,being overhauled 49 times in total. KODIT has enhanced its accessibility to customers,with 99 branches as of the end of 2010.

Planning & CoordinationDepartment

ManagementPlanning Division

GuaranteeBusiness Division

Debt Collection &Entrusted Business Division

Board of Policy

Board of Directors

Chairman & CEO

Executive Vice President Chief Executive Auditor

Auditing & Examination OfficeRisk Management Office

Public Relations Office

Secretary Office

ManagementSupport Division

Credit GuaranteeDepartment

Debt CollectionDepartment

Human ResourcesDepartment

Perfomance EvaluationDepartment

Guarantee EvaluationDepartment

Credit InsuranceDepartment

Customer SatisfactionSupport Department

Funds Management &Accounting Department

Social Overhead CapitalGuarantee Department IT Strategy Department

<Figure 2-6> Organizational Chart of KODIT


3.2. Outline of KODIT’s Services

3.2.1. Outline of Services

KODIT provides credit guarantees for enterprises that bear repayment obligationstoward banks, the government or other entities. With the help of these guarantees,enterprises can, for example, receive loans from banks or receive benefits from thegovernment, such as the extension of a due date for tax payment.

When an enterprise that has received a guarantee defaults on its obligationtoward a bank or other entity, KODIT repays the obligation on behalf of theenterprise. Then KODIT will make efforts to collect its subrogation payment from theenterprise.

3.2.2. Major Business

KODIT operates the credit guarantee service as a core business. In addition to thecredit guarantee service, it also provides such services as credit insurance,infrastructure credit guarantee and management consulting.

<Figure 2-7> Outline of Credit Guarantee Services


The aim of credit insurance is to protect SMEs from chain bankruptcies due todishonored commercial bills of sales receivable. The credit insurance service has beenin operation since 1997. The purpose of an infrastructure credit guarantee is toextend guarantees for loans or bonds when private investors attempt to financegovernment-planned infrastructure projects such as ports, expressways, bridges, andthe like. KODIT began the service in 1995 along with two other institutions, and hasbecome the sole provider since 1999 when the two institutions transferred their tasksrelated to the service.

KODIT also operates a management consulting service. One of the consultingprograms is a one-stop service for start-ups. The program provides start-up trainingsas well as guarantees to entrepreneurs in order to help them start their companies assmoothly as possible. The program has gained in popularity since its inception.

3.2.3. Types of Guarantees

When KODIT was established, there were only four types of guarantees:guarantee for loan, guarantee for payment, guarantee for corporate bond andguarantee for tax payment. Subsequently, to respond to the emergence of newfinancial products, changes in commercial transactions among enterprises and the

<Table 2-6>Major Business and Services of KODIT

Classification Details Introduction

General guarantee helps companies secure

financing from banks and financial institutions

P-CBO guarantee guarantees SPC’s CBO

Protects SMEs from chain bankruptcies arising

from dishonored commercial bills or non-payment

of sales receivables by covering their loss with

compensation

Guarantee for loans or bonds when private

investors or private project planners get to finance

for government planned infrastructure projects

Customized one-stop services, from preliminary

consulting to post-establishment consulting

(Preliminary consulting → entrepreneurial

training → credit guarantee → post-

establishment consulting)

CreditGuarantee

CreditInsurance

InfrastructureCredit

Guarantee

ManagementConsulting

1976

2001

1997 (Corporate Bill Insurance)

2004 (Sales receivable insurance)

1995

2008

①

②

③

④


needs of the national economy, the types of guarantee have been expandedcontinuously, to reach eleven today. Here, a guarantee for loan means a creditguarantee for “monetary obligations an enterprise bears toward a financialinstitution by borrowing money,” and is the most common form of guarantee.Among SMEs, guarantees for loans account for about 80% of total guaranteesupports, since borrowings from financial institutions are the most common way ofraising the funds needed for working capital or facility investments.

3.2.4. Flow Chart of Guarantee Services

Guarantee procedures start with an SME's application for guarantee at a KODITbranch. KODIT decides on a credit guarantee after consultation with the applicant,credit analysis and assessment. When the applicant enterprise is selected forguarantee support, KODIT makes the guarantee agreement with the applicant,collects the guarantee fees and issues the letter of guarantee to the counterparty ofthe guarantee.

<Figure 2-8> Flow Chart of Credit Guarantee Services

Guarantee application and consultation

•On-line application through KODIT homepageor a visit to a business unit (branch)

•Hints of guarantee amount, term, etc. throughconsultation

Collection of documents and

credit analysis

•Collection of materials necessary for creditanalysis and guarantee assessment

•Credit analysis through a visit to applicant'sbusiness site, etc.

Guarantee assessment and approval•Calculation of credit rating and assessment of

guarantee amount, etc.

•Decision on approval of guarantee

Conclusion of agreement and issuance

of letter of guarantee

•Conclusion of credit guarantee agreement andcollection of guarantee fees

•Issuance of letter of guarantee (on-line)


3.3. Operational Details of Credit Guarantees

3.3.1. Eligible Enterprises

All for-profit enterprises are eligible for guarantee support by KODIT, but theutilization of guarantee support may be restricted in the cases described in the Tablebelow.

3.3.2. Guarantee Coverage Ratio

A partial guarantee is a system under which a credit guarantee institution and afinancial institution share, in a certain proportion, the risk of loss arising from aguaranteed loan. This is, as explained above, one of the most important means ofpreventing moral hazard of creditor institutions.

KODIT differentiates credit guarantee coverage ratios according to credit ratingand the period of utilization of guarantee support, with the lowest being 50% andthe highest being 85%. One thing to note here is that KODIT applies the lowerguarantee ratio to the enterprise with the higher credit rating. While the guaranteeratio of 50% is applied for an enterprise with the highest credit rating of S1, the ratioof 85% is applied for an enterprise with the lowest credit rating of E3. This is toinduce banks to decide on their own to lend to enterprises with high credit ratings,without the support of a credit guarantee. KODIT also applies guarantee ratios thatare 5 percentage points lower than the standard ratios to enterprises that utilizeguarantee support for longer than ten years, so as to induce their advancement away

<Table 2-7> Examples of Restriction on Utilization of Guarantee Support

Classification Contents

Prohibition or

Restriction by Law

Restricted Industries

Inefficient Sector, etc.

•Enterprises for which KODIT or KOTEC has made subrogation payments

•Enterprises in temporary closing of business

•Enterprises lacking creditworthiness

•Existing loans

•Related to gambling and gaming

•Related to adult entertainment and real estate

•Businesses dealing with alcoholic drinks, cigarettes and extravagant

goods

•Enterprises utilizing guarantees for an extended period of time or

utilizing large-amount guarantees

•Large enterprises, etc.


from guarantee support.

3.3.3. Guarantee Fees

The guarantee fee is the price for guaranteeing the debtor's obligation. KODITdetermines its guarantee fee rates by applying the standard guarantee fee rates plusthe addition rates or minus the subtraction rates. The guarantee fee rates that areultimately applied are between the lowest rate of 0.5% and the highest rate of 3.0%,excluding exceptional cases of disaster guarantees, etc.

3.3.4. Handling of Defaulted Guarantees

A defaulted guarantee is a guarantee for which there is a high possibility ofKODIT needing to perform its guarantee obligation due to the occurrence of loanarrears or default by the enterprise that has received guarantee support. Awarenessof a default mainly comes through creditor’s notice, KODIT’s follow-up activities ormass media. In particular, creditors are required by the guarantee clauses to notifyKODIT of default events within the stipulated notice period in order to preventdebtors from hiding properties.

<Table 2-8> Coverage Ratio of KODIT

Credit RatingsGuarantee Utilization Period of

Ten years or LessGuarantee Utilization Period of

more than Ten years

S1 50% 50%

S2 - S3 70% 65%

A1 - A4 75% 70%

B1 - B3 80% 75%

B4 - E3 85% 80%

<Table 2-9> Structure of Guarantee Fees of KODIT

Standard GuaranteeFee Rates According

to Credit RatingsAddition (+) Subtraction (-)

Guarantee FeeRates to be

Applied

- Long-term utilization

0.5~2.5%enterprises: 0.1-0.2%p

- Start-ups: 0.3%p

- Large-amount guarantee- Green growth 0.5~3.0%

enterprises: 0.1-0.2%penterprises: 0.2%p


When a branch of KODIT becomes aware of a default event, it should register theoccurrence of a default into the database so as to share the information with all theparties concerned. It should then take legal measures to prevent the hiding ofproperties, or take other steps such as inducing the normalization of the defaultedenterprise before KODIT reaches the stage of performing its guarantee obligation.

3.3.5. Payment of Guarantee Obligation

Performance of guarantee obligation means that KODIT makes subrogationpayment on behalf of an enterprise that received guarantee support from KODIT andhas not performed its obligation. With the subrogation payment, KODIT acquiresindemnity right against the debtor.

In general, when a default occurs due to loan arrears, the creditor bank candemand KODIT to perform its guarantee obligation three months after the date ofoccurrence of the default. When a creditor bank demands KODIT to perform itsguarantee obligation, KODIT reviews the appropriateness of the demand andwhether or not the creditor bank has observed its related duties, and then proceedsto perform the guarantee obligation. The scope of performance of guaranteeobligation by KODIT is limited to principal, agreed interest and costs paid by thecreditor to collect the guaranteed loan.

3.3.6. Management of Indemnity Right

Management of indemnity right is an operation for collecting debt by exercisingthe indemnity right that KODIT obtained through performance of its guaranteeobligation on behalf of the debtor. The activities for collecting debts are conducted

<Table 2-10> Examples of Types of Default Events

Events Notice Period

Non-repayment of Principal for Within one month after the due date for a Guaranteed Loan repayment

Non-payment of Interest on a Guaranteed Loan

Within two months after the due date

Occurrence of Dishonored Bill Within the business day following the date of occurrence of the event

Occurrence of a Registration Event under Within one month after the date of occurrence Credit Information Management Regulation of the event

Filing for Restoration or Bankruptcy by Debtor Within ten days after the date of awareness of the fact


by KODIT’s branches across the nation. Collection of some written-off debts isentrusted to external agencies specializing in debt collection.

KODIT exercises its indemnity right through various methods. The most commonmethods of collection are: peremptory notice to pay debt, legal procedure againstproperties owned by debtor, and guarantee for restoration support. When a certainperiod of time has passed after KODIT’s subrogation payment and the possibility ofdebt collection is very low even after collection activities such as legal procedures, theindemnity right is written off. Write-off of indemnity right means that the debt isregarded as a loss in the accounting, in order to prevent the overstatement offundamental property and to secure the soundness of assets. Therefore, it is differentfrom giving up of claims, and KODIT continues its collection activities with regard toindemnity rights even after they are written off.

3.4. KODIT’s Advancement Process

3.4.1. Introduction Period (1976-1979)

The Korean economy in the early 1970s had multiple weaknesses in its structure.The economic growth at the time had been heavily reliant on international trade,

<Figure 2-9> Flow of Business Processes Following the Occurrence of a Default

Default Management•Input of default information into the database•Investigation of debtor's properties, measures to secure

collection of debt and inducement of normalization

Payment of Guarantee

Obligation

•Review of appropriateness of a claim for performance ofguarantee obligation, including observance of guaranteeclauses by creditor bank

Management of

Indemnity Right

Management of

Written-off Debts

•Filing of lawsuits•Inducement of voluntary payment, carrying out of collection

activities such as compulsory execution

Writing off No possibility of collection

•Collection activities by branches or task force specialized incollection of written-off debts•Entrustment of collection to collection agencies


resulting in a deepening trade deficit because as Korea exported more, it wasrequired to import even more from foreign countries. This in turn widened the gapbetween large enterprises and SMEs since the Korean government then favoredexport-oriented companies, most of which were large enterprises. SMEs were furtherdiscriminated against in the financial market. SMEs that lacked collateral werecrowded out from the formal financial market and forced into the informal financialmarket, where they had to cope with much higher interest rates. Korea’s economicsituation made it compulsory to come up with measures to provide financial supportto SMEs, leading to the establishment of KODIT.

In January 1976, KODIT took over the capital fund of 27.9 billion KRW and creditguarantee business from IBK, and officially started its business. KODIT formed itscapital fund with contributions from the government and financial institutions, andretained the earnings of the fund. Financial institutions had to pay monthlycontributions equivalent to 0.5% per annum of their average outstanding balance ofloans, with the end of 1980 as the time limit for the contribution. When KODIT wasestablished, the capital fund was 27.9 billion KRW, expanding to 42.6 billion KRW bythe end of 1976 and to 112 billion KRW by the end of 1979.

As credit guarantee services were launched in earnest with the establishment ofKODIT, an independent institution specializing in credit guarantee, the outstandingbalance of guarantees of only 101.6 billion KRW at the time of KODIT’s establishmentrapidly increased to 700.8 billion KRW by the end of 1979. Looking at theoutstanding balance of guarantees before KODIT’s establishment, it can be seen thatthere were limitations to the extent to which guarantee services could be invigoratedwhen lending institutions and guarantee-providing institutions were not separated.

<Table 2-11>Major Management Indicators of KODIT (1976-1979)

(in billion KRW)

Description 1979197819771976(Jun - Dec)

GDP Growth Rate (%) 13.5 11.8 10.3 8.4

Supply of Guarantee 112 273 369 679

Outstanding Guarantee 158 265 408 701

Default Rate (%) 1.1 2.0 1.4 2.7

Subrogation Payment 0.6 1.1 1.9 7.7

Government Contributions 0 0 0 0

Capital Fund 43 61 84 112

Leverage Ratio (times) 3.7 4.3 4.9 6.3


3.4.2. Growing Period (1980-1987)

In the early 1980s, as the business conditions worsened due to the second oil shockthat started in 1979 and the political and social turmoil in Korea, many SMEs wentbankrupt, and KODIT's credit guarantee default ratio rose rapidly, which meant thatKODIT had to struggle more. As KODIT’s various management indicators worseneddue to the government policy of increasing the provision of credit guarantees, thegovernment helped KODIT to expand the capital fund in 1983 through its firstcontribution since KODIT’s establishment.

3.4.3. Maturing Period (1988-1996)

In the early 1990s, the acceleration of protectionist tendencies world-wide and theeconomic slowdown in Korea caused chain-reaction bankruptcies of SMEs, which ledto a rapid increase of credit guarantee defaults and KODIT’s subrogation payments.This in turn led to encroachment on KODIT’s capital fund and a decrease of KODIT’sprovision of credit guarantees, accelerating the vicious cycle. In 1993, guaranteeswere provided in a large quantity under the government’s economic policies, such asthe real-name financial transactions system and the new-economy policy. This led toan increase of guarantee defaults, contributing to the aggravation of KODIT’sfinancial conditions. In 1994, KODIT’s delinquent guarantees amounted to 916.9billion KRW, which was equivalent to 12% of the outstanding balance of guarantees,


(in billion KRW)

Classification 1980 1981 1982 1983 1984 1985 1986 1987

GDPGrowth Rate (%)

-1.9 7.4 8.3 12.2 9.9 7.5 12.2 12.3

Supply ofGuarantee

1,761 1,842 1,549 1,386 1,649 1,871 2,237 2,371

Outstanding Guarantee

1,255 1,544 1,358 1,310 1,550 1,896 2,320 2,780

Default Rate (%) 3.8 6.4 7.5 7.7 4.3 2.9 4.4 3.8

SubrogationPayment

23 58 103 57 72 62 67 93

GovernmentContributions

0 0 0 25 15 8 10 20

Capital Fund 135 138 112 162 199 255 305 388

Leverage Ratio(times)

9.3 11.2 12.1 8.1 7.8 7.4 7.6 7.2


and the number of defaulted enterprises climbed to 11,497, accounting for 16% ofthe total enterprises that received guarantee support from KODIT.

In this situation, KODIT reset the direction of its credit guarantee policy to focuson sound guarantees, and realigned various guarantee service systems and its follow-up management system. KODIT reduced the limit of the guarantee amount,consolidated the standards for its assessment process to ensure sound guarantees,and made systemic improvements, including the introduction of a specialized assessorsystem, to provide sound guarantee support.

3.4.4. Period of Overcoming the Foreign Exchange Crisis (1997-2002)

In July 1997, the collapse of the baht, the Thai currency, triggered a foreignexchange crisis in Southeast Asia, which in turn disturbed the global financialmarkets. Thereafter, the Korean economy contracted rapidly due to problems such aschain-reaction defaults of large enterprises and deepening default of financialinstitutions. The high-interest-rate policy recommended by the InternationalMonetary Fund (IMF), the drop of the sovereign credit rating and the sharp rise ofthe exchange rate of KRW led to en-masse SME defaults. This sharp increase indefaults by SMEs gave rise to a rapid increase in KODIT’s credit guarantee defaultsand subrogation payments. Guarantee defaults and subrogation payments in 1997amounted to 1,220.2 billion KRW and 735.7 billion KRW respectively, and in 1998


(in billion KRW)

Classification 199619951994199319921991199019891988

GDPGrowth Rate (%)

11.7 6.8 9.3 9.7 5.8 6.3 8.8 8.9 7.2

Supply ofGuarantee

2,727 3,043 4,522 5,222 5,419 6,387 4,442 5,727 6,755


3,280 3,856 5,231 6,595 7,160 8,544 7,665 8,191 9,247

Default Rate (%) 3.5 2.6 2.3 4.2 9.1 4.9 9.0 9.1 5.6

SubrogationPayment

103 78 71 157 461 396 438 685 505


15 22 8 5 87 90 240 290 350

Capital Fund 474 578 623 681 579 504 549 528 688


6.9 6.7 8.4 9.7 12.4 17.0 14.0 15.5 13.4


reached 3,119.5 billion KRW and 2,010.7 billion KRW respectively. However, thegovernment’s bold reform measures, such as supplying a large quantity of fundsthrough the utilization of credit guarantees and restructuring the financial industry,led to palpable results, and the national economy began to recover at the end of1998.

3.4.5. Restructuring Period (2003-2008)

After the Asian foreign exchange crisis, Korea achieved gradual economicrecovery thanks to intensive industrial restructuring. With the start of the Kim Dae-Jung administration in 2003, the economic policy direction shifted towardemphasizing distribution as well as growth. The SME policy direction also put anemphasis on enhancing innovative capacity and strengthening competitivenessrather than protection and fostering. Meanwhile, the outstanding balance of creditguarantees exceeded 30,000 billion KRW at the end of 2001 and reached 33,571billion KRW at the end of 2004 due to the continued promotion of the policy toexpand the guarantee supply to overcome the foreign exchange crisis.

In 2005, the government announced “Measures to reform the SME financingsupport system” (the 6.23 Measures) based on market principles in order to shifttoward an innovation-driven economy. KODIT expanded credit guarantee supportfor innovative start-up enterprises and technology-intensive enterprises, and placedan emphasis on investment or a combination of investment and loan rather than


(in billion KRW)

Classification 200220012000199919981997

GDPGrowth Rate (%)

5.8 -5.7 10.7 8.8 4.0 7.2

Supply ofGuarantee

8,313 22,416 19,933 22,377 30,529 27,334


11,329 21,454 19,621 22,591 31,268 32,514

Default Rate (%) 10.8 14.5 3.3 4.4 3.4 3.8

SubrogationPayment

736 2,011 1,119 815 888 839


400 2,881 1,001 510 1,223 525

Capital Fund 705 665 2,022 2,602 2,892 3,458


16.1 10.1 7.5 7.0 8.4 9.6


simple support for lending. KODIT intended to promote financial support for SMEsthrough direct financing, and to change the direction of SME financing support fromgovernment-directed to market-friendly. Thus, KODIT started to depart from aquantitative guarantee operation centered on expansion of guarantee supply, andpushed for qualitative change, emphasizing support for SMEs with growth potentialthrough selection and concentration.

3.4.6. Period of Coping with the Global Financial Crisis (2009 - present)

In the aftermath of the global recession triggered by the financial crisis in theUnited States, SMEs faced a liquidity crisis, and the demand for credit guaranteesincreased sharply. The global financial crisis caused another shift in the creditguarantee policy, under which the guarantee supply contracted gradually. The


(in billion KRW)

Classification 200820072006200520042003

GDPGrowth Rate (%)

2.8 4.6 4.0 5.2 5.1 2.3

Supply ofof Guarantee

30,918 31,845 30,718 29,603 29,592 30,282


32,734 33,571 31,099 29,634 28,917 31,743

Default rate (%) 7.1 6.1 6.5 4.5 4.2 4.9

SubrogationPayment

1,726 1,674 1,325 665 775 1,066


656 521 300 300 130 93

Capital Fund 3,369 3,203 3,166 3,720 3,607 3,721


9.7 10.5 9.8 8.0 8.0 8.5

<Table 2-15> Long-term Plan for Guarantee Operations under the 6.23 Measures and Actual State of Guarantee Operations

(in billion KRW)

Description 20102009200820072006

Total Guarantee Goal 2,766 2,700 2,630 2,560 2,500

Actual Result 2,852 2,854 3,039 3,925 4,034

* Shift of policy toward the expansion of guarantees during the second half of 2008 in the wake of the globalfinancial crisis


government had implemented a guarantee operation policy based on marketprinciples since 2000 and reduced the size of the guarantee supply, but recentlyallowed a credit significant expansion of the guarantee supply to help to cope withthe global financial crisis, utilizing the credit guarantee as a policy measure.

4. Performance of KODIT's Operations

4.1. Current State of KODIT

With the growth of the national economy, the scale of KODIT’s guaranteeoperations expanded significantly. The outstanding balance of guarantees at thetime of KODIT’s establishment was only 157.9 billion KRW, but it continued toincrease, reaching 21,454.2 billion KRW in 1998, as a result of the sharp increase inthe guarantee supply that was needed to overcome the foreign exchange crisis inAsia.

After 2002 the financial markets stabilized thanks to the economic recovery, andKODIT has gradually reduced the scale of its guarantee operations since 2005.However, the need for credit guarantee support was heightened in the second halfof 2008 due to the global financial crisis, and the outstanding balance of guaranteesstarted to grow again, reaching 47,333 billion KRW in 2010. In this way, KODIT grewin parallel with the advancement of Korean economy, playing the role of afirefighter that mitigated the impacts of recession through the supply of guaranteeswhenever Korea faced economic difficulties.


(in billion KRW)

ClassificationGDP

GrowthRate

Supplyof

Guarantee

OutstandingGuarantee

DefaultRate(%)

SubrogationPayment

Gov’tContribution

CapitalFund

LeverageRatio

2009 0.3 45,620 46,913 3.7 1,337 1,680 6,376 7.4

2010 6.2 44,732 47,333 3.9 1,269 - 6,508 7.2


The default ratio shows an inverse relationship with economic conditions, as itdrops during economic prosperity but goes up during recession. Since theestablishment of KODIT, the default ratio has fluctuated significantly. It was very highduring the periods 1980-1984, 1992-1995 and 1997-1998. During these periods, theeconomy of Korea faced big difficulties at home and abroad due to factors such asthe second oil shock, the implementation of the real-name financial transactionsystem and the Asian foreign exchange crisis. The default ratio stabilized between 2 ~4% during the latter half of the 1980s and the mid-1990s, when business conditionswere good.

One factor to notice here is the trend of the default ratio since 2000. The ratio hasstabilized at around 5%, except for the period of 2003-2005, when it was recorded ataround 6%. This can be attributed to the introduction of a credit ratings system andconsolidated risk management in 2001. In addition to the credit ratings system,KODIT introduced a variety of risk management systems, and has maintained thedefault ratio at around 5% since 2007 despite big recession factors such as the globalfinancial crisis.

500,000

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

-

1976

1977

1978

1979

1980

1981

1982

1983

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1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Total Outstanding Guarantee(including P-CBO)

Outstanding General Guarantee

(billion. KRW)

<Figure 2-10> Trend of Outstanding Balance of Guarantees


4.2. Inducement to Increase of SME Loans (see Appendix 1)

The rapid growth in the scale of credit guarantees played a big role in improvingthe attitude of financial institutions toward SME lending. In 1975, immediately priorto the establishment of KODIT, SME loans by Korean financial institutions amountedto 753 billion KRW and accounted for only 35.0% of total enterprise lendings. Thisnumber has continually increased, reaching 440,858 billion KRW in 2010 andaccounting for 44.383.1% of total lendings.

The growth of the weight of SME lendings in Korea is mostly attributable to thestrong will of the government to support SMEs. First, IBK, which specializes infinancing support for SMEs, was established and operated. Second, the governmentprovided strong leadership and guidelines for financial institutions to keep onextending SME loans. Third, the government induced an increase in SME loans byeliminating some of the burdens through the utilization of various credit guaranteesystems such as KODIT.

The credit guarantee system in Korea is considered throughout the world as a bestpractice, as it has helped to enable an environment where financial institutions cancontinuously deal with SME loans.

1976

1977

1978

1979

1980

1981

1982

1983

1984

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2002

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2005

2006

2007

2008

2009

2010

(billion. KRW) (%)

DistressAmount

GDP Rate

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

DefaultRate

20

15

10

5

0

-5

-10

<Figure 2-11> Trend in the Default Ratio


4.3. Contribution to the Reduction of Capital Requirements of Financial Institutions

The usefulness of the credit guarantee system can also be found in terms of itscapacity to secure the stability of financial markets. The weighted risk ratio of loanscovered by credit guarantees has been adjusted downward from 10% to 0% underBasel II, which mitigates the burden of capital requirements of financial institutions.This means that commercial financial institutions can secure room to enter a newhigh-risk market for SMEs and micro-businesses. As well, it means that the creditguarantee contributes indirectly to an expansion of SME lending.

In 2010, KODIT calculated the Bank of International Settlement (BIS) CapitalAdequacy Ratio (CAR) of domestic financial institutions under the assumption thatenterprises provide collateral instead of a credit guarantee to receive loans, and onthis basis, estimated the size of credit required to satisfy the BIS capital adequacyratio. According to this analysis, their BIS CAR would fall by 0.31% points. It isestimated that with that drop in CAR, an additional supply of about 39 trillion KRWin credit could be created. This implies that the credit guarantee not only functions todirectly increase loans by the amount of credit guarantee supplies, but also plays therole of indirectly increasing loans by mitigating the burden of financial institutions tosecure equity capital.

4.4. Contribution to the Mitigation of EconomicFluctuation

The credit guarantee attracts the most attention as a counter-cyclical policy. Ascan be seen in the figure below, there is an inverse relationship between the creditguarantee supply and economic fluctuation. When the GDP growth rate goes up, thesupply of guarantees decreases, and vice versa. The credit guarantee functions toprevent chain-reaction bankruptcies of enterprises and the spread of problems byinducing an increase of loans for enterprises.

<Table 2-18> SME Lending by Financial Institutions

(Unit: billion KRW)

1975

TotalLending

(A)

SMELending

(B)B / A

2010

TotalLending

(A’)

SMELending

(B’)B’ / A’

2,149 753 35.0% 994,349 440,858 44.3%

Source: Bank of Korea, Financial Supervisory Service


It was acknowledged through the experiences of the Asian foreign exchange crisisin 1997 and the global financial crisis in 2008 that the credit guarantee is one of themost effective policy measures to secure the stability of SME financing markets andpromote the provision of liquidity in response to economic fluctuation.

GDP Growth Rate Increase Rate of OutstandingGuarantee

Increase Rate of Outstanding Guarantee GDP Growth Rate

'82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

25%

20%

15%

10%

5%

0%

-5%

100%

80%

60%

40%

20%

0%

-20%

<Figure 2-12> Credit Guarantee Increase Rates and GDP Growth Rates

Source: KODIT Report 2011-3, “Macro-analysis of Effects of Credit Guarantee in 2010”




Chapter3

1. Introduction

2. Current Credit Guarantee System of Kazakhstan

3. Efforts of the Government of Kazakhstan to Improve the Credit Guarantee System

4. Credit Information and Guarantee Evaluation System of Kazakhstan

5. Assessment on the Credit Guarantee System of Kazakhstan


Summary

Since its independence from the Union of Soviet Socialist Republics in 1991,Kazakhstan has achieved relatively rapid economic growth compared to otherCentral Asian countries. Its abundant natural resources, such as oil and natural gas,and its agriculture sector based on its vast land mass, have provided comparativeedges for the country’s development. But paradoxically, the resource-industry-dependent development has compromised the growth momentum of its SMEs,which have to thrive by developing technologies and expanding their shares in thedomestic market. The income earned by resource exports have not been reinvestedto strengthen SMEs’ competitiveness, but on importing cheap consumer goodsmostly from China, Russia and European countries, undermining the mid and long-term growth potential of Kazakhstan.

Before the global financial crisis hit in 2008, financial institutions in Kazakhstanrealized explosive growth thanks to the booming real estate market and cheapforeign capital. Many foreign investors acquired bank stocks or even establishedbanks in Kazakhstan, relying on the rosy prospects of the banking industry inKazakhstan. However, when the real estate market fell flat during the globalfinancial crisis, banks’ NPLs snowballed and foreign investment stopped, virtuallybreaking the financial system. As the government acquired shares of four majorbanks that announced defaults and provided subsidies, the problem seemed to havebeen somewhat eased. Nevertheless, considering that banks of Kazakhstan have NPLs


Jong-Goo Lee (KODIT)

Islambek Kairabekov (DAMU)

Chapter 3 _ Credit Guarantee System of Kazakhstan·087

over 30% of their assets on average, there is still a long way to go to fully normalizethe banking industry. When banks cannot operate adequately due to NPLs andfinancing difficulty, the overall economy, not to mention SMEs, inevitably facesfinancing difficulties.

The Kazakhstan government launched a series of economic development plansand set a policy priority to foster SMEs. In particular, the government is trying to fill inthe gaps in the private financial market by bolstering its policy financing for SMEs.The credit guarantee system, which was implemented in the second half of 2010 byDAMU, is a key program to foster SMEs. However, for multiple reasons the creditguarantee system has delivered only lackluster performance thus far.

DAMU’s credit guarantee program focuses on promoting SMEs in a few strategicsectors to invest in facilities, rather than financing SMEs overall. However, as SMEs donot often invest in new facilities, demand for credit guarantees remains weak. Inaddition, as the credit guarantee procedure and requirements are overly complex,neither SMEs nor banks are enthusiastic about utilizing the program. It would usuallytake more than six months for a company to complete the procedure. It is uncertainwhether a company will be able to get the credit guarantee support after the longprocedure as well. The sustainability of the program itself is also doubtful, as plans tosecure mid and long-term resources for the fund have yet to be prepared.

As supervisor of the program, MEDT is already well-aware of the problems and isconducting multi-faceted studies to invigorate the credit guarantee program. TheMinistry decided to establish an institution dedicated to the credit guarantee systemand prepared funding measures to ensure the sustainable operation of the system. Itis also continuing its efforts to streamline the credit guarantee procedure, which isthe biggest shortcoming of the existing system. The plan for improvement of thegovernment of Kazakhstan is a leap forward from previous plans, as establishing anindependent agency dedicated to the credit guarantee system lays the creditfoundations for SME policy financing in the mid and long run.

In evaluating the performance of a credit guarantee program as a policy financingtool, guarantee size and support effects are generally the key factors. However,government contributions to the operation of the program must be minimized.Accordingly, establishing a risk management system based on systematic creditevaluation is important. Still, like other developing countries, Kazakhstan has yet toimplement a credit ratings system that assesses borrowers’ credit before grantingloans or guarantee services. As financial institutions in Kazakhstan previouslyprovided loans by obtaining collateral like real estate, there was no need for creditratings system. However, to develop not just the credit guarantee program, but thefinancial system overall, a credit ratings system is a prerequisite. Considering the level


of the credit information infrastructure and its management, it may be difficult toestablish an effective corporate credit ratings system (CCRS) in the near future.Kazakhstan may need meticulous preparations and strenuous efforts to eventuallydevelop a credit ratings system.

Above all, the government should actively support the establishment of a creditratings system. The first step will be to establish a credit information archive agencythat collects, exchanges and maintains credit information about individuals andcorporations. It is also important to enhance the credibility of corporate financialstatements, as well as the materials or documents issued by public agencies. Inaddition, financial institutions, including banks and credit guarantee agencies, needto accumulate customer credit information and draw their customers' attention tocredit management.

In conclusion, the credit guarantee system that is being operated in Kazakhstan tonurture SMEs must face daunting challenges to deliver satisfactory results. It isunlikely that such problems can be solved simply by improving the credit guaranteesystem; rather, the economic, social and cultural environment as well as the financialindustry must be simultaneously improved. Nevertheless, it is meaningful to adoptand operate an optimal credit guarantee system that fits the conditions ofKazakhstan. By doing so, the credit guarantee system should support the privatefinancial market and take root as a core policy financing tool.

1. Introduction

The Korean government directly or indirectly operates several policy fundingprograms, including credit guarantees that are executed by governmentorganizations to expand SME loans, policy loans that the government assigns andprovides to technology-oriented or innovative firms, funds that the governmentprovides for promising and potentially-profitable companies with high potential tobear capital gain for the investors and lines of credit through which the Bank ofKorea (BOK) institutionally encourages companies to get government-supportedloans. In addition, the government introduced the On-lending system, an indirectbank loan system, through Korea Finance Corporation (KoFC) in 2009.

Generally, SMEs account for a substantial portion of a country’s economy, as theyare nimble and responsive to market changes due to their business nature, andprovide growth drivers to each nation’s economy. Because of their significantcontributions to the national economy as well as their capacity to increaseemployment, most countries are striving to expand SMEs and improve theircompetitiveness.


However, most SMEs have disadvantages compared to large corporations,regarding their overall business activities such as financing capacities and technologydevelopment. In particular, they face structural weakness in financing due to highertransaction costs, information asymmetry of the financial market, poor credit leveland higher possibility of banks’ request for collateral. Accordingly, SME financingcannot be left to the invisible hand of the free market, but should be addressed bygovernment policies. In this regard, many countries have long implemented theirown policy funding systems for SMEs.

The government of Kazakhstan has been no exception to this trend. Thegovernment recognized the need to foster SMEs in order to diversify its distinctivelyresource-focused economy, and established a few independent government agenciesto provide them with both financial and non-financial support. To develop andoperate SME support policies, the government of Kazakhstan has established andreinforced DAMU, NIF, CMAR and Samruk-Kazyna NWF.

DAMU, a representative organization for SME support that has provided wide-ranging financial and non-financial support since its establishment in 2007, submittedthe proposal “Development of Entrepreneurship in Kazakhstan for 2010 - 2014” tothe government in 2009 and actively participated in the development of “BusinessRoadmap 2020”10), a business development plan completed in 2010. “BusinessRoadmap 2020” recognized the limitations of the country’s highly-imbalancedindustry structure after the global financial crisis, introduced a few SME financingprograms, including a credit guarantee program to foster SMEs in strategic sectors,and designated DAMU as the operator of the programs.

However, considering that only 17 companies had been provided with creditguarantee support as of the end of September 2011, the program has yet to befurther invigorated, and a comprehensive review is needed. In fact, the governmentof Kazakhstan has already noticed such problems and is preparing a new creditguarantee system. Against this backdrop, this study aims to examine the currentstatus and problems of the credit guarantee system of Kazakhstan, and to review anew system in order to help the government improve its credit guarantee systemthrough precise diagnoses.

The government of Kazakhstan chose the Korean credit guarantee system as abenchmark, as Korea has successfully achieved its policy goal of fostering SMEs whilemaintaining low subrogation rates and thus minimizing financial burdens on thegovernment. Therefore, this study will include evaluations on the credit guarantee

10) ”Business Roadmap 2020” aims at maximizing existing businesses and creating new permanent jobs, aswell as achieving sustainable and balanced growth of regional entrepreneurship in non-raw materialsector industries of the economy of Kazakhstan.


system in Kazakhstan and brief proposals for improving both the credit guaranteeprogram and the credit risk management system. In the next chapter, we willevaluate more specific recommendations for the actual improvement andimplementation of the credit guarantee system in Kazakhstan.

2. Current Credit Guarantee System of Kazakhstan

2.1. Overview of the Credit Guarantee Agency: DAMU

Currently, the credit guarantee system in Kazakhstan is operated by DAMU, whichis 100% owned by a sovereign fund, Samruk-Kazyna NWF. Established as SMEF in1997, DAMU managed investments and contributions from ADB and the EuropeanBank for Reconstruction and Development (EBRD) until 2001. It began directfinancing for SMEs in 2002, evolved into a comprehensive SME-supportingorganization from 2007, and is currently under the direct supervision of MEDT. As ofAugust 2011, it operates 16 branches with 270 employees, and provides bothfinancial and non-financial services for SMEs.

Financial Programs

Financial programs under "Business Roadmap 2020"

(interest rates subsidizing, guaranteeing)

Stabilization program - tranche 1-3

DAMU-Regions 2

Conditional placement in leasing companies

Institutional development of business infrastructure (guarantee funds, private equity funds)

Targeted programs of financing in regions

Program of business development in small towns

Non-Financial Programs

Non-financial programs under "Business Roadmap 2020" (service support, training)

Call-center for SMEs

Business-portal

Training program "Business-advisor"

Institutional development of business infrastructure (business development centers)

Analytical and information materials for SMEs

Cooperation under program <Senior Experts>;

�� •SES

�� •PUM

TV-project "Business story"

<Figure 3-1> Details of SME Support Systems of DAMU

Source: DAMU


As the global financial crisis of 2008 undermined the financial market inKazakhstan, DAMU has expanded its role as a policy financing organization. ThoughDAMU had previously been implementing 4 financial and non-financial supportprograms, it began in 2009 to operate 13 financial and 11 non-financial supportprograms. In particular, under the government’s “Business Roadmap 2020,” it wasdesignated as the operator of the credit guarantee system and interest rate subsidyprogram for SMEs needing strategic support. “Business Roadmap 2020” wasdesigned to create jobs in existing companies, encourage prospective entrepreneursto found new firms and pursue sustainable and balanced growth by fostering non-resource industries. To this end, it provides financial and facility support for start-ups,financial and tax support for existing and promising companies, foreign exchangerisk reduction for export companies and education programs to promoteentrepreneurship.

2.2. Overview of the Credit Guarantee System of DAMU

The credit guarantee system of DAMU was implemented in September 2010 tosupport new facility investments and expansion by SMEs. Manufacturing, healthcare,education and tourism businesses are eligible for this program. The maximumguarantee amount is as high as 3 billion KZT (2.4 billion KRW), and guaranteed loanscannot surpass 85% of the total investment. In principle, the guarantees are providedin long terms to alleviate borrowers' repayment burden, but the period cannotexceed 10 years.

In addition, credit guarantees that directly affect risk of a credit guaranteeinstitution cannot surpass 50% of the total loan amount, and credit guarantees forcompanies are provided free of charge. Considering that guaranteed loans bear lowcredit risks and banks in Kazakhstan currently charge high interest rates to SMEsstruggling with high financial cost, the interest of loans backed by the creditguarantee is capped at 14%.

While the operating expenses of DAMU are primarily supported by the centralgovernment, local governments contribute to the capital for the preparation ofpayments under guarantee liabilities by funding 20% of guarantee amountsexecuted by DAMU. Like SMEs, financial institutions that virtually benefit from theprogram, are free from any fees or expenses.


2.3. Procedure of the Credit Guarantee System of DAMU

Unlike most credit guarantee systems, which are comprised of a few stakeholderssuch as applicant SMEs, financial institutions and a credit guarantee institution, theguarantee system in Kazakhstan involves more parties in the screening and approvalprocesses. First of all, MEDT that supervises DAMU engages both directly andindirectly in the evaluation processes of individual guarantee loans, and RegionalCoordinating Council (RCC) and regional governments (as coordinators) alsoparticipate in the decision-making process to evaluate the contribution of theinvestment plan to the regional economy. Banks and DAMU also have independent

<Table 3-1> Details of the Credit Guarantee Systems of DAMU

Eligibility Details

Eligible Funds Facility investment for a new project or for the expansion of existingbusinesses

Eligible Businesses Companies in the strategic sectors- manufacturing, medicine, education, tourism, etc.

Limitations per Business Up to 3 billion KZT per company (App. 2.4 billion KRW)

Funding Limitation Loan amount ≤ Total investment x 85%

Guarantee Period Up to 10 years

Guarantee Portion Up to 50% of total guaranteed loan amount

Guarantee Fees No fees (for borrowers or lenders)

Other Conditions 20% of guarantee amount paid by RCC

Source: DAMU

12 4

3

CreditGuaranteeInstitution

SME

Bank

Application forguarantee

Execution of loan

Notification of guarantee

Analysis &Evaluation

<Figure 3-2> General Credit Guarantee Procedure

Source: KODIT


evaluation processes to determine loan and guarantee eligibility. Accordingly, incomparison with other countries, the credit guarantee system of Kazakhstan hasmore stakeholders and a more complex structure as a whole.

Like those of other developing countries, the credit market in Kazakhstan is alsodominated by loan suppliers, i.e. financial institutions, which have more thoroughscreening processes for loan applications. However, as these financial institutions lackexperience in operating credit guarantee or credit loan systems, the complex systemmay not be an effective measure to lower credit risks of loans or prevent moralhazard of SMEs.

Nevertheless, the government seems to believe that a series of evaluationprocesses by different parties concerned may help them select an applicant with agood credit rating, and thus control the credit guarantee program successfully.

The procedure begins when ① a company completes its facility investment plan,calculates a necessary loan amount and submits an application for a bank loan. ②When a bank evaluates the loan application and decides to process guaranteedloans, the bank submits the application and a letter of recommendation to theregional government (the coordinator), and ③ the coordinator reviews thedocuments and requests the approval of RCC. ④ RCC decides on the eligibility of theloan guarantee, and if approved, ⑤ requests coordination of the loan guarantee

The Authorized Body

(MEDT)

Regional Coordinating

Council (RCC)

Program Coordinator

(Regional Government)

Financial Agent ofthe Program

(DAMU)

Banks

(STBs)

<Figure 3-3> Primary Participants in the Credit Guarantee System of DAMU

Source: DAMU

•Exercises target transfer to the local budget•Determines the overall financing limit for each region

•Considers the projects to meet the criteria of the Program•Decides on the possibility of participation in the Program

•Distributes the overall financing limit and corresponds with theauthorized body•Transfers projects of the Program participants to RCC

•Acts as guarantor to banks on loans of the Program participants•Monitors banks and projects

•Consider projects on the condition of the guarantee by the financialagent•Provide funding for projects under the guarantee from DAMU


decisions of MEDT through the coordinator. ⑥ Then, the coordinator informs DAMU,the bank and the applicant company of the guarantee approval result, and ⑦ thebank submits the necessary documents to DAMU. ⑧ The Evaluation Committee ofDAMU makes the final decision on the loan guarantee after examining thedocuments and conducting due diligence. ⑨ If approved, DAMU sends a pre-guarantee document to the bank, and ⑩ when the company, the bank and DAMUsign a credit guarantee agreement, ⑪ the bank executes the loan and completes theprocedure. In addition to the evaluation processes of banks and approval/permissionprocesses of regional governments, DAMU’s in-house experts will conduct an in-depth evaluation process regarding all aspects, including legitimacy, stability,economy and risk.

As mentioned earlier, the system involves many stakeholders from the verybeginning of the process in order to prevent moral hazard of SMEs and minimize baddebts or defaults. This is particularly important because the guarantee will beoperated based on financial aid from the government budget. However, it must beconsidered that complex systems of this type tend to have fundamental inefficiencyissues and may result in adverse consequences.

7

6

6

5

43

2

1

8 910

10

Authorized Body

RCC

Coordinator

Bank

Entrepreneur

DAMU

<Figure 3-4> Guarantee Procedure of DAMU

Source: DAMU

1. The Applicant applies to the Bank, which decides on the loan

and provides the Applicant a letter indicating the estimated

guarantee size.

2. The Applicant applies to the Program Coordinator at the local

level attaching the letter from the Bank.

3. The Coordinator transfers the project to RCC.

4. RCC makes decision on guarantee possibility.

5. The Coordinator provides RCC report to the Authorized Body

that coordinates RCC decision.

6. The Coordinator provides the list of approved projects to the

financial agent and Banks.

7. The Coordinator notifies the Applicant.

8. The Bank provides necessary documents to the

financial agent.

9. In the case of a positive decision, the financial agent sends a

prior guarantee letter to the Bank.

10. The Bank, the financial agent and the Applicant sign a

guarantee contract.


2.4. Issues in the Credit Guarantee System of DAMU

Introduced in September 2010, the credit guarantee program of Kazakhstanprovided 14 million USD of credit guarantee to 17 companies from January toSeptember 2011, and some of the beneficiary companies defaulted not long afterthey had received loan guarantees. Although the beneficiaries were mostlybusinesses in strategic sectors, including manufacturing, communications andtransportation and medical services, the total support was insufficient to delivertangible policy outcomes. The following are the fundamental issues in the creditguarantee system of Kazakhstan.

2.4.1. Complex Procedure

The complex procedure may be one of the primary reasons for the lacklusterperformance of DAMU. In fact, it takes three to six months for an SME’s guaranteeapplication to reach DAMU, after undergoing a series of evaluations by banks,coordinators and MEDT. Once it reaches DAMU, it undergoes another series ofscreening processes within DAMU, including document examination, due diligenceand assessment by an evaluation committee. As such, obtaining a loan guarantee isprohibitively difficult for an SME. In addition, as facility investment plans oftenrequire quick decisions and swift financing, many companies try to find otherfinancing sources or give up on the investment altogether due to the prolonged andtime-consuming process. In other words, the complex procedure itself is the maincause that discourages credit guarantee demands.

To be specific about the reasons for the delayed process, the main culprits arecoordinators, RCC and MEDT, even though they are not core players in decidingcredit guarantee approval. These organizations were probably included in theprocess because the government of Kazakhstan intended to provide a one-stopservice for facility investment projects, in order to reduce the time and effort requiredto obtain approval and permission from the central and local governments. However,the government approval and permission process should be streamlined separatelyfrom financing procedures in order to attain real progress.

Inefficient operation of the credit guarantee programs due to a lack ofexperiences also causes delays. The Evaluation Committee of DAMU headquartersperforms in-depth examinations on each application, even though the amount is notconsiderably large. The Committee mainly evaluates documents submitted byapplicant SMEs and banks. Regional branches of DAMU are also involved in the on-site investigation process and its own evaluation process, even though they have littleeffect on the final result of credit guarantee approval. To streamline the screeningprocedure and shorten the evaluation period, it is desirable to assign more roles and


responsibilities to regional branches and internal experts. However, DAMU seemsreluctant to accept this idea due to operational risks and other issues such as moralhazard.

2.4.2. Limited Eligibility

Another major cause of the poor credit guarantee performance is the overlyconservative eligibility requirements. Although the government of Kazakhstan hasdesignated only SMEs in strategic sectors as beneficiaries of the credit guaranteesystem, it is not easy to find new investment demand when there are gloomydomestic market prospects with no or few, if any, competitive inter-relatedindustries. In addition, considering that SMEs or start-ups that are already competitiveare unlikely to decide on new investments to strengthen their competitiveness whenfinancing costs such as interest and guarantee fees are so high, the strict eligibilityrequirements may cause an adverse selection problem, in that the program may haveto choose SMEs that are embedded with higher risks and more vulnerable toeconomic fluctuations, which will ultimately increase the loss of the credit guaranteeinstitution.

The poor business environment of SMEs in Kazakhstan may also contribute to theweak demand for credit guarantees. As Kazakhstan suddenly became a marketeconomy, without preparation, after 70 years under the socialist regime, most peoplelack entrepreneurship, which is the primary driving force for economic development.Furthermore, the small population is sparsely distributed in the vast land and socialinfrastructure such as roads and railroads have yet to be significantly developed.Accordingly, companies that try to overcome the weak domestic demand by exportsfind themselves confronting the difficulty of pioneering international sales channels.They also have no choice but to compete with SMEs in neighboring large economiesincluding China and Russia, which are usually more competitive in both price andquality.

Therefore, the policy fund should shift its focus from the strategic sectors to allSMEs that are struggling from the poor financial infrastructure. If SMEs in generalsectors expand their domestic businesses and become competitive, they will alsocontribute to the growth of strategic sector companies.

2.4.3. Sustainability

In addition to the aforementioned problems, the credit guarantee program ofDAMU is expected to have long-term sustainability issues related to increasedsubrogation payment and operating expenses, as it does not receive guarantee feesfrom SMEs or banks, but only receives contributions from local governments for 20%


of each credit guarantee provision. In addition, considering the high NPL ratio ofcommercial banks, a high subrogation rate will be inevitable for the initial period,which is likely to deplete the funds and ultimately threaten its very existence. In thatregard, the credit guarantee institution needs to find ways to acquire a stable sourceof capital, preferably on the basis of a special law.

Meanwhile, since DAMU is the sole operator of the policy fund in Kazakhstan andshould be responsible for a wide range of SME policies, it may not devote its coreoperating capability to the credit guarantee program. The government ofKazakhstan may need to establish a dedicated institution that can moresystematically operate the credit guarantee program in a more systematic way.

3. Efforts of the Government of Kazakhstan toImprove the Credit Guarantee System

3.1. Needs for System Improvement

The government of Kazakhstan recognized the need to improve the creditguarantee system as it operated the credit guarantee program for about one yearbut failed to draw much attention from SMEs or banks. Accordingly, the governmenthas understood the overall problems and engaged in discussions over theestablishment of a dedicated institution, the improvement of the guaranteeprocedure, the creation of demand for guaranteed loans and plans to encourageparticipation of banks.

3.2. Establishment of Basic Principles

MEDT has set forth a handful of principles for a new credit guarantee system thatthe Ministry is currently working on.

First, a new credit guarantee agency (hereinafter referred to “GuaranteeFund”(tentative name)), which shall take over the roles and responsibilities of DAMU,should be established in order to enhance efficiency and attain policy goals. As statedpreviously, if DAMU continues to operate many different financial support systems, itwill be hard to achieve the efficient operation of the credit guarantee system.

Second, a new principle should be established that ensures the government andthe private sector share the financial sources of credit guarantee institutionsreasonably and proportionately in compensation for the accompanying risks. If thecurrent free-charge practice continues, sustainability of the Guarantee Fund will beseverely undermined.


Third, to streamline the Guarantee Fund support procedure, a government-approved checklist should be utilized in the credit guarantee screening process. Inaddition, banks should be encouraged to participate in the initial establishment ofthe Guarantee Fund, and international financial institutions (IFIs) such as ADB andEBRD should also be encouraged to engage in the capital preparation andmanagement of the Guarantee Fund.

3.3. Details of System Improvement by MEDT

3.3.1. Establishment of the New Credit Guarantee Fund

As DAMU was virtually the sole operator of the existing credit guaranteeprogram, it will assume a leading role in establishing the Guarantee Fund. DAMU willparticipate in the establishment as the largest shareholder and serve as a channelthrough which the government will make further contributions. Accordingly, DAMUshall be involved in the decision-making process and operation of the GuaranteeFund. In addition, the new guarantee scheme of the Guarantee Fund will be builtupon the DAMU framework, with some improvement. However, it should also adoptnew and independent programs in order to successfully set up the system in the mid-to long-term.

For its part, the government of Kazakhstan is encouraging banks to participate inthe establishment of the Guarantee Fund. Commercial banks in Kazakhstan welcomethe government’s efforts, as they cannot aggressively increase loans in the face oftheir own operation problems with growing bad debts and difficulties in borrowing,particularly from overseas. However, considering that neither the government northe banks12) have experience in secured loan operation, and the credit guaranteeconditions have yet to be decided, banks are not expected to aggressively participatein the credit guarantee system in the initial stage. In particular, foreign banks, whichaccount for a substantial portion of the banking sector in Kazakhstan, are unlikely tobe active participants, and inducing them into the system remains a major challenge.In order for the credit guarantee system to take root early and successfully, theparticipation of banks that actually handle SMEs and execute the guaranteed loans isthe most important factor. For this reason, constant consultation with the banksabout the system must take place.

In addition, while the government of Kazakhstan hopes to receive capitalcontributions and technical support from international organizations such as ADBand EBRD, it will not be easy to elicit such support because capital contributions to

12) In Kazakhstan, 16 out of the 39 banks are foreign-owned, as the government of Kazakhstanderegulated foreign investment in 2005 as a condition of its entry to the World Trade Organization.


guarantee institutions, unlike the establishment of for-profit financial institutions likebanks or stock exchanges, by their nature inevitably involve operating losses. For thisreason, it will be more realistic for the government to anticipate technical assistanceor consulting aid from those international organizations.

3.3.2. Sourcing

The government of Kazakhstan recognized the necessity of a continuous andstable cash infusion to secure the long-term sustainability of credit guaranteeinstitutions, which unlike commercial insurance companies, inevitably providefinancial support for businesses in high risk areas. In principle, subrogation andoperating costs will be recovered with the guarantee fee from SMEs, as well as feesor contributions from banks and government contributions or capital investment.The fund already set forth an operating target of 10 billion KZT (about 80 billionKRW) guarantee in 2012, and the government decided to allocate 4 billion KZT(about 32 billion KRW) to the Guarantee Fund. It is expected that government fundswill be continuously added to the Guarantee Fund in accordance with subrogationcosts and operating expenses, in order to secure the stability of the Guarantee Fund.While government budget infusion is inevitable in the initial stage, if the subsidycontinues, this will pose a threat to fiscal soundness of the government. Therefore,studies should follow to find an optimal model of expense sharing among thegovernment, companies and banks.

Entrepreneur STBs

Guarantee

fee 1

.5%

Application 1%

Funds

Funds

Subrogation

Loans

Guarantees*

IFI

Government Budget(via DAMU)

Chartered Capital

Administrative expenses of the Guarantee Fund

<Figure 3-5> Operating Scheme of the Guarantee Fund

Source: DAMU


3.3.3. Details of Major Changes

Although MEDT is currently analyzing the causes of DAMU’s poor performanceand searching for improvement measures, it has failed to radically improve theexisting system due to a lack of experience and an overly prudent approach to takingrisks in the operation of the system. Above all, it still maintains strict eligibilityrequirements, which is one of the prime culprits of the poor performance. In otherwords, it still sticks to loan guarantees for the facility investment of companies instrategic sectors and added a few amendments to the procedure. However, thecomplex and prolonged procedures have to be further streamlined.

Meanwhile, there were comparatively large changes in the risk managementsystem to reduce the loss of the government. First, the potential for moral hazard onthe part of companies and banks was lowered by dropping the loan guarantee limitper company from 2.25 billion KZT (App. 18 billion KRW) to 2 million KZT (App. 1.6billion KRW). Bank participation was induced by setting the minimum loan amountat 80% of collateral value. Efforts to decrease the financial cost of SMEs weremaintained by capping the interest rate at 14%. In addition, the period ofguaranteed loans was reduced from 10 to 7 years to lower the risk to the GuaranteeFund.

Meanwhile, the government prepared three subrogation models from whichcompanies and banks can choose before they execute the guaranteed loan. Themodel was intended to give banks the opportunity to accept guarantee conditionsmore easily. However, this could make the procedure more complex, pushing banksaway from participation. When banks or SMEs have to choose one of the models, it isprobably not clear which model will be more favorable to them when they have toclaim for the payment under guarantee obligations. So, it could just add one fruitlessdecision-making process, without a real economic benefit or convenience on eitherside.

Of course, it is necessary to operate the system strictly in order to minimize risksand losses arising from default by SMEs. As a whole, despite some importantimprovements, the program is still more focused on the risk management of thecredit guarantee institution than on increasing the credit guarantee supply to widerranges of SMEs. If it is too strict, banks and companies are discouraged fromparticipating in the program. Thus, rather than pursuing more strict conditions in thescheme, it would be more effective to perform risk management by improving thescreening process.


3.3.4. Changes in the Credit Guarantee Support Procedure

Despite its focus on streamlining the procedures, which was one of the biggesthurdles for the vitalization of the credit guarantee system, the new system is notexpected to be greatly different from its predecessor. One distinctive improvement isthat the new system requires companies to submit the credit guarantee applicationdirectly to a bank, eliminating the need to apply simultaneously to localgovernments. However, as long as companies are required to prepare the samedocuments, the overall processes will take no less time than before. In addition, it isnot clear whether regional governments can make any significant improvements intheir approval process for investment projects. Furthermore, if a regional governmentdelays the approval process of an investment project, SMEs may have to visit thegovernment to accelerate the process.

<Table 3-2> Summary of the New Credit Guarantee System

Eligibility Details

Eligible Loans New facility investment (including modernization and expansion offacilities)

Guarantee Limitation per Business

2 million KZT (1.6 billion KRW)

Minimum Loan Amount 80% of the market value of collateral

Interest Rate Cap Collateralized loan interest rates limited to 14% per year

Guaranteed Loan Period Up to 7 years

Discovery of Eligible Borrowers

By companies and banks

Conditions for Guarantee will automatically be cancelled when the collateralized Guarantee Cancellation loan amount reaches 40% of the market value of collateral

Timing of Subrogation Application

After bank’s application of the executions of collateral

Right to choose one of the 3 subrogation models before loanexecution of banks and companies①Model 1: Within 30% of the collateralized loans at the time of

guarantee (Before sales of the collateral)②Model 2: Within 40% of the total bonds upon the request of

repayment (Before sales of the collateral)③Model 3: Within 50% of bank’s total loss, including principal and

legal expenses (After sales of the collateral)

① Bank’s loan restructuring (when needed)② Bank’s execution of collateral (when applied)

Subrogation Procedure ③ Application for subrogation (in accordance with the pre-decided model)

④ Subrogation by the Guarantee Fund⑤ Subrogation loss preservation by the government (annually)

Source: DAMU

Subrogation Models


Internally, the Guarantee Fund will considerably change and simplify DAMU’sscreening practices, which were quite complex and demanded a great deal of timefrom internal professionals. It also prepares a checklist pre-approved by thegovernment and DAMU. Once the application documents arrive at the GuaranteeFund, the rest of the guarantee procedure will be completed in a radically shorterperiod of time. However, when the Fund uses a uniform checklist in the evaluation ofcomplex investment projects, it may overlook details on risk management. To addressthe shortcomings of the checklist method, the Fund also needs to preparesupplementary measures, such as training employees to improve their analytic ability.

4. Credit Information and Guarantee Evaluation System of Kazakhstan

4.1. Overview of the Credit Information Management

When the credit information infrastructure is well established in a financialindustry, it helps financial institutions accelerate their decision-making processesmore effectively and lowers the credit risk of their loans by ensuring an accurate andwide range of information. In the banking industry, credit risk management is one ofthe core factors of competitiveness. Unless default of their loan portfolios is

Bank

NewGuarantee

FundMEDT

RCC

Entrepreneur

<Figure 3-6> Procedure of the New Credit Guarantee Fund

Source: DAMU

1. An entrepreneur goes to the bank with an application for a loan.

2. In the event of a positive decision by the bank, the entrepreneur

submits an application for credit guarantee.

3. Local regional body makes the draft to RCC, who will decide on the

possibility of credit guarantee. If approved, it is sent to the New

Guarantee Fund and MEDT (list of approved projects)

4. After receiving the application, the New Guarantee Fund considers

the project in compliance with statutory requirements and makes a

decision on granting credit guarantee.

5. If the application is approved, the bank issues a preliminary letter of

guarantee.

6. Upon receipt of preliminary letter of guarantee by the bank, a

contract between the entrepreneur, the bank and the New

Guarantee Fund is drawn up, and the credit guarantee is issued.

7. After receiving assurance from the New Guarantee Fund, the bank

carries out the actual disbursement of the loan to the entrepreneur.


minimized, activities for strict internal operational risk management and cheapborrowings from outside cannot guarantee the soundness of banks. This is also thecase in the banking industry of Kazakhstan.

Although it is true that an increase in the bad debts of banks in Kazakhstan afterthe global financial crisis is primarily attributable to their over-exposure toconstruction and real estate industries, a lack of willingness on the part of customersto repay the loans, whether those are individual debts or corporate debts, is one ofthe biggest and the most chronic causes of high NPLs. The socio-culturalcharacteristics of the Transition Economy are closely related to the lack of willingnessto repay loans. Furthermore, when companies or individuals fail to meet loanrepayment schedules, only weak financial or economic sanctions are imposed on theirfuture economic activities. Strict management of credit information and history andrestriction of economic activities for individuals and companies will help change theirbehavior.

In this regard, the government should put the highest priority on securing creditinformation infrastructure. Without an institutional mechanism, it is difficult toexpect changes in individual and corporate attitudes regarding loan repayment.Thus, a public credit information system should be set up to manage, share andcontrol corporate and individual identities, credit information and default history. Ifall financial institutions utilize a single channel of credit information, it will bepossible to encourage changes in customer attitudes.

In Korea, the Korea Federation of Banks (KFB) began to offer credit informationmanagement services in 1986. In 1997, the government officially designated the KFBas Korea’s public credit registry (PCR) and granted it the authority to collect andmaintain credit information from all financial institutions, in accordance with theUtilization and Protection of Credit Information Act. Almost all the informationproduced in the financial institutions and some important information from thepublic institutions is mandatorily collected by KFB, and will be distributed to thefinancial institutions and public institutions that require the information for theirbusinesses. When the information collection system is managed thoroughly, theaccuracy and trustworthiness of credit information is very high, and contributes topromoting a credit-based society.


Generally, thorough credit information management will improve the attitude ofborrowers. When the Korean credit guarantee system was first implemented, manyKorean companies initially regarded the guaranteed loans as a government grant orpork barrel policy and were reluctant to repay the debt. However, when companiesor individuals with bad credit ratings were restricted from financial and economicactivities thanks to the sharing of information between guarantee agencies and allfinancial institutions, the development of lists of bad credit holders, lawsuits andother legal actions, and NPL rates went down and became stabilized.

4.2. Status of the Credit Information System

Although DAMU checks and utilizes the credit information of companies and theirChief Executive Officers (CEOs) before providing credit guarantees and operates aproprietary credit risk evaluation system, its capacity to predict corporate risks has yetto be further advanced. The credit information that DAMU can gather from outsideinstitutions is limited and may not be so critical in the evaluation process of aguarantee.

In Kazakhstan, there is no such agency as KFB or a Public Credit InformationRegistry, which systematically collects and manages corporate and individual financialinformation. Instead, First Credit Bureau (FCB), a private organization, fulfills the roleof a for-profit CB. FCB was established in September 2004, led by European creditratings firm, CreditInfo Schufa Group, and participated in seven major banks andfinancial institutions as shareholders. At present, FCB shares information with some

KFB(PCR)

CB(Individual and

Corporate)

PublicInstitutions

PublicInstitutions

FinancialInstitutions

FinancialInstitutions

DataAcquisition

DataInquiry

<Figure 3-7> Flow Chart of Credit Information Exchange in Korea

Source: KFB


60 institutions and has information about 4.3 million individuals and 85,000companies. As the credit information service business has a public purpose, FCB isfounded and operated in accordance with the Act on the Establishment of CreditBureau and Credit Information Records of Kazakhstan. This small company isheadquartered in Almaty and has 25 employees.

FCB is responsible for collecting personal loan records, and credit and delinquencyinformation each month, providing credit information online when requested byfinancial institutions. It has not prepared a proprietary credit ratings service, butprovides limited scoring services about individuals. In general, the financialinformation supplied by PCR is a critical factor in the credit ratings of other financialinstitutions or CBs. Financial transaction records and credit/default history are themost important factors in deciding the credit ratings of both individuals andcompanies. However, as most individuals and companies are customers to a singlebank in Kazakhstan, banks are less likely to refer to the financial informationcollected and distributed by FCB. Ultimately, customers need to have transactionswith several different banks in order to accelerate the competition between banksand enhance the quality of the financial service.

The credit information PCR collects from relevant financial institutions and publicinstitutions varies depending on the regulations of each country. When a widerrange of information is collected, the government has to be more concerned aboutthe protection of customer rights and the strict control over the circulation of thisinformation. However, in the early stage of development of credit informationinfrastructure, the government needs to focus more on the expansion andadvancement of credit information management. In Korea, KFB strictly manages theidentification information of individuals and companies and collects an extensiverange of credit information from financial institutions, such as banks, credit cardcompanies, and leasing companies, as well as from public institutions such as taxagency, court, customs, etc.


<Tab

le 3

-3>

Cre

dit I

nfor

mat

ion

Col

lect

ed b

y K

FB

Co

mp

anie

s

Cat

ego

ryC

on

ten

tsC

ateg

ory

Co

nte

nts

Ind

ivid

ual

s

Sour

ce: K

FB

Iden

tific

atio

n

Info

rmat

ion

Cre

dit

Tran

sact

ion

Info

rmat

ion

Publ

ic

Info

rmat

ion

Cre

dit

Cap

abilit

y

Info

rmat

ion

•Na

me

of fi

rm /

Type

of b

usin

ess

•Co

rpor

ate

regi

stra

tion

No. /

Busin

ess r

egist

ratio

n No

.•

Repr

esen

tativ

e’s n

ame

and

resid

ent r

egist

ratio

n No

.

Ope

ning

and

clo

sure

of

hous

ehol

d an

d bu

sines

s ch

ecki

ng a

ccou

nts

/Ope

ning

and

clo

sure

of

cred

it ca

rd a

ccou

nts

/ Out

stan

ding

loan

s an

dgu

aran

tees

of

repa

ymen

t (in

cludi

ng c

olla

tera

l, cr

edit

line

info

rmat

ion,

and

mat

uriti

es)

/ D

elin

quen

cies

on

debt

/ Im

prop

er u

se o

f lo

ans

/Su

brog

atio

n by

thi

rd p

artie

s / F

ailu

re t

o re

deem

cor

pora

te b

onds

at

mat

urity

/Misc

ondu

ct c

ausin

g di

sord

er in

cre

dit

card

mar

ket,

such

as

defa

ults

on

cred

it ca

rd d

ebt

/Misc

ondu

ct c

ausin

g di

sord

er in

cre

dit

trans

actio

ns, s

uch

as u

se o

f fra

udul

ent i

nfor

mat

ion

•De

linqu

encie

s on

natio

nal t

ax, l

ocal

tax

and

cust

oms d

utie

s•

Failu

res t

o ho

nor c

ourt

repa

ymen

t ord

ers

•Co

rpor

ate

info

rmat

ion

on N

PLs c

olle

cted

from

the

Kore

a As

sets

•M

anag

emen

t Cor

pora

tion

and

Kore

a •

Labo

r Wel

fare

Cor

pora

tion

•C

ompa

nies

in b

ankr

uptc

y/liq

uida

tion

proc

eedi

ngs

unde

r th

eBa

nkru

ptcy

Act

, or

in c

ourt-

med

iate

d co

mpo

sitio

n pr

ocee

ding

s in

acco

rdan

ce w

ith th

e Co

mpo

sitio

n Ac

t

•Co

rpor

ate

prof

ile (i

nclu

ding

affi

liate

s and

subs

idia

ries)

•G

ener

al in

form

atio

n on

bus

ines

s and

pro

duct

s•

Finan

cial in

form

atio

n, su

ch a

s fin

ancia

l sta

tem

ents

and

leve

rage

ratio

s•

Non-

finan

cial in

form

atio

n su

ch a

s aud

it re

ports

Iden

tific

atio

n

Info

rmat

ion

Cre

dit

Tran

sact

ion

Info

rmat

ion

Publ

ic

Info

rmat

ion

•N

ame

•Re

siden

t reg

istra

tion

num

ber

•O

ccup

atio

nO

utst

andi

ng lo

ans

(dat

es, a

mou

nts,

lend

ing

inst

itutio

ns, c

olla

tera

l) /

Cash

adv

ance

s / O

utst

andi

ng c

ard

loan

s /G

uara

ntee

s on

rep

aym

ent

(dat

es, a

mou

nts

and

nam

es o

f gu

aran

tee

inst

itutio

ns) /

Ope

ning

and

closu

re o

f hou

seho

ld c

heck

ing

acco

unts

/ O

peni

ng a

nd c

losu

re o

f cre

dit

and

debi

t ca

rd a

ccou

nts

/ Del

inqu

encie

s on

deb

t / D

efau

lts o

n cr

edit

card

deb

t / S

ubro

gatio

n by

thi

rd p

artie

s / D

ishon

ored

bills

and

che

cks

and

bank

rupt

cy d

ecla

ratio

n in

form

atio

n/De

bt r

edem

ptio

n in

form

atio

nhe

ld b

y th

e C

redi

t C

ouns

elin

g an

d Re

cove

ry S

ervi

ce /

Misc

ondu

ctca

usin

g di

sord

er in

the

cre

dit

card

mar

ket,

such

as

defa

ults

on

cred

itca

rd d

ebt /

Misc

ondu

ct c

ausin

g di

sord

er in

cre

dit t

rans

actio

ns, s

uch

asus

e of

frau

dule

nt in

form

atio

n

•De

linqu

encie

s on

natio

nal t

ax, l

ocal

tax

and

cust

oms d

utie

s•

Failu

re to

hon

or c

ourt

repa

ymen

t ord

ers

•Ex

empt

ions

from

deb

t rep

aym

ent d

ue to

cou

rt de

cisio

n to

disc

harg

eup

on re

ques

t fro

m d

ebto

r•

Indi

vidu

als

in d

ebt

reco

very

pro

cess

und

er t

he In

divi

dual

Deb

tor

Reco

very

Act

•De

linqu

encie

s on

cust

oms d

utie

s•

Delin

quen

cies

on in

dust

rial i

nsur

ance

pre

miu

ms

and

empl

oym

ent

insu

ranc

e pr

emiu

ms


4.3. Importance of Credit Infrastructure to Banks

In Kazakhstan, as most banks have been dealing only with collateralized loans andhave little experience with credit loans, the credit ratings systems has not beenutilized for individuals or for companies. Credit ratings should be associated with thecalculation of interest rate, the determination of maturity extension andrestructuring of loans, but credit ratings for banks of Kazakhstan exist in name only.They only consider the type and maturity of loan in deciding the interest rate, not thecredit rating of the borrower.

Banks also need to establish a precise internal credit ratings system in order tomanage CAR, which is defined by the BIS and is used to measure the soundness ofbanks’ financial status. As the cost of external capital financing will be affected by thecredit rating, banks must secure a good rating from credit ratings agencies. Duringthe international financial crisis in 2008, the credit ratings of most commercial banksof Kazakhstan were downgraded and have remained under speculative grades dueto both NPLs and liquidity issues. These banks need to find ways to acquire highergrades in order to normalize their capital raising and lower NPLs by strengtheningtheir capacity for risk management. One of the important roles of the government ofKazakhstan with regard to those matters will be to help establish a reliable publiccredit infrastructure that all financial institutions can use for internal credit evaluationsystems.

<Table 3-4> Change in the Credit Ratings of the Top 3 Commercial Banks of Kazakhstan

Classifications BTA BankHalyk BankKazkommertsbank

Before the Global Financial

S&PCrisis of 2008

BB BB+ BB

As of May 2011 B B+ B-


Moody'sCrisis of 2008

Ba1 Ba1 Ba1

As of May 2011 Ba3 Ba2 Caa3


FitchCrisis of 2008

BB+ BB+ BB+

As of May 2011 B- BB- B-

Note: Credit ratings are based on long-term bonds denominated in foreign currencies. Source: S&P, Moody's and Fitch


4.4. Credit Evaluation System

DAMU is utilizing its own system to evaluate guarantee applications and reviewsby internal experts to obtain the final approval of the headquarters EvaluationCommittee. As of September 2011, the headquarters Committee has approved about58% of the applications and rejected the remaining 42%, citing the poor credit level.This shows that DAMU is operating its own screening system.

For their internal screening process, DAMU mainly examines documents submittedby companies and banks, as well as the financial record reported by FCB. It relies mostheavily on the financial statements of applicant companies. In fact, financial ratios aregenerally the most important consideration in evaluating credit ratings. Theevaluation report of DAMU also focuses on diverse types of financial ratios. However,the fundamental issue is the reliability of the financial statements of companies inKazakhstan. Companies are not obligated to go through an auditing process afterthey prepare their annual reports, including financial statements. They seem toautonomously observe the international financial reporting standards (IFRS), so thereis no compulsory mechanism to enhance the reliability of the financial numbers. InKorea, any corporation with total assets of 10 million USD or more is required by lawto be audited by an external accounting firm. Even bigger corporations have todisclose their financial statements on the website of the Korean Financial SupervisoryService, where all investors and financial institutions can view the reliable financialstatements of private and public companies.

In addition to financial statements, the credit screening process also requiresapplicants’ financial transaction records and default history reported by banks andFCB, tax payment or delinquency records reported by tax authorities, and corporateestablishment information issued by the Ministry of Justice. DAMU has its expertsreview all of the documents before reaching a final conclusion. Nevertheless, it relieson the financial ratio analyses of experts and other evaluation tools, not on aquantitative standards or a credit ratings system.

Despite the thorough review on documents and experts’ analyses, a comparativelyhigh default rate from outstanding guarantees often occurs in the initial stage of thecredit guarantee system. However, this cannot be solely attributed to theshortcomings of the screening or evaluation system itself. The accuracy and reliabilityof the submitted documents must also be addressed. In addition, to enhance thecredibility of financial information, it is worth establishing a new public creditinformation registry that collects, manages and controls credit information morethoroughly.


5. Assessment on the Credit Guarantee System of Kazakhstan

5.1. Assessment on the Credit Guarantee Policy

The aftermath of the global financial crisis of 2008 and overheated investment inconstruction and real estate brought numerous NPLs and bankruptcy risks to thefinancial industry in Kazakhstan, to the extent that many players became reluctant toprovide loans to enterprises. Many SMEs that have weaker credit or insufficientcollateral are not able to borrow money from financial institutions. In addition, asfinancial institutions have little credit information about borrowers and no system forsharing information between them, credit loans are virtually unavailable, reinforcingthe collateralized loan-focused practice.

To improve this situation, the government of Kazakhstan introduced a creditguarantee system in the second half of 2010, but the aforementioned problems inthe system have stopped it from flourishing. The government should clarify themission of the system based on an accurate understanding of the purposes of creditguarantee systems in general. For example, the Korean system provides 34.6 billionUSD of guarantee for 230,000 companies as of the end of 2010. Among them, 92%have been provided funds for working capital, while only 8% have been providedfunds for facility investment. On the other hand, the Kazakhstani system onlysupports facility investment, and thus demands are fairly weak. This is only naturalbecause, unlike Korea, manufacturing accounts for only a small fraction of the

<Table 3-5> Documents Required to Apply for Credit Guarantee to DAMU

No. Documents NotesIssuer

Financial statements (Balance sheet, income Company's 1 statement and statement of cash flow) Accounting Financial soundness

*Notes should be included. Department

2 Confirmation Statement of Bank's Loan Existence of Provisions

Bankloan provision

3 Statements of Tax Payment Tax Agency Delinquent tax or bills

4 Permission, Patent and Quantity Confirmation Ministry of Legitimacy of the Statement Justice business reporting

5 Facility Investment Plan Company Investment analysis

6 Business Plan Company Feasibility analysis

7 Documents related to Company Ministry of Legitimacy of the Establishment Justice company establishment

Source: DAMU


economy of Kazakhstan. It may be meaningless to simply compare the results ofcredit guarantee operations without consideration of the economic structure of thetwo countries. Nevertheless, the government of Kazakhstan needs to focus on thedemand issue as well as the adjustment of the current guarantee scheme.

In other words, achieving policy goals may be impossible if the focus is only onfostering competitive SMEs and supporting facility investments. Generally, creditguarantee systems are devised as a policy tool to help general SMEs that are unableto borrow money from risk-averse commercial financial institutions. Thus, they areusually implemented to provide financing solutions not only to innovative SMEs, butalso to more general SMEs.

If the ultimate goal of the government’s SME policy is to foster a handful ofinnovative SMEs, more direct support such as policy loans, technology developmentfinancing, sales channels development and funds for capital investment may be moreeffective than indirect support such as credit guarantees. Therefore, accurate analysesby the government on the purpose of the credit guarantee system must precededecisions on the specific models of establishing, sourcing and operating.

5.2. Assessment on the Specific Issues in the Credit Guarantee System

5.2.1. Efforts to Enhance Sustainability

Both DAMU’s guarantee system and the MEDT’s new guarantee system havethree major problems: complex procedures, poor risk management mechanisms andlack of mid to long-term sustainability. In actual operations, a lack of autonomy inimplementing detailed procedures may cause problems.

The complex procedures, as stated before, include not only the internal screeningprocess of guarantee institutions, but also permission and approval procedures thatinvolve different stakeholders in a company’s investment projects, such as a regionalgovernment. This cannot be resolved simply by streamlining the evaluation processesof the guarantee institutions, but requires multi-faceted efforts by the governmentto prepare a business-friendly environment.

The risk management issue is a bit more complex and requires gradualimprovement measures that consider the socio-cultural situation. In this regard, thetop priority should be improving the financial information infrastructure. Setting upan internal control system for the guarantee institution is also important to manageoperational risks. In addition, the role of branch employees should not be limited tohandling paperwork after a final guarantee decision is made, but extended to


evaluating the credit risks of applicant companies. To this end, those employeesshould be trained into experts in credit evaluation and authorized for the screeningjobs to some extent.

The government of Kazakhstan, particularly to MEDT, confirmed its will toprovide government budget support to secure the mid to long-term sustainability ofthe guarantee institution. However, based on the level of NPLs of SME loans offinancial institutions in Kazakhstan, it is predicted that their losses may be too hugeto be constantly and solely subsidized by the government. Therefore, plans to sharethe expenses of the system with companies and banks should be considered in orderto sustainably maintain the guarantee system in the long term.

5.2.2. Establishing and Operating a New Credit GuaranteeInstitution

The government of Kazakhstan is establishing an independent agency to operatethe credit guarantee system, with the expectation that this new agency can replacethe poorly-performing DAMU. This is an effort to run the system as part of the SMEfinancing policy. Unlike the autonomous and spontaneous mutual guarantee systemsof Europe, the system in Kazakhstan will be a government-driven public policy.However, to ensure long-term sustainability, a clear legal basis that stipulates theoperating purposes and operating mechanism of the guarantee institution is needed.Accordingly, a special act on the system is worth considering. KODIT was founded onthe basis of the Korea Credit Guarantee Fund Act, which dictates the operating goalsof the credit guarantee system, the details of contributions by the government andfinancial institutions and other operating matters, so that KODIT can makeindependent decisions and secure reliability.

Guarantee screening processes, from credit evaluation to the credit guaranteedecision, can be run directly by the credit guarantee institution through itsnationwide branch network (direct method), or indirectly entrusted to the banks thatmake loan and guarantee decisions in accordance with predetermined criteria(indirect method). In terms of drawbacks, the direct method has high costs, as it isnecessary to establish regional branches throughout the country, while the indirectmodel may cause severe moral hazard. Considering that the banking industry ofKazakhstan had no experience in dealing with credit loans and high NPL ratios ontheir loans, it may seem risky to have banks perform the screening process. However,to invigorate the credit guarantee program in the initial stage without a well-organized system, banks may certainly be an option. Nevertheless, in the long run,the direct method system seems desirable to minimize the financial burdens on thegovernment.


5.2.3. Sourcing of Capital and Expenses

The success of the credit guarantee system depends on how confident banks andcompanies are in the system and how enthusiastic they are about the use of the system.The system should be well-prepared, with guarantee sources and basic assets to securepublic confidence. In this regard, the government should establish a legal basis forproviding financial resources and encouraging financial institutions and companies toprovide financial support. In the initial period, the government may consider assuminglarger financial burden than banks or companies to settle the system. Later, when thefinancial market grows and financial institutions become strong enough to stand ontheir own, the contributions by financial institutions and fees paid by companies maybe enough for the government to reduce its financial support.

In the long term, guarantee fees must be differentiated according to eachborrower’s credit ratings on the premise of the “beneficiary pays” principle. In mostcountries, guarantee fees are one of the major financial sources of the guaranteefund, and the credit guarantee agencies charge 1 to 2 % guarantee fees according toguarantee type and amount and borrower's credit ratings. Ideally, the fees must bebased on guarantee risks and operating expenses. However, if the fees are too high,companies have to bear heavy financial burdens. This increases the possibility ofadverse selection, undermining the sustainability of the guarantee system. AsKazakhstan has yet to establish a credit ratings system, a fixed guarantee fee rate willbe reasonable in the initial period of the guarantee system.

5.2.4. Decisions on the Operating Details

Coverage ratio is a basic and core component of the guarantee system operation,but determining an adequate ratio is not an easy task. Kazakhstan, which is currentlymaintaining a coverage ratio of up to 50%, is discussing the possibility of loweringthe ratio. Accordingly, it seems necessary to accurately understand how coverageratio operates. A guarantee system ensures that three parties, i.e. lender, borrowerand guarantor, share the risks of loss, and each entity assumes an appropriate level ofliability. In Korea, the coverage ratio differs from case to case, ranging from 50 to85%, but when needed for policy purposes, a 100% guarantee is also provided. Highguarantee ratios may enhance the merchantability of credit guarantee products, butoverly lower banks’ risk-taking. Thus, the ratio should be determined in a range thatcan encourage banks’ participation while holding them accountable for a reasonableportion.

Another topic to consider is how to lower risks through the use of collateral. TheKorean system does not require any collateral unless the loans are used for facilityinvestments. This is in line with the policy principle that provides a credit guarantee


for companies that cannot afford sufficient collateral. Some credit guaranteefoundations in Korea do require real estate collateral when they lend workingcapital, but the portion of collateral is fairly minor. On the other hand, consideringborrowers’ attitudes toward loan repayment and banks’ NPL ratio in Kazakhstan, thecredit guarantee program has a high chance of bad debts. Under the current system,which only supports facility investment, banks can collateralize the facility or realestate concerned. However, if the guarantee system is extended to cover workingcapital, Kazakhstan’s system may need to be redesigned as a safer scheme. Thesecuring of collateral for part of the loans may be used as a core mechanism toreduce the possibility of bad debts.

The subrogation process is also a factor that is critical to the success of the creditguarantee system. Banks may favor credit guaranteed loans over pure credit loans, asthe guarantees are as secure as collateral such as real estate or other assets. Bankstrust credit guarantees since even if a borrower fails to repay the loan, the bank cancollect as soon as possible by making a claim under the guarantee. Under KODIT’ssystem, banks have the right to subrogation claims after a company fails to repay itsdebt, regardless of the loan type. When default of a guaranteed company occurs,banks usually execute the right after three months, a term that was set to preventexcessive claims. Once the guarantee agency pays the debts on behalf of thedefaulted company, it begins collection activities. On the other hand, Kazakhstan’ssystem requires banks or lenders to sell all collateral before pursuing the subrogationclaim to the guarantee agency. With the ill-established auction system and legalprocedures, it sometimes takes years for banks to complete the auction. Accordingly,banks are unlikely to trust guarantees from the guarantee institution even if it is agovernment organization. Therefore, in order for the guarantee system to take root,it is necessary to establish a subrogation system that fully considers banks’ situations,not to mention minimizing risks.

5.3. Assessment on the Credit Ratings Infrastructure

Although the establishment of a credit evaluation system was the core riskmanagement strategy of the government of Kazakhstan and DAMU to settle theircredit guarantee system, it is regrettable that they cannot establish an effectivesystem in the short term.

In fact, the standardized and systemized model of KODIT has existed for only adecade. Before then, financial institutions including KODIT had to rely on rawfinancial and credit information provided by KFB. After the Asian financial crisis,KODIT realized the importance of risk management, introducing CCRS in June 2001to operate a more standardized credit risk management system. CCRS was developedbased on KODIT’s 25 years of expertise in credit evaluation and its accumulated


information about SMEs.

Due to the lack of accumulated information, it would not be easy for Kazakhstanto introduce an accurate CCRS in the near future. For this reason, it is necessary toestablish a credit information infrastructure, particularly with regard to individualcustomers. Banks and other financial institutions must systematically accumulate andshare corporate credit information. From the very beginning of the implementationof the guarantee system, credit guarantee agencies also have to collect and managedata, such as basic identification criteria, financial records and credit/delinquencyhistory, based on information technology.

It is also required to make efforts to enhance the accuracy and reliability of thecredit information. In particular, measures must be taken to improve the reliability offinancial statements, since they are the most important factors in measuring thecurrent financial status and future sustainability of companies. For example, lawsshould be enacted that mandate companies with assets larger than a certain amountto receive regular external auditing from accountants, to ensure transparent book-keeping and taxation practices of SMEs. In addition, public organizations mustthoroughly manage internal data so that they can guarantee the transparency andreliability of the official documents that they issue. A financial and credit informationinfrastructure based on extensive information and meticulous management can serveas the foundation not only for the development of the credit ratings system, but alsofor the setting up of reasonable financial policies and further improving the financialindustry as a whole.

5.4. Conclusion

We highly appreciate the sound decision of the government of Kazakhstan tochoose the credit guarantee system and to establish a financial supporting plan as astrategy to foster competitive SMEs. One thing worth understanding here is thatalthough credit guarantee programs are widely used by developing countries withfledgling financial markets, each country should design and implement the programsin accordance with their own economic and socio-cultural environment. Countrieslike Korea, where we believe credit guarantee systems are properly entrenched,actually have experienced a series of trials and errors and crises to build such effectivemodels. In addition, it should be noted that a credit guarantee system is only a smallportion of the whole financial policy structure, and thus cannot address all thechallenges that Kazakhstan faces regarding SME policies. Furthermore, for the creditguarantee system to serve as a key driver of the Kazakhstan’s SME financial policy, acooperative effort between the government, credit guarantee institutions, banks andall interested parties should converge in the development of an optimal system.



Suggestions for the Operation of a Credit Guarantee System and

a Credit Ratings System

Chapter4

1. Introduction

2. Suggestions for the Establishment of the Credit Guarantee Institution

3. Suggestions for the Credit Guarantee Program

4. Suggestions for the Operational Details of the Credit Guarantee

System

5. Plans for the Introduction of a Credit Ratings System

6. Roadmap and Conclusion


Summary

The government of Kazakhstan has strived to improve its guarantee programoperated by DAMU, as the program has failed to deliver the expected results. Themost significant decision among the efforts of the government is to establish a newinstitution that independently operates the guarantee program. This chapter willdiscuss the current status and problems of the credit guarantee system in Kazakhstanthat was examined in Chapter 3, as well as policy suggestions based on the Koreancredit guarantee system of Korea discussed in Chapter 2, so that the system can befirmly established in Kazakhstan.

Above all, a new basic operation system should be established to prepare andproceed with the process of establishing the new institution. Relevant laws andregulations should also be enacted to define important issues, like the goal of theinstitution, measures to secure financial resources and loss compensations by thegovernment. In the establishment phase of the independent institution, sufficientconsideration should be given to the operation of the organizations and humanresources. As a large budget is needed to fund both the headquarters and branchoffices and to secure sufficient human resources, a framework for the overalloperation of the credit guarantee institution should be defined. It is also importantto define the roles of the government in both the establishment and operation ofthe credit guarantee institution, in order to ensure the autonomous operation of theinstitution.

Suggestions for the Operation of a Credit Guarantee System and a Credit Ratings System

Eui-Jong Kwon (KODIT)

Nurlan Shokbarbayev (MEDT)

Ilyas Usanov (MEDT)

Chapter 4 _ Suggestions for the Operation of a Credit Guarantee System and Credit Ratings System·117

In addition, the operating goal of the credit guarantee institution must beclarified. Considering the eligibility of the system under DAMU, the policy goal of thecredit guarantee system seems limited. Accordingly, the new institution shouldexpand its policy goal to provide comprehensive support for SMEs that facedifficulties in securing operating funds. As the expanded guarantee coverage willrequire more financial resources, banks and beneficiary companies should pay fees ata reasonable level as well.

Furthermore, details regarding the operation of the credit guarantee institutionmust be decided. First and foremost, it should be determined who will be responsiblefor the credit guarantee evaluation. In the beginning of the system’simplementation, banks can assume the responsibility. However, it is stronglyrecommended that the credit guarantee institution take over the responsibility oncethe system is firmly established. Considering that one of the significant problems ofthe credit guarantee system of DAMU was the complexity of its procedures, it isimportant to reduce the time and effort required in the application and evaluationprocess. As delays in the application process occur mostly outside of the creditguarantee institution, the institution must cooperate with the government to makesure that the procedure can be completed as soon as possible. For the internalevaluation process, it will be also helpful to assess common items using a checklist,rather than examining documents that are not substantially useful for themanagement of risks, in order to simplify the procedure.

Moreover, it is necessary to reach an agreement with banks and SMEs whendeciding guarantee fee rates and guarantee coverage ratios. Although a higherguarantee fee rate is favorable to the credit guarantee institution as a major sourceof operational expenses, it should be priced after considering the fact that guaranteefees are a considerable financial burden on SMEs. Also, since the credibility of aguarantee scheme relies heavily on the swift handling of banks’ claims, terms andconditions of payment under guarantee, the procedures and conditions of paymentby the credit guarantee institution should reflect the opinion of banks.

Although government contribution to the credit guarantee fund is inevitable,efforts to minimize the amount are necessary. Losses incurred by guarantee defaultsmust be minimized, through active risk management from the beginning of thesystem. As mentioned in the previous chapter, it is almost impossible to establish anadvanced credit ratings system from the beginning. Still, continuous efforts arerequired to develop an advanced system in the future. The government mustsystematically implement a credit information infrastructure about both individualsand corporations and policies that can enhance the reliability of credit evaluationdata, including financial statements. The credit guarantee institution mustaccumulate and manage credit information, and ensure that companies recognize


the importance of credit management. In the beginning of the operation, theadoption of a credit scoring system, even if it is very basic, is necessary for the long-term development of the credit ratings system. The institution may need to design apartial collateral program to minimize subrogation losses.

In Korea, it took quite a long time to establish the credit guarantee system as acore device to provide financial support for SMEs, and there have been multiple trialsand errors. It can be said that Kazakhstan took the first step towards developing apolicy financing system for SMEs by implementing the credit guarantee system in2010. For the system to become well-entrenched, the comprehensive development ofthe financial system and improvement of SMEs’ competitiveness must occur, alongwith the continuous support from the government. Only when the credit guaranteesystem is efficiently operated and complements the downsides of the financialindustry in Kazakhstan, the country will move up into the ranks of the world’sadvanced economies.

1. Introduction

Previous chapters discussed the status of Kazakhstan’s SMEs, financial industry,and credit guarantee system, and the operation and performance of the Koreancredit guarantee system of Korea. In the grand ceremony to mark the 20thanniversary of its independence in December 2011, Kazakhstan celebrated itssuccessful transition from a socialist regime to a market economy. For a period oftime, the country achieved a per capita GDP of 10,000 USD, and became an attractiveinvestment destination based on its abundant natural resources.

However, as the economy of Kazakhstan disproportionately relies on the resourceindustry, to the extent that it constitutes over 40% of the GDP and 75% of totalexports, it has failed to secure sustainable and stable momentum for growth.Restructuring the economy is a daunting challenge, due mainly to the small domesticmarket despite the vast land mass, the backward state of technologies, fragilebackbone industries and lack of entrepreneurship. In addition, the financial sector,which was hit hard by the global financial crisis after an explosive growth propelledby the real estate boom, is no longer strong enough to support companies.

Accordingly, in 2010 the government of Kazakhstan announced “BusinessRoadmap 2020,” a mid-term economic development plan to achieve sustainable jobcreation and balanced growth in non-resource industries. With regard to nurturingSMEs, which is one of the action plans, the government decided to provide policyfunding, like credit guarantees and an interest subsidy. DAMU was designated as anoperator of the credit guarantee program. Since its establishment as a comprehensive


assistance institution for SMEs in 1997, DAMU has provided both financial and non-financial services, such as consulting for founding and developing enterprises andsupporting policy funding. Although the government of Kazakhstan tried to operatethe credit guarantee program by DAMU, which is virtually the only SME policyfinancing institution, DAMU seemed unable to concentrate its efforts on the creditguarantee program, which was just one of many programs under DAMU'sresponsibility.

In fact, since the introduction of the credit guarantee system in September 2010,the performance has been poor, providing only 14 million USD of support for 17companies as of September 2011. Considering that some of the beneficiaries are at ahigh risk of default, the credit guarantee program has failed to fulfill its policy goal.The performance and risk management of the credit guarantee system have alreadybeen discussed. The following is a summary of the discussion in the previous chapterto help readers' understanding.

First, the guarantee procedure is overly complex. When an SME prepares a facilityinvestment plan, it must undergo a series of approval processes involving banks, thelocal government (or coordinator) and DAMU to verify investment feasibility,financial soundness and profitability before finally obtaining a guaranteed loan.Although it is true that the procedures are necessary, it takes too much time andeffort to go through the different evaluation procedures of different institutions.

Second, the program is inefficiently operated as DAMU has little experience in theoperation. For each guarantee application worth 1 million USD on average, theEvaluation Committee of DAMU headquarters conducts an in-depth evaluation. Asthe Committee considers multiple aspects, such as laws and regulations, economicfeasibility and risk management, the evaluation process is complicated and time-consuming.

Third, demand for the credit guarantee program is low due to its limited supportfor facility investment. The government of Kazakhstan restricts the use of the fund tonew facility investment, facility expansion and modernization of SMEs in strategicsectors. The program does not cover companies that need working capital to expandtheir businesses, have relatively sufficient capital or are not included in a strategicsector. Such limited coverage stifles the growth of demand for the credit guarantee.

To address the aforementioned problems, MEDT and DAMU jointly prepared anew credit guarantee system as of the end of 2011. First of all, the governmentdecided to set up an operator of the credit guarantee system, tentatively referred toas Guarantee Fund, to stably secure credit guarantee resources by charging fees tocompanies and banks. The government is also attempting to simplify the overly-


complex credit guarantee application procedure and to induce the activeparticipation of banks by developing various forms of credit guarantee services.

However, it is doubtful that the new system will be able to make practicalimprovements, as it focuses merely on the problems of the current system and pursuesa palliative for the problems. The limitations of the new system are as follows:

First, the new system covers only new facility investments of companies instrategic sectors, without changing the eligibility. Second, as many stakeholders, likethe central and local governments, are participating in the decision-making processof the credit guarantee provision, the operators are not allowed to autonomouslyoperate the program. Third, operators' internal procedures have not beenstreamlined, except for the minor progress of adopting a checklist.

The conservative movement of the government of Kazakhstan is understandableto some extent, as the credit guarantee expansion is in conflict with the strict riskmanagement policy. Yet, in order to upgrade the backward SME financing system,the government may need to spur the financial market by aggressively driving thepolicy funding program, even though this means that it has to assume more risks. Tothis end, a new and comprehensive approach to the SME funding issue that goesbeyond the current framework is required.

This study is designed to present several suggestions for the establishment andoperation of an independent credit guarantee institution in Kazakhstan, based onthe experience of Korea, in operating the credit guarantee system. First of all, it isnecessary to study the legal and institutional issues regarding the establishment of anew institution. To operate it as an independent agency, government decisions onmacro-policies, such as the purposes of the new institution and operating andfunding mechanisms are also important. A meticulous examination of the detailsshould follow. In the last part of this chapter, a mid-to-long term roadmap will beproposed that will enable the credit guarantee system in Kazakhstan to take rootand thrive.

2. Suggestions for the Establishment of the Credit Guarantee Institution

2.1. Overview

In Kazakhstan, MEDT decided to establish and operate a dedicated creditguarantee institution in October 2011 to invigorate the credit guarantee program.The ministry launched an improvement plan after it recognized that the previous


system under which the credit guarantee program was operated as part of thebusiness of DAMU was not able to actively utilize the program. However, founding anew institution was a tough decision, as it would require additional governmentfunds and constant management and supervision. Therefore, sufficient research onand support for every detail is necessary from the very beginning, so that the newinstitution can take root as early as possible. In particular, important conditions in theestablishment state include preparing clear legal grounds, forming well-functioningorganizational structure, hiring experts and implementing an efficient supervisionsystem.

2.2. Establishment of Legal Grounds

Legal grounds should be clearly defined so that the Guarantee Fund to beestablished can stably and independently serve its purposes. To achieve the policygoal, missions of the organization and scopes of guarantee responsibilities must beclarified. Critical components of the operation should be dictated by law so that theFund can consistently embrace government policies without confusing those who arein charge of the relevant policies. For example, if the government intends to focus ona certain industrial sector or exclude a sector from the guarantee support, this can beoutlined in the law or regulation. It may also be helpful to legally define the financialsouring mechanisms of the Guarantee Fund. As stated in the previous chapter, theKorea Credit Guarantee Fund Act, which stipulates banks’ contribution requirements,has helped KODIT to manage its fiscal soundness. Although the question of whetherbanks in Kazakhstan are ready to accept mandatory and regular contributionsremains another thorny issue, specific measures must be prepared to stably andconsistently finance the Guarantee Fund.

Moreover, the Korea Credit Guarantee Fund Act dictates guarantee leverageratio, maximum guarantee ceiling, and compensation of operating loss. Of these, theclause regarding loss compensation mandates the government to compensate losses

<Table 4-1> Key Contents of the Korea Credit Guarantee Fund Act

Details

1 Mission and purpose of KODIT

2 How to raise the fund for credit guarantee operation

3 Definition of the main business of the Fund (guarantee and related services)

4 Maximum leverage ratio (outstanding guarantee over capital)

5 Priority sectors which will be preferentially supported by the Fund

6 Enterprises for which guarantees are prohibited

7 Government coverage for the loss of the Fund

Source: KODIT


when the credit guarantee institution has assumed too much loss to respond tobanks' subrogation claims. This clause effectively improves the creditworthiness ofthe credit guarantee institution and thus helps it to smoothly manage its operation,particularly in connection with banks. However, as an enormous one-time loss mayimpose, at least temporarily, a heavy burden on the government, thoroughexaminations and intensive consultations must precede the introduction of a losscompensation mechanism.

To be sure, there may be controversy over whether a specialized legal basis isnecessary for Kazakhstan to establish a dedicated credit guarantee institution. Underthe legal system of Kazakhstan, enacting a specialized law may be unnecessary orimpractical. However, what is more important is not which laws or regulationsinclude the aforementioned clauses, but whether or not they are fully considered anddiscussed before making decisions on the establishment of the credit guaranteeinstitution.

2.3. Organizational Structure and Human Resources

The organization of the new Guarantee Fund can be determined only after thedecision on the types of credit guarantee operations is completed. If the governmentopts for an indirect model, it may not need to run a large-scale organization. Incontrast, if the Guarantee Fund directly operates the credit guarantee system, andindividual guarantee cases are internally reviewed and evaluated, it must establishmore branches and hire more evaluation experts. The choice is in the hands of thegovernment of Kazakhstan, and the details will be discussed in the following way.Considering experiences of banks in Kazakhstan in corporate ratings and operatingpractices of credit guarantee institutions in other countries, the indirect model orportfolio model cannot ensure the success of the credit guarantee system. Therefore,discussions on the organizational structure will be premised on the direct operationmodel for the mid-to-long term.

In the initial period, it is desirable for the Guarantee Fund to develop policiesbased on several key departments at its headquarters. Key departments include aplanning team-responsible for budget allocation and guarantee support planning-, apolicy team-responsible for developing credit guarantee service products andforming relationships with banks - and a risk management team-responsible forchecking both planning and policy teams and supervising fund risk management -also important are a general administration team in charge of recruiting andaccounting and an independent auditing team in charge of internal auditing. As thecredit guarantee system refers to providing loans without acquiring collateral, SMEscan enjoy substantial financial benefits and thus, a fair and transparent evaluation isa core factor for success. The internal auditing team is also an effective mechanism to


minimize the possibility of moral hazard.

During and immediately after establishment, it is recommendable to establish andoperate the Guarantee Fund by forming an Establishment Committee (tentatively)that consists of government departments, DAMU, other relevant authorities andrepresentatives of guarantee-handling financial institutions. In addition, a secretariatjoined by experts from the participating parties should be established to lay out thedetails of the system, including a relevant legal system, an organizational structure,guarantee product designs and a standardized agreement with banks. In particular,considering that a credit guarantee system can take root only when banks activelyparticipate in the system, banks will better embrace the system if their expertsparticipate in the development process and reflect their ideas

Generally, a credit guarantee institution is responsible for a wide range of jobs,from credit analysis, guarantee and loan execution, disposal of collateral and debtcollection, to resolution of legal disputes with banks or companies. Accordingly, theGuarantee Fund may well hire experts in SME credit ratings, loan provision, realestate appraisal and financial laws and regulations. Government employees withexperience in policy execution will also help the Guarantee Fund plan and execute itsbudget.

Meanwhile, the Guarantee Fund is not expected to directly handle the creditevaluation process in its early stage. Instead, banks will perform the evaluationprocess according to the criteria provided by the Guarantee Fund. Accordingly, theGuarantee Fund may not need regional branches at the beginning. However, it isadvised to gradually take over the evaluation work by expanding its own branches sothat the Guarantee Fund can soundly operate its business in the long run. Forreference, before KODIT was established, IBK was responsible for credit guarantees.However, as IBK did not have sufficient human resources to dedicate, the credit checkand evaluation process had to be commissioned to loan-providing banks. Later, whenKODIT was established, the direct credit guarantee model was introduced in Korea.KODIT, which began operation in 1976 with 19 departments and 65 employees in theheadquarter, now has 15 departments in the headquarter, 99 sales branches and2,150 employees as of 2010 year-end.

<Table 4-2> Organizational Changes of KODIT

Organization 20102006199619861976

Departments in the Headquarters 19 15 12 23 15

Branches - 41 81 85 99

Employees 65 1,542 2,123 2,149 2,150

Source: The 30-Year History of KODIT


2.4. Establishment of a Supervisory System

According to the plan for establishing the Guarantee Fund, the initial capital andoperating losses of the Guarantee Fund will be compensated by the government ofKazakhstan. This demonstrates how urgent it is to achieve the policy goal of fosteringcompetitive SMEs, and is why MEDT actively engages in the process not only ofestablishing the Guarantee Fund, but also of designing its guarantee products indetail. However, the roles of the MEDT need to be adjusted after the GuaranteeFund is established and the new credit guarantee programs are fully implemented.To improve efficiency, it is recommended that the government provide clearguidelines for the operation of the Guarantee Fund, while the Guarantee Fundautonomously operates its organizations.

In order to efficiently supervise and manage the Guarantee Fund, the roles andresponsibilities of the government and relevant agencies must be clearly defined, andthe Guarantee Fund must be allowed to autonomously operate the credit guaranteeprogram. It is clear that the government should fulfill its roles in defining the scopeand directions of the credit guarantee policy, allocating operational budget,determining government contributions and aggregated amount of guaranteesupply, and assessing the performance of the Guarantee Fund. Meanwhile, theGuarantee Fund should be able to independently design a credit guarantee schemeand evaluate individual guarantee applications for the sake of operational efficiency.In addition, independent auditors, which are separate from the supervisors of MEDT,must regularly audit the operation of the Guarantee Fund in order to prevent moralhazard of the Fund and its management.

3. Suggestions for the Credit Guarantee Program

3.1. Clarification of the Policy Goal

Although the goal of a credit guarantee system may differ from country tocountry, the system is generally implemented to promote SME loan provision bymitigating credit risks, thereby promoting the economic development of the country.In doing so, the system may not only bolster SMEs’ competitiveness, but also theircredit management capabilities. Furthermore, banks may also improve theirprofitability thanks to increased loan demand from SMEs. In other words, a creditguarantee system can fulfill its role when it is utilized as a universal financing toolthat supports SME financing by encouraging financial institutions to provide loans forSMEs.


The credit guarantee system in Kazakhstan is currently utilized as a policy tool tonurture competitive SMEs in certain sectors, rather than as a universal financingprogram for SMEs. The government pursues direct and short-term results of industryrestructuring by fostering competitive SMEs with the credit guarantee system.Accordingly, the limited budget and eligibility have led to poor performance of thecredit guarantee program thus far.

Considering that most financial institutions in Kazakhstan have implementedconservative loan policies due to a high NPL ratio and difficulties in financing, andmost SMEs are struggling to finance their operations and investments, it is desirablefor the government to materialize the credit guarantee system as a universal SMEfinancing policy.

In the meantime, the government should also recognize that government-drivenfinancing policies to nurture competitive SMEs cannot reach their goals only throughcredit guarantee support and that diverse supporting measures should be prepared.Policy options to support SME financing are not limited to the credit guaranteesystem, and finding a proper policy is important to achieve policy goals. For example,a fund of funds is an effective tool to foster innovative ventures with the potential togo public, or the government may provide loans at low interests for technologydevelopment or export growth of SMEs. Tax benefits are also a readily-availableoption for the government, as it can directly select the target sectors.

3.2. Expansion of Guarantee Eligibility

As stated previously, if a credit guarantee system is designed to financially supportSMEs in general, the target SME sectors and the use of guaranteed loans should beexpanded. Currently, eligible loans are limited to facility investments and workingcapital is provided only when it is accompanied by a facility investment project.

If the credit guarantee program covers all SMEs, demand will surge. In this case,increases in credit guarantee provision may lead to increases in the governmentguarantee budget. Still, the government will be able to control the budget bylimiting the outstanding guarantee amount in proportion to the capital amount ofthe Guarantee Fund. In addition, if the government maintains preferential treatmentfor SMEs in strategic sectors, such as a higher guarantee ceiling, simplified evaluationcriteria and lower guarantee fees, the credit guarantee system will conform to thepolicy directions of the government.

As for the eligible use of loans, working capital should also be covered. Whencompanies plan to invest in new facilities or expand existing facilities, most willprepare their internal reserve capital to some extent and apply for bank loans only


for shortage. Thus, they are mostly able to afford sufficient collateral based on thevalue of their total facilities, and do not need to obtain credit guarantee support, asbanks may not request additional collateral or guarantee. In the case of KODIT, whena credit guarantee is provided for a facility investment, like a new building, the loan-providing bank secures the building as collateral upon the completion ofconstruction. Meanwhile, KODIT partially cancels the credit guarantee for the portionof collateral value. In other words, guarantees for facility investments are atemporary measure to alleviate bank risk until the facility is completed. This explainswhy demand for the current credit guarantee program is weak in Kazakhstan.

On the other hand, as companies constantly need working capital to expand theirbusinesses-purchase inventories and supplies, invest in R&D and hire additionalemployees-demand for working capital guarantees will always exist. For reference,the guarantee balance of KODIT as of 2011 year-end consists of 91.9% workingcapital funding and 8.1% facility investment funding, demonstrating that demandfor working capital guarantees are dominant. As for Kazakhstan, since it was hit bythe 2008 global financial crisis, the financial system has yet to be normalized, andthere are many SMEs with a shortage of funding. If SMEs are allowed to financeworking capital through credit guarantee programs, the credit guarantee system cansubstantially help struggling SMEs.

In addition, if working capital is covered by the credit guarantee system, the creditguarantee procedure will be radically streamlined. Unlike credit guaranteeevaluation for facility investments, working capital may not require an approval orpermission process from the relevant authorities. Then, the Guarantee Fund willindependently handle the evaluation process with the rare involvement of otherparticipants such as local governments and MEDT.

<Table 4-3> Credit Guarantee Supply for New and Existing Customers (2011)

(Unit: million USD)

Number of Guarantee Cases

Amount of Guarantee

%%

Average Amountper Case

(thousand USD)

New Customers (SMEs) 40,605 171.0 4,662 158.2 115

Existing Customers 16,600 129.0 3,347 141.8 202

Total 57,205 100.0 8,009 100.0 140

* 1 USD = 1,159 KRWSource: KODIT


However, while a swift and efficient procedure increases the total creditguarantee supply, the possibility of payment under credit guarantee will alsoescalate. In particular, when banks provide working capital loans, they may notacquire any related collateral. For such reasons, for working capital loans, the risk ofdefault is higher and collection rates are lower when compared to facility investmentloans. Accordingly, it should be considered that entry into working capital fundingmay increase the losses of the Guarantee Fund.

Generally, credit guarantees are provided for relatively high-risk sectors or projectsby the government to achieve the policy goal of fostering and supporting SMEs. Thusit is virtually impossible for a credit guarantee institution to supply operatingexpenses and subrogation claims through charges or fees from SMEs. Accordingly,the question of how the Guarantee Fund can be consistently financed from externalsources needs to be answered.

Although governments generally subsidize guarantee programs in the initialstage, government funds cannot be stably allocated in the mid-to-long term. As SMEs

8.9%

91.1%

Working Capital Facility Investment

<Figure 4-1> Outstanding Guarantee of KODIT by Usage of Loans (2011)

Source: KODIT

<Table 4-4> Default and Collection Rates of KODIT by Usage of Loans (2011)

(Unit: %)

Default RateRate of Payment under

Guarantee (gross)Collection Rate

Facility Investment 3.5 3.6 4.9

Working Capital 5.1 5.1 3.7

Total 4.9 5.0 3.8

* Net rate of payment under guarantee (2011): 3.2%Source: KODIT


are the direct beneficiaries of the credit guarantee system, it is only natural that theypay guarantee fees to some extent. Banks that handle guaranteed loans also securestable profit sources since they can maintain a certain level of loan balance, while theGuarantee Fund substantially absorbs credit risks of companies. Certainly, the benefitto banks will differ according to many different factors, such as amount of guaranteesupply, interest rates of guaranteed loans and guarantee coverage ratio. Still, thecredit guarantee system will contribute to the growth of the banking industryoverall. Therefore, banks should assume financial support or contribution to someextent for the establishment and operation of the Guarantee Fund.

In Korea, it is legally required that banks contribute 0.38%13) of their total loanbalance every year as a credit guarantee resource. The contributions are primaryresources of KODIT, KOTEC and other 16 credit guarantee foundations. Guaranteefees from SMEs are also a very secure source of funding. In Kazakhstan, since theinterest rates of loans from banks are quite high and loan suppliers are dominatingthe loan market, SMEs may be ready to pay a high guarantee fee. However, in theinitial stage of the guarantee system, the rate of the credit guarantee fee shall beconcluded by policy decisions. We can learn more about the guarantee fee rate in thelatter part of the chapter.

As each country faces different economic conditions, there is no one-size-fits-allanswer in determining the levels of funding responsibilities that the government,SMEs and banks should assume. Nevertheless, it is absolutely necessary toinstitutionalize a funding scheme so that the Guarantee Fund can stably maintain itsexistence and financial sustainability.

4. Suggestions for the Operational Details of the Credit Guarantee System

4.1. Guarantee Investigation and Evaluation Mechanism

4.1.1. Decision of Entity for Guarantee Evaluation

In the operation of the credit guarantee system, it is very important to decidewhich institution will carry out guarantee investigation and evaluation. Generally,there are two different models of operation: one is a direct model, in which creditguarantee institutions receive applications from banks or directly from SMEs, and

13) Laws such as the Korea Credit Guarantee Fund Act of Korea define the contribution rates that will bedistributed to each of the credit guarantee institutions (KODIT 0.225%, KOTEC 0.135% and CreditGuarantee Funds 0.02%)


make decisions on all relevant issues on guarantee approval; while the other is anindirect model, in which banks select eligible companies according to the criteriapredetermined by the credit credit guarantee institutions, provide them withguaranteed loans and apply to the guarantee institution for ratification afterward.Under a certain indirect model, banks may have to obtain approval for their selectionof eligible SMEs from credit guarantee institutions before loans are provided. Usually,the indirect model will be based on a contract signed by banks and credit guaranteeinstitutions. The eligibility and scope of guarantee liabilities should be clearly definedin the contract.

The direct model involves higher operating expenses, as it needs branches andevaluation organizations, but maintains comparatively lower subrogation ratesthanks to its strict evaluation processes. In contrast, the indirect model may saveoperating expenses since banks conduct loan and evaluations simultaneously.However chances of poor evaluations and moral hazard are higher, hence the highersubrogation rates. Of the Asian countries, Korea and Japan have opted for the directmodel, whereas Taiwan and Thailand operate the indirect model-the indirect modelis recommended for countries where banks have extensive experience in credit loanprovision. It is necessary to implement measures to minimize moral hazard, such asthe banks’ abuse of guaranteed loans to repay their own borrowings.

The credit guarantee program of DAMU is close to the direct model, as guaranteeapplications are first evaluated by local governments and banks, and then thoroughlyexamined by DAMU. However, if DAMU has to conduct another in-depth evaluationto minimize or prevent moral hazard after a bank-examined guarantee application,the procedure will only get more complex and take longer time.

The government of Kazakhstan seems to prefer the indirect model for its newcredit guarantee system. As stated before, the indirect model-which utilizesnationwide networks of bank branches-can supply a great amount of guaranteesover a short period of time and keep the size of the Guarantee Fund at a minimum,thereby minimizing operating expenses such as wages and branch operatingexpenses. Under the indirect model, loan officers of banks are responsible for bothloan and guarantee evaluation. The Guarantee Fund either grants approval of a theguarantee application of a bank after a minimal evaluation or omits the pre-evaluation and examines subrogation claims in detail after providing guaranteeswithout prior approval procedures.

In particular, if Kazakhstan’s limitation of guarantee eligibility to facilityinvestments is maintained, credit guarantee demand will remain low, and loans willbe directly associated with collateral; thus risks will also remain low and the indirectmodel will be applicable. Working capital guarantees, which carry a relatively higher


risk, may be made available within a limited amount under the indirect method. InKorea, banks are allowed to perform indirect model guarantees for working capitalloans, and the maximum guarantee amount is capped at around 140 thousand USD.However, banks rarely use the indirect model, and only small fractions of creditguarantees are supplied.

Despite the comparative convenience and short-term effectiveness of the indirectmodel, it should not be overlooked that losses incurred by subrogation claims, duelargely to banks’ moral hazard or loose guarantee evaluations, can overwhelm theeffect of saving operating expenses in the long run. That is why it is desirable toenthusiastically adopt the direct model when the credit guarantee system hasgradually become established, even if the operation is initially based on the indirectmodel.

4.1.2. Credit Guarantee Application Procedure

One of the major problems of the credit guarantee program of DAMU is thecomplexity and poor performance that arises from there being too manystakeholders. A credit guarantee application must go through a series of evaluationprocesses by banks, local governments and the central government before it reachesthe credit guarantee institutions. Sometimes it takes six months to reach DAMU.Despite the prolonged and complex evaluation procedure, risk management of thesystem has been found not to be particularly effective. Rather, the complexprocedure can distribute the responsibility of each party, triggering moral hazard; orless competitive companies are likely to choose to endure the complex procedure asthey have no alternative source of loans, leading to adverse selection.

In principle, the procedures that take place prior to a guarantee application’sarrival at the credit guarantee institution are not included in the guaranteeevaluation process. When SMEs in Korea plan to make new investments, they musthandle administrative procedures first and derive their own solutions, and only thenconsult with banks or credit guarantee institutions regarding monetary issues.Currently, evaluation process of DAMU includes approval procedures by the regionaland central governments to determine whether an investment plan of a companycan actually contribute to the regional or national economy. Strictly speaking, theprocedures are not included in the financial realm, but are addressed by andbetween the company and the government.

It is noteworthy that the government is trying to implement a one-stop servicethat addresses administrative and financial support procedures for SMEs’ facilityinvestments, by including governmental approval and permission processes ofinvestment in the credit guarantee procedure and by having banks and the credit


guarantee institution provide companies with direct and indirect support foradministrative procedures. In addition, the new credit guarantee system to beintroduced by the Guarantee Fund frees companies from the need to visit regionalgovernments, but makes banks do the visits, in order to streamline the governmentalapproval and permission process. However, if the government of Kazakhstan intendsto support SMEs’ facility investment procedures with more efficiency, it should devisea comprehensive investment promotion plan as a policy agenda that includes thesimplification of approval and permission processes, rather than considering animprovement plan within the policy funding framework.

While the Guarantee Fund, as a policy funding institution, evaluates whetherinvestment plans would contribute to the national or regional economy, they alsoput great weight on the credit ratings and repayment capabilities of applying SMEs,just like general commercial banks. Accordingly, it is necessary to comprehensivelyimprove the pre-guarantee processes so that a credit guarantee application can reachthe credit guarantee institution after quickly passing through preceding procedures,like regional governments and banks. In addition, the Guarantee Fund must swiftlyevaluate an application by focusing on financial soundness and the possibility ofdefault, so that it can smoothly support corporate financing.

4.1.3. Internal Evaluation by the Guarantee Institution

Simplifying the internal evaluation procedures of the credit guarantee institutionis also critical to shortening the evaluation period and strengthening the riskmanagement. Decisions on eligibility for guarantee are mostly made by theEvaluation Committee of DAMU headquarters. If the DAMU headquarters has todecide the eligibility of all applications regardless of their guarantee amount, itcannot help but take a long time and become inefficient. It may be expected that theCommittee conducts in-depth and thorough examinations as a group. However,chances are that the evaluation will become a mere formality, grounded mostly indocuments submitted by the bank and the applicant. Even if guarantee decisions aremade incorrectly, individual members of the Committee may not be heldaccountable. Furthermore, the prolonged and complex procedure may not be soeffective in terms of screening out high-risk companies.

In Korea, KODIT directly collects the documents necessary for credit guaranteeevaluations and analysts visit applicant companies to interview the management andinvestigate the real operations before making final decisions. Only when theguarantee amount is too large or a thorny issue arises will the KODIT headquartersbecome involved in the evaluation and the final decision-making process. The samegoes for Kazakhstan. The best way to simplify the internal evaluation procedure andimprove the risk management system is to reinforce the roles and responsibilities of


analysts. When credit guarantee demands increase further, the Committee will notbe able to handle all the evaluation cases. Therefore, it is reasonable to delegate theevaluation authority to the working-level employees when the guarantee amount isimmaterial.

In lenders’ market like Kazakhstan, delegation of this authority may seem like adangerous idea that could escalate the possibility of moral hazard or corruption.However, as stated previously, a collective decision made by the Committee cannotbe an approach to minimizing problems like moral hazard. The Guarantee Fund mustassign the authority of guarantee decisions to branch managers or analysts whileconducting strict internal auditing, monitoring guarantee evaluation results andholding decision makers accountable in accordance with their authority, so that thesystem ensures the evaluation capabilities of individuals and minimizes default risks.In KODIT, 98% of the approval cases in 2010 were made at the branch level. Onlycases involving a considerably large guarantee amount, or cases with seriouseligibility issues-despite the need for financial support-, will be sent to the higher-level committees.

In the case of KODIT, if the accumulated guarantee amount of a company is nomore than 85,000 USD14), the guarantee decision can be made by a team manager; ifthe accumulated guarantee amount is no more than 1.3 million USD, the finaldecision on the guarantee approval will be made by a branch manager, in referenceto the opinions of team members and team managers. However, considering branchemployees in Kazakhstan are yet to be specialized and companies are at higher risksof default than their Korean counterparts, such an autonomous operation cannot bewidely implemented in the near future. Nevertheless, branch offices should beresponsible for immaterial credit guarantees so that they can develop theirevaluation capacities for future operation.

<Table 4-5>Number of Evaluation Cases by Approval Authority (2010)

Approval Authority Proportions (%)Number of Cases

Team Manager 31,338 56.6

Branch Manager 22,953 41.4

Head of Regional Headquarters 810 1.5

Committees in Headquarters or Higher 300 0.5

Total 55,401 100.0

Source: KODIT

14) The amount of the case that a team manager or a branch manager can approve will be differentiatedby credit ratings of applicant SMEs. For the highest rated SME, a team manger can approve theguarantee amount of 260 USD or lower.


4.1.4. Use of Checklist

A checklist is also a good tool for streamlining the guarantee evaluationprocedure. The benefits of a checklist are that it standardizes the evaluation process,which otherwise may differ by analyst or by branch of the Guarantee Fund or banks,and it helps to strike a balance between objective criteria and analysts’ subjectivedecisions. It can be also used to extend the roles and responsibilities of branch offices,while preventing moral hazard to some extent. In addition, it can help to swiftlyprovide credit guarantee support for companies that meet the requirements of thechecklist. A checklist covers a wide range of information, such as eligibility, co-guarantors/co-sureties, guarantee ceiling, credit of affiliated companies, projectfeasibility, etc.

However, when complex evaluations are required, such as when there is a largeguarantee amount for big companies or large-scale facility investment projects, auniform checklist is not an efficient tool for thorough evaluation. In this case, onlycommon components may be evaluated through a uniform checklist, and the otherevaluation processes should be qualitatively handled by expert analysts.

Kazakhstan plans to adopt the checklist mechanism while maintaining theeligibility only for facility investments. However, as facility investments are toocomplex and diversified to assess solely with a checklist, experts’ in-depth evaluationsshould accompany the checklist method. A checklist is useful to assess guarantee forworking capital where common components are readily applicable. In evaluatingworking capital cases, the Guarantee Fund does not have to consider the investmentproject, which usually requires a lot of assumptions and predictions for future success.However, evaluation for working capital focuses more on the current issues, such asthe financial status of a SME itself, rather than the feasibility of the investmentproject.

<Table 4-6> Approval Authority of KODIT by Credit Ratings and Guarantee Amount

(Unit: thousand USD)

Credit Ratings

GuaranteeBusiness

EvaluationCommittee

GuaranteeDeliberationCommittee

Head ofRegional

Headquarters

BranchManager

TeamManager

High grades Above 6,000 6,000 - 1,300 260

Middle grades Above 3,500 3,500 - 1,300 085

Low grades Above 2,600 2,600 1,300 1,850 085

Note: The table above is a simplified example and is different from the table actually used by KODIT Source: KODIT


While a checklist is a tool to examine credit status, it is different from the creditratings system that will be discussed in the following section. A checklist includeswide-ranging points regarding creditguarantee provision, not to mention creditfactors, whereas the credit ratings system mainly assesses credit risk of companies bymeans of statistics. In Korea, KODIT utilizes both the credit ratings system andchecklists.

<Table 4-7> Evaluation Checklist of KODIT (for Working Capital & Small Amount)

Item O/XDetails

1. Within the previous three months, whether the Company or the CEO/President failed to meet a loan repayment schedule for (O/X)10 days or more

2. Within the previous one year, whether the Company or the CEO/President- was registered as a bad credit holder by a financial institution

(O/X)- violated rights of other businesses/houses- defaulted on credit guarantees (including in other credit guarantee institutions)

Credit Ratings

3. Whether the Company or the CEO/President is delinquent on national tax payment

(O/X)

4. Whether the Company or the CEO/President is delinquent on local/regional tax payment

(O/X)

5. Whether CB has collected any delinquency information about the Company or the CEO/President

(O/X)

6. Whether the total borrowing is greater than its revenue of the current fiscal period

(O/X)

Operating 7. Whether the revenue of the current fiscal period has decreased by 25% or more compared to the previous fiscal period

(O/X)Condition

8. Whether the equity (capital) is impaired (fully impaired) (O/X)

9. Whether the CEO/President or the owner of the Company was changed within the previous year

(O/X)

10. Whether the revenue of the company has continuously decreased or its net loss has increased over the past 2 years

(O/X)

11. Whether the CB rating on the CEO/President is no higher than Poor CBR-6

(O/X)

Credit Ratings 12. Whether CCRS rating is no higher than E2, or SBSS (O/X)rating is no higher than SB9

13. Whether the CCRS rating is no higher than E1, and the cash flow rating is no higher than CR-4

(O/X)

Note: 1) Apply to general evaluations for credit guarantee no more than 300 million KRW 2) Separately evaluate eligibility, credit guarantee limitations, credit ratings of affiliates and co-sureties/co-

guarantors


4.2. Guarantee Fees

Guarantee fees can be considered in many different aspects: a fee for the use ofguarantees, a risk premium and an interest expense. From the perspective of theGuarantee Fund and based on free market principles, it is reasonable to receive feesbased on the default risk of guarantee portfolios and operating expenses, so that theGuarantee Fund can operate the credit guarantee system without the help of thegovernment or financial institutions.

However, in countries with immature financial markets, credit guaranteeinstitutions are required to fulfill policy funding roles by fully utilizing governments’financial resources, not to mention addressing the problems of informationasymmetry and market failure. In this case, SMEs should be allowed to use creditguarantee services at much lower guarantee fees compared to their real credit risks.On the other hand, credit guarantee institutions inevitably incur operating losses andthus, rely on government contributions as they assume subrogation and operatingexpenses that are much greater than guarantee fee revenues.

Decisions on guarantee fees must be based on a comprehensive consideration ofinterest rates, total financial cost of SMEs and financial sourcing mechanisms of thecredit guarantee institution. In Kazakhstan, the official borrowing rate published bythe central bank is about 14%, but actual market interest rates are higher. AlthoughDAMU caps the interest of guaranteed loans at 14%, if guarantee fees are added,financial burdens on SMEs will significantly rise. Therefore, when considering thefinancial soundness of credit guarantee institutions and risks of SMEs, guarantee feesmust be set high; but when considering the actual financing costs of SMEs, the feesshould remain low as a general policy.

In theory, as credit risks differ from company to company, it is reasonable todifferentiate guarantee fees according to default risk. However, when banks orfinancial institutions have yet to associate corporate credit ratings with their interestrates, it may be difficult to establish a guarantee fee system that is linked to creditratings in the near future. Accordingly, a near-term option is charging flat fees forguarantees. The government of Kazakhstan is considering a fixed fee system, inwhich SMEs pay 1.5% of the guarantee amount per year and banks pay 1% of theguarantee amount as fees, and 1% as contributions. Considering the guarantee feerates are 1 - 2 % in countries where the credit guarantee system is well entrenched,1.5% seems reasonable in Kazakhstan. Still, it is recommended to associate the feeswith corporate credit ratings in the long run.


Meanwhile, as stated above, if the Guarantee Fund receives 1% of the guaranteeamount as fees from banks for each guarantee case, banks may indirectly transfercharges to SMEs by increasing interest rates. According to the plan of the GuaranteeFund, the guarantee rates that SMEs should pay are likely to add up to 3.5%: 1.5%for guarantee fees and 2.0% for bank fees.

Under the 14% cap of guaranteed loan interest, the 2.5% bank fees are likely tobe paid by banks. However, considering that it is uncertain whether the interest capwill be maintained in the long run, the case-by-case guarantee charge system maybecome an unfavorable condition for the SMEs that receive guaranteed loans.Therefore, contributions of a bank should be charged in accordance with the size ofthe bank and loan balance, not with each of the guaranteed loan borrowers.

The mechanisms and timing of fee collection also vary depending on creditguarantee institutions. KODIT receives a guarantee fee in advance on the issuing dateof guarantee certificate. When a loan period exceeds one year, KODIT collects feesevery year. In Korea, credit guarantees are provided mostly for short-term workingcapital and the yearly collection scheme works appropriately. On the other hand, inJapan, where guarantee loans are mostly scheduled for payment over long-terminstallments, guarantee fees are initially collected at once, depending on thepayment schedule.

<Table 4-8> Average Guarantee Fee Rate of KODIT

Year 2005 2006 2007 2008 2009 2010 2011

Average Rate (%)

1.01 1.25 1.36 1.35 1.18 1.21 1.23

Source: KODIT

<Table 4-9> Average Loan Interests and Guarantee Fees (2010)

Approval AuthorityKazakhstan

(Guarantee Fund)Japan(CGCT)

KoreaKODIT

Average Corporate Loan Interests 5.56% 1.22% 11.9%

Guarantee Fee Rate 0.50 ~ 2.50% 0.45~2.20% 1.5% (fixed)

Average Guarantee Fees 1.21% 1.35% -

Note: For Kazakhstan, interest rate is for non-bank legal entities and guarantee fee rate is based on thegovernment policy. The guarantee fee rate of KODIT is for SMEs.

Source: KODIT, Bank of Korea, Credit Guarantee Corporation of Tokyo (CGCT), Bank of Japan, DAMU


4.3. Partial Guarantee and Coverage Ratio

Most credit guarantee institutions have implemented partial guarantee systemsthat guarantee only a certain portion of a loan. As explained above, the partialguarantee system is a policy tool to prevent moral hazard and improve post-management of borrowers by having banks assume a certain level of responsibility. Inparticular, the system is an effective device to prevent moral hazard in the indirectcredit guarantee model. In this case, the guarantee coverage ratio should be lowerthan that of the direct model, in order to increase responsibilities of banks. On theother hand, as chances of moral hazard are slimmer under the direct model, theguarantee coverage ratio can be set higher. In Korea, the ratio usually ranges from50% to 85%, but for some exceptional cases like green-growth companies or start-ups, it rises to 90% or higher. During the global financial crisis, when banks avoidedcredit loans due to increased credit risks of SMEs, the coverage ratio was temporarilyset higher. As of the 2011 year-end, the average coverage ratio of KODIT was 86.9%.

Banks are exposed to credit risks for the unguaranteed portions. Accordingly, thehigher the guarantee portions, the higher the likelihood of acceptance from thebank. Thus, the guarantee coverage ratio must be decided by considering not onlythe risks of credit guarantee institution, but also the bank’s acceptability.

Decisions on guarantee coverage ratio should also be based on actual risks. A lowcoverage ratio may be applicable to facility investment loans, unlike working capitalloans. In the case of guarantees for facility investment loans of DAMU, banks securethe facility as collateral, and thus guarantees will serve as secondary collateral.Accordingly, even if the 50% guarantee portion is maintained, banks will not assumehigh credit risks. On the other hand, banks will change their attitude toward thepartial guarantee system if guarantees cover working capital. If the guaranteecoverage ratio remains at the current level of 50%, banks are unlikely to accept aguarantee certificate for working capital. Considering that banks must go throughmore complex procedures than credit loans or mortgage loan, but are still directlyexposed to 50% of the credit risks, chances are high that they will be reluctant toaccept guarantee certificates.

<Table 4-10> Average Guarantee Coverage Ratio of KODIT

Year 2005 2006 2007 2008 2009 2010 2011

Average Rate (%)

84.9 83.3 83.4 83.9 87.9 87.4 86.9

Source: KODIT


For about 25 years after the establishment of KODIT, only full credit guaranteeshave been provided. Naturally, at the beginning of the partial guarantee system inMarch 1999, KODIT did have some conflicts with banks regarding the ratio. Currently,a guarantee coverage ratio of approximately 80% is widely accepted. It should benoted that when Korean banks provide loans by relying on the 80% guaranteecertificates, they are not allowed to secure any collateral for the remaining 20%, inorder to prevent moral hazard on the part of the banks. However, the 20% mayimpose a significant burden on banks in Kazakhstan. Accordingly, it may be necessaryto improve the acceptability of credit guarantee certificates by setting higher ratioguarantees for start-ups or companies unable to provide collateral.

4.4. Acquisition of Collaterals

Credit guarantee institutions rarely obtain collateral from companies uponproviding credit guarantees. The inherent role of a credit guarantee institution is toprovide credit guarantees for companies that have good credit ratings but cannotafford collateral to take out loans. Therefore, as the institutions operate guaranteeprograms for companies that lack collateral, not requesting collateral conforms to theobjective of the institutions. In principle, KODIT and banks do not request or obtaincollateral when providing credit guarantees for working capital loans. Exceptionally,some credit guarantee institutions acquire collateral when providing working capitalguarantees.

If the credit guarantee institution in Kazakhstan continues to deal with creditguarantees only for facility investment loans, banks can naturally secure the relatedfacilities as collateral and thus collateral acquisition will not be an issue to consider.However, as stated before, if the credit guarantee is extended to working capital, it isnecessary to consider whether credit guarantee institutions or banks should obtaincollateral from companies.

Considering the high NPL rates of banks and low credit ratings of SMEs inKazakhstan, guarantees for working capital bear much higher risks than those forfacility investment. Accordingly, it is necessary to consider collateral, such as realestate, as a measure to alleviate risks on credit guarantee institutions. If banksoperate conservative loan policies, companies may have to obtain loans that aremuch lower than their collateral value. This is because of the collapse of the realestate market after the global financial crisis dragged down the value of collateralthat banks had previously acquired, and thus banks are likely to tighten their Loan-to-Value ratio.

Thus, to reduce the risks imposed on credit guarantee institutions and promotethe use of collateral by companies, it may be a better option to request collateral to


some extent, even when dealing with guarantees for working capital. This will alsobenefit companies, since they can afford more loans through credit guarantees, eventhough they have to provide collateral to credit guarantee institutions or banks. Itmay be an option for a credit guarantee institution to obtain a subordinatemortgage when issuing a credit guarantee certificate. However, as it is not commonin Kazakhstan for multiple financial institutions to collateralize single property, it maybe easier to allow financial institutions to include special conditions of obtainingadditional collateral upon credit guarantee certificates.

SMEs tend to be more apt to repay loans when they provide collateral, leading tothe effect of maintaining low default rates on guaranteed loans. Even if an SMEdefaults on its loan, the credit guarantee institution can collect part of the loan orsubrogation expenses by auctioning off the collateral and reduce losses. Based on thecases in Korea, SMEs companies that have provided their offices or houses ascollateral to take out loans are less likely to fail to meet the repayment schedule.

Nevertheless, as mentioned above, it is not desirable to provide credit guaranteeservices for the companies that provide collateral, because credit guaranteeinstitutions are designed to support the financing of companies that cannot affordcollateral. If banks in Kazakhstan become able to properly evaluate collateral valuesand proportionately provide loans in the future, credit guarantee institutions shouldprovide credit guarantees based purely on the creditworthiness of SMEs, withoutrequesting collateral.

4.5. Efficient Operation of Guarantee Procedures

4.5.1. Efficient Guarantee Procedures

The time-consuming credit guarantee evaluation of Kazakhstan has led to poorperformance so far. Since credit guarantee institutions directly assess corporate risksin the direct evaluation system, strict and meticulous procedures are only natural.However spending extensive time in document review does not always ensurereliability. A standardized and highly computerized evaluation procedure minimizesthe time and effort involved in evaluation procedures, enhancing the speed of thework. If evaluation items, types, required documents and verification schemes arestandardized in advance, all companies can submit the same types of documents, andanalysts can become more specialized in the process.

More specifically, the standardization of document requirements and evaluationitems, as well as the streamlining of approvals, guarantee certificate issuances andloan execution processes, are necessary to achieve an efficient guarantee procedure.In Korea, employees who repeatedly handle similar credit guarantee applications in


KODIT branch offices, according to standardized procedures, are able to deal withguarantee procedures efficiently and quickly. As such, in Kazakhstan, the GuaranteeFund needs to reduce processing time by standardizing work procedures as much aspossible according to types of guarantees. In particular, if companies that fail to meetthe application eligibility or minimum credit requirements are denied in the initialstage, the time wasted may be reduced.

4.5.2. Standardization of Required Documents

If document requirements for credit guarantee applications are too complex, thepreparation of documents takes too much time, and this is sometimes enough todiscourage companies from applying for the credit guarantee. Therefore, therequirement must consist of documents that are indispensable for the evaluationprocess and the format should be standardized. Documents that are essential tocredit ratings should be issued by publicly-acknowledged institutions, whiledocuments drafted and issued by the applicant companies should be minimized. InKorea, KODIT requires applicant companies to submit documents about thecorporation, CEO’s residence certificates, real estate registration of offices andhouses, photo-IDs of management, tax payment confirmation issued by the NationalTax Service, financial transactions of bank loan repayment and financial statementsverified by public accountants. KODIT provides standardized forms for documentsthat applicant companies can fill out, which minimizes the documents that must befully drafted by applicants.

In Korea, an online inquiry system has been implemented to overcome thelimitations of document-based credit evaluation and to enhance the reliability of thedocuments. For example, an information techndogy (IT) system that allows real-timequeries to banks about the financial transactions record of an applicant company andits CEO has been established and operated. The query record held by the creditguarantee institution is transparently managed. As the online search system isunlikely to be subject to internal/external manipulation, it maintains a high level ofaccuracy and reliability of the information and saves time and money that wouldotherwise be spent on visits to companies. In addition, when the query record ismanaged transparently, records of repeated applicants are readily identified, leadingto swift decision-making in the early phase of the credit guarantee evaluationprocess. KODIT is currently establishing a system that allows checking as muchinformation via online as possible. Table 4-11 shows documents that can now bequeried via the online system of KODIT.


4.5.3. Streamlined Procedures after Approval

SMEs approved for credit guarantee services should be able to promptly take outloans from banks. In Korea, it takes a fairly short time to obtain loans after approvalby a credit guarantee institution. This is because the credit guarantee procedure hasalready been standardized, terms and conditions of the loan are already agreed-upon with banks and agreements are already made with regard to repeatedly-occurring important issues. The terms and conditions printed on the back of thecredit guarantee certificate have been used for a long time and are unlikely to besubject to legal conflicts. Banks are able to check major terms, such as guaranteeamount, loan amount and loan execution conditions, which are dictated on the faceof the statement, so that they can safely execute the loans. The credit guaranteecertificate is actually regarded as securitized collateral.

To be certain, to standardize the guaranteed loan procedures of banks, it isnecessary to accumulate experience in handling guarantee certificate-based loans, sothat banks and credit guarantee institutions can build trust to a substantial extent.Meanwhile, KODIT is directly connected with all banks online and is able toelectronically share information from the beginning of the credit guaranteeapplication to the issuance of a guarantee certificate, minimizing the number of visitsto banks or credit guarantee institutions by applicant companies.

4.6. Swift Payment for Non-performing Guaranteed Loans

In Korea, real estate is the most commonly-used collateral when SMEs obtainloans from banks. Since real estate prices are relatively stable, banks are less likely toincur losses, even if SMEs fail to repay their loans. In addition, as the legal procedurefor collateral execution is well established, it is possible to collect NPLs through

<Table 4-11> Online Document Requirements in Korea

Documents Public/Private NoteIssuer

Credit Information and History KFB Public CB

Residence Registration Certificate MOPAS Public

Tax Payment Records MOPAS Public

Financial Transaction Statements All Banks Private

Financial Statements Tax Advisor Private

Summary of Tax VAT Invoices Tax Advisor Private

Source: KODIT


auction processes within a relatively short period of time. Guarantee certificates maybe better collateral than real estate if banks do not consider the credit risks for thepartially unguaranteed portion. Most banks rely on credit guarantees because mostcredit guarantee institutions are financially reliable, the value of a guaranteecertificate is unlikely to fall and it is also possible to collect NPLs within a short period.

For banks in Kazakhstan to increase SME loans by utilizing credit guaranteecertificates of the Guarantee Fund, the Fund must secure public confidence andquickly handle subrogation claims. Credit guarantee institutions can obtain publicconfidence only when they secure sufficient liquidity, based on diverse financingincluding government contributions to subrogate a sudden large-scale default. Inaddition, the subrogation payment should be completed within the period agreed toby and between banks and credit guarantee institutions, in order for banks to rely onguarantee certificates and expand guaranteed loans. In particular, as banks inKazakhstan have experienced situations in which they were not able to handle a pileof NPLs due to a drop in the real estate market and complex auction and legalprocedures, it is natural for them to prefer guarantee certificates as collateral ratherthan real estate.

In Korea, the terms and conditions of the guarantee certificate define the defaultconditions of guaranteed loans. The Korea Credit Guarantee Fund Act of Koreadictates that subrogation claims be allowed from 90 days after a default conditiontakes place. The subrogation assessment process is also simplified and, in most cases,the subrogation money is paid within a week from the beginning of the assessmentprocess. The assessment process, just like the credit guarantee evaluation process, alsoutilizes checklists to determine whether banks have violated any of the clausesstipulated in the terms and conditions of the guarantee certificate. When noviolation is found, subrogation proceeds without delay. As the subrogation includesboth principal and interest, if the process is delayed, the interest also increases. Thus,credit guarantee institutions try to swiftly pay off subrogation claims in order tominimize the total amount.

On the other hand, under the current credit guarantee system of DAMU, banksare obligated to execute collateral when guaranteed loans are not paid, before filinga subrogation claim with the credit guarantee institution. However, as explainedpreviously, the collateral execution process in Kazakhstan is highly complex and time-consuming, thus it is virtually impossible to receive subrogation for guaranteed loansin a short period of time. Considering the fundamental reasons for banks acceptingcredit guarantee certificates, swift subrogation is a prerequisite for the guaranteeloan system to take root. Therefore, it may be worth considering easing thesubrogation claim requirements and expediting the subrogation claim procedurewhen no violation is found in the loan provision practice.


5. Plans for the Introduction of a Credit Ratings System

5.1. Concept of a Credit Ratings System

5.1.1. Definition

A CCRS comprehensively evaluates both financial and non-financial factors thataffect corporate credit levels in order to calculate default risks in the form of grades.In Korea, most financial institutions that deal with loans have proprietary creditratings systems that utilize an internally-accumulated database and externally-fedfinancial information.

5.1.2. Limitations and Needs

As a credit ratings system provides users, such as analysts of credit guaranteeinstitutions and loan providers, with quantitative data about default risks in the formof grades, the decision-making process regarding loan provision becomes faster andmore objective. Thus, companies are able to readily access loans, while financialinstitutions are able to systematically manage risks and stably expand loan provision,driving the overall growth of the financial industry. In addition, a credit ratingssystem is a foundation for establishing a credit risk management system-recommended by Basel -so that financial institutions can enhance theirinternational credibility.

Despite the benefits, such as quantified result and high comparability, creditratings systems have some limitations. First, as the system is based on financial andnon-financial data and credit/default records that have been accumulated over a longperiod of time, it cannot be built within a short period of time. Second, as the dataand records reflect the past, recent economic changes, like changes in themacroeconomic environment, are barely reflected in the ratings. Third, as the ratingsare computed in accordance with the possibility of default, statistical errors areinevitable. Thus, the ratings must be supported by analysts' qualitative decisions ofanalysts.

5.2. Suggestions for the Introduction

5.2.1. General Procedures for Developing a Credit Ratings System

In order to develop a CCRS, corporate credit information data that has beenaccumulated over a long period of time are necessary. To be specific, quantified andstandardized data must be secured regarding factors potentially or presumably


correlated to the credit risks of companies. For example, in the loan or creditguarantee evaluation process, figures such as the applicant company’s businesshistory, CEO’s age, factory ownership, business category, revenues, equity capital andother financial information must be specifically input and kept in the database. Inaddition, a clear definition of default must be established and default history must beretained. In order to enhance the predictability of the credit ratings system, sufficientsamples must be secured and relevant data must be accumulated over five years.Other than data kept by financial institutions or credit guarantee institutions, furtherdata about personal and corporate financial transactions, default records, taxpayment and other public information must be fed into the database by externalfinancial infrastructures.

After collecting data for the development of a model, analyses on the correlationsbetween credit ratings factors and default are conducted and correlation coefficientsbetween credit ratings factors are calculated. In general, to enhance the verifiabilityof the model, separate models are established by corporate size, business categoriesor other factors to which common credit ratings components can be applied. Then,weights are given to the credit ratings components that show strong predictability ofdefault, and according to the final credit scores based on the weights, credit ratingsassociated with default risks are determined.

A credit ratings system is a statistical model that predicts default risks based on ahistory of credit information and default risks. Financial institutions collect and utilizecurrent credit information about companies in their loan assessment process tosupplement the downside of the ratings model. Finally, through a credit ratingssystem, future default risks are also computed in the form of a grade to helpdecision-making.

Internal DataAccumulation

Data Analysis System Development•Credit factors

•Default history

•Category factors

External DataUtilization

•Financial transaction

�� information from CB,

etc.

•Relations b/w credit

factors and default

•Co-relation b/w

credit factors

•Categorizing

industry and firm

•Deciding weight on

each credit factors

•Scoring

•Classifying ratings by

PD

<Figure 4-2> Summary of the Credit Ratings System Development

Source: KODIT


5.2.2. Conditions for the Introduction of a Credit Ratings System inKazakhstan

Currently, DAMU provides both financial and non-financial support, but has notserved as a financial institution that handles loans. Accordingly, DAMU does not seemto have sufficient credit information about SMEs. A lack of credit information willpose similar problems for the Guarantee Fund if it is established and independentlyoperated. In addition, the financial information infrastructure in Kazakhstan has yetto be further developed to address the relevant problems. FCB, a private CB, isregularly collecting information from financial institutions and providing financialinformation to banks and other financial institutions. However, the informationcollection is not frequent enough and the number of participating financialinstitutions is limited. Considering the situation that the Guarantee Fund faces, bothinternally and externally, it is hard to expect that the country will implement a creditratings system with excellent predictability in the near future.

However, even if it is impossible to introduce a credit ratings system, Kazakhstanshould accumulate and manage financial, non-financial, public and fiscal informationcollected in the course of the credit guarantee evaluation process from now on. Tothis end, a standardized credit check form should be mandated in each evaluationcase, and an internal IT system should be established and operated so that analystscan enter accurate information into the system. The credit check form should consistof items that are quantifiable and strongly correlated with corporate defaultpredictability, so that they can be utilized as evaluation criteria in developing a creditratings system in the future. In addition, considering the comparability of long-termaccumulated data, even when the credit check form is modified, the items should beconsistent. It is also important to strictly manage the database so that theaccumulated data shall not be destroyed or deleted.

As for the financial information infrastructure, relevant systems should beimproved so that private company FCB can establish an upgraded financialinformation infrastructure, beyond its current task of collecting and providinginformation according to autonomous agreements with banks. For example, as theFCB collects financial information monthly, which is relatively infrequent, theinformation cannot be timely. When poor credit decisions are made based on oldfinancial information, financial institutions unexpectedly incur losses. The collectedand distributed financial information should cover not only bank loan records, butcredit card transactions, private commercial credit transactions, and publicinformation. Generally, in countries where the credit information infrastructure iswell established, almost all financial information is computerized and shared in realtime among financial institutions, and the coverage is being gradually expanded.


PCR, an information archive that collects and distributes financial information, isusually under the strict supervision of financial supervisory bodies, in terms ofinformation collection, concentration and management. In particular, the creationand deletion of bad credit information is strictly controlled, so that financialinstitutions can rely on the information. For Kazakhstan, it is recommended toestablish a credit information archive such as PCR, apart from FCB, or to enhance thepublic nature of FCB, so that financial institutions trust and more strongly utilizefinancial information.

5.2.3. Operation of a Simplified Credit Scoring Model

Just like DAMU or the to-be established Guarantee Fund, when credit guaranteeinstitutions have little or no accumulated information, and thus are not able topredict correlations between credit ratings components and default risks of applicantcompanies, a simplified version of the credit rating system, which can be called acredit scoring model, can be a temporary option. A checklist model is also an exampleof the simplified version.

As for the checklist model, if a company fails to meet one or more evaluationitems on the list, credit guarantee approval may be restricted, the authority forapproval may be transferred to a superior body or the guarantee amount may bedecreased. The scoring model, which is something between a checklist and a creditratings system, gives weight to individual evaluation factors, calculates the final scoreand grants a credit guarantee approval if the final score or grade exceeds a certaincutoff. While the checklist can only decide pass or non-pass, the scoring system canrank companies into several levels, and thus be utilized to determine approvalauthority, guarantee amount, coverage ratio and guarantee fees. However, ashistorical data are not available to determine evaluation factors and weights, strictverification and analyses must take place. The most representative method is todecide potential factors for the final evaluation by benchmarking evaluation factorsof other financial institutions, then conduct surveys by analysts about the potentialfactors, and finally decide evaluation factors and weights. Although it is useful toutilize evaluation factors that are owned by major commercial banks and financialinstitutions, it is still necessary to adjust the factors according to customers of theGuarantee Fund, since their sizes and types vary widely.

5.2.4. Mid-to-Long Term Challenges in the Development of a CreditRatings System

Some countries have developed separate credit information systems forindividuals and corporations. An individual credit ratings system collects financialinformation and transaction records of all citizens who participate in economic


activities, and evaluates and grades their credit ratings. Considering that for a smallSME, CEO’s credit ratings is one of the most important factors in the corporate creditratings, both corporate and individual credit ratings systems need to be developed,hand in hand. In Kazakhstan, FCB is close to an individual CB, considering the natureof its financial information archive. In the long run, it is necessary to foster a separateindividual CB or to strengthen the public nature of FCB and establish an individualcredit information infrastructure.

Corporate credit ratings require more data than individual ones. Individual creditratings can mostly be determined by financial transaction records, and thus ifinformation exchanges between financial institutions are active, accurate data can beobtained. On the other hand, corporate credit ratings are affected not only bycorporate financial transaction records, but also by other factors, like the CEO’sfinancial transactions and management capability, the financial status of thecompany, business partners and product quality. While the CEO’s credit score may bea determining factor for tiny companies, the financial status of the company is thedecisive factor for companies that are larger than a certain size.

Although companies in Kazakhstan are obliged to adopt the IFRS to prepare theirfinancial statements, they are not subject to regulations or outside supervision, andthus tend to follow proprietary accounting standards. Unless their financialstatements are audited by accounting firms or tax authorities, it is hard to expect toenhance the reliability of the statement. Therefore, Kazakhstan should strengthen itsindependent auditing system and tax filing regulations.

5.3. Suggestions for the Application of a Credit RatingsSystem

Although both the credit ratings system and credit scoring model are objectiveand statistical devices for credit evaluation, the outcomes may be erroneous if theraw data of credit factors are not reliable. However, even before KODIT introducedthe credit ratings system in 2001, it had maintained quite a stable default rate byrelying on credit analysis by its analysts. Depending on the circumstances of theircredit markets, there are many countries where the results of expert systems arestronger than those of quantitative credit ratings systems. Considering the currentcredit environment, the new credit guarantee institution, the Guarantee Fund mayneed to focus more on the enhancement of the credit analysis capacities of its ownemployees than rushing to develop a quantitative credit ratings system.

6. Roadmap and Conclusion

6.1. A Roadmap for the Long-term Sustainability of the Credit Guarantee System in Kazakhstan

As Kazakhstan has little or no experience in operating credit guarantee systems, itis difficult to stably operate a credit guarantee institution after its establishment. Forthis reason, it is important to design a system that strikes a balance between thegovernment policy goals and risk management.

<Table 4-12>A Roadmap for the Sustainable Operation of the Credit Guarantee System in Kazakhstan

Stage Tasks and Strategies1st Stage 2nd Stage 3rd Stage

6 mths 1 yr 2 yrs 3 yrs 3 yrs +

Operation

Establishment


Enacting credit guarantee law and related decree

Setting up organizational structure

Recruiting experts for establishment

Rules and guidelines for guarantee operations

Setting guarantee products

Development of credit information inquiry and management system

Development of automated and computerized operating system

Agreement with banks

Start of credit guarantee services

Set-up of new branches Risk (optional)

Management Educating and training and Expansion analysts

Development of credit ratings system


First of all during the initial period of establishment, a foundation for theorganization should be established and the organization should be centered aroundexperts in credit guarantee system and guarantee product design. Then, the initialorganization must quickly design credit guarantee products and enact regulations inorder to implement the credit guarantee system. In the operation of the system, acredit check system and an internal IT system must be built and agreements withbanks on details must be made. When details of the system are prepared, the creditguarantee system officially takes effect. For the credit guarantee system to take rootin the mid-to-long run, it is necessary to strengthen the capabilities of analysts andbranch offices. To this end, employee education and training should be reinforced,and the number of branch offices should be gradually increased, so that the creditguarantee institution can directly handle the credit guarantee procedures. Alsoimportant are efforts to introduce a credit ratings system to systematically managecredit risks.

6.2. Conclusion

The Guarantee Fund to be established in Kazakhstan will serve as part of thefinancial system by executing the financial policies of the government. In order forthe Guarantee Fund to take root and thrive, social and cultural development and thegrowth of the financial industry must also take place. Above all, attitudes of bankstoward SME credit loans must be positively changed and their workers in charge ofloans must develop competence. In terms of legal and institutional aspects, it isnecessary to improve the auction system of real estate and streamline lawsuitprocedures and governmental permission/approval procedures for investment.Finally, loan users, regardless of whether they are individuals or corporations, shouldalso change their attitude toward loan repayment and credit management. All thesechanges cannot be made solely by the private sector, but require consistent attentionand efforts of the government. This research expects that, along with diverse effortsto firmly set up the Guarantee Fund, a credit guarantee system will play a critical rolein fostering SMEs and developing the financial industry in Kazakhstan.


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Freedman, Paul L. United States. U.S. Agency for International Development. DesigningLoan Guarantees to Spur Growth in Developing Countries. Washington D.C.: U.S.Agency for International Development, 2004.

Green, Anke. United Nations Industrial Development Organization. Program Developmentand Technical Cooperation Division. SME Technical Working Papers Series, CreditGuarantee Schemes for Small Enterprises: An Effective Instrument to Promote PrivateSector-Led Growth. Vienna: Program Development and Technical Cooperation Division,2003.

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for SME Development in Kazakhstan Appendix

Introduction to Financial Supporting Systems for SMEs in Korea

2011 KSP with Kazakhstan (in Russian)

Executive Summary (in Russian)


① Establishment of SME-specialized Bank

Industrial Bank of Korea (IBK) was established in 1961 by the government tospecialize in expanding SME loans. Since it raises its capital fund by issuing SMEFinancial Bonds at low rates, IBK has been able to supply SME loans more easily thancommercial banks. As financial markets have grown and commercial banks canprovide SME loans in market-friendly way, IBK has changed its market positioning tobe closer to that of a general commercial bank.

② Aggregate Credit Ceiling System

For policy-oriented lending such as export loans, commercial trade loans etc., Bankof Korea (BOK) supplies funds to commercial banks at lower rates than prevailingmarket interest rates based on their lending performance. This system is called the“aggregate credit ceiling system.” Through this system, BOK can increase the supplyof SME loans for certain policy-oriented loan products at low interest rates.

③ Mandatory Minimum SME Loan Ratio System

Under the mandatory minimum SME loan ratio system, BOK encouragescommercial banks to provide more than the recommended proportions of loans toSMEs. To contribute to the development of the regional economy, the recommendedproportion for regional banks is higher than that of general commercial banks. To

Introduction to Financial SupportingSystems for SMEs in Korea

Appendix·155

make the system more effective, BOK has combined it with the “aggregate creditceiling system.” Currently, the minimum ratios for SME loans are 45% for commercialbanks, 60% for regional banks and 35% for foreign banks.

④ Credit Guarantee Systems

For SMEs lacking collateral or having difficulties obtaining credit loans from banks,policy institutions such as KODIT, KOTEC and KOREGs supply credit guarantees.Considering the current scale of outstanding guarantees and the proportions ofguaranteed loans out of total bank loans, the system has been playing a core role inthe Korean SME financing.

⑤ Direct Policy Loans

For SMEs with high growth potential, technology-oriented companies and start-ups, the Small & Medium Business Corporation (SBC) supplies direct policy loans atlower interest rates. SBC can supply the loan either directly or via commercial banks.

⑥ On-lending Loans

Korea Finance Corporation (KoFC) provides on-lending loans for SMEs with highgrowth potential. With on-lending loans, SMEs can get long-term and low interestrate loans.


В 2011 году между Министерством экономического развития и торговли (МЭРТ) Республики Казахстан и Министерством стратегии и финансов (МСФ) Республики Корея была достигнута договоренность о продолжении работы во второй год по развитию МСП в рамках программы KSP вместе с Казахстаном.По результатам обсуждений на заключительном семинаре по программе KSP-2010 в Астане и политического диалога на высоком уровне между бывшим Министром промышленности, энергетики и торговли Кореи, Ким Ен Чжу и Вице-министром экономического развития и торговли Республики Казахстан, Г-ном Кусаиновым М.А. 21-25 января 2011 года, а также анализа письменного отчета для обзора спроса, представленного через Посольство Кореи в Казахстане, была определена тема для программы KSP 2011 года в Казахстане под названием: «Гарантирование кредитов и оценка кредитной системы для развития бизнеса в Казахстане».При поддержке МСФ и Корейского института развития (КИР), консорциум между KODIT и КИРС был определен в качестве органа по реализации программы KSP 2011 в Казахстане. Консалтинговая группа для программы KSP 2011 в Казахстане была организована следующим образом:

Программа KSP- 2011 в Казахстане

Appendix·157

Делегация корейских экспертов во главе с доктором Ы-Чон Квоном, менеджером программы (МП) KSP 2011 в Казахстане, посетила города Алматы и Астана с 5 по 11 июля, 2011 г., чтобы провести Обзор спроса и пилотные исследования.Во время визита, делегация KSP провела встречи с МЭРТ РК и институтами по поддержке МСБ, такими как АО «Институт экономических исследований» (ИЭИ) и АО «ФРП «Даму» для того, чтобы определить конкретные требования и политические приоритеты Казахстана на эти темы. Тема была обсуждена и принята посредством дискуссий между МЭРТ и корейской делегацией.

Кроме того, АО «ФРП «Даму» было определено в качестве контрагента Казахстана для программы KSP 2011. Таким образом, Меморандум о взаимопонимании был подписан д-ром Чен Ы- Квоном, представителем консорциума KODIT и КИРС и г-жой Ибрагимовой Ляззат Еркеновной , председателем АО «ФРП «Даму», для достижения долгосрочного сотрудничества между обеими сторонами для успешной реализации программы KSP 2011.С 30 августа по 30 сентября 2011 года, корейские эксперты провели дополнительные пилотные исследования в городах Алматы и Астане. В ходе своего визита корейская делегация провела дополнительное Пилотные Исследования, посетив головной офис АО «ФРП «Даму», Алматинский филиал АО «ФРП «Даму», АО «Институт экономических исследований» (ИЭИ) и Центр ГЧП при Министерстве экономического развития и торговли (МЭРТ). Корейские эксперты также провели встречи с представителями Национального банка Республики Казахстан, а также с менеджерами по гарантированию кредитов и займам коммерческих банков: Альянс Банка и Халык Банка.После этих встреч, корейская делегация и местные эксперты, назначенные МЭРТ для проведения совместного исследования по программе KSP 2011 в Казахстане, обсуждали «Новый фонд гарантирования кредитов в Казахстане

Темы консультаций Эксперт (Корея) Эксперт (Казахстан)

Предложения для работы Системы гарантирования кредитов и системы оценки кредитов

Доктор Ы Чен Квон Г-н Нурлан Шокбарбаев

Развитие и функционирование системы гарантирования кредитов в Казахстане

Г-н Юнгпюнг Парк Г-н Ильяс Усеров

Система гарантирования кредитов в Казахстане Г-н Джонгу Ли Г-н Исламбек Каирбеков

Структура промышленности и система поддержки МСБ в Казахстане

Г-н Мюнхо Ю Г-жа Малика Биляшева


", который сейчас находится в процессе подготовки МЭРТ. Правительство Казахстана применяет в работе успешный опыт Кореи для улучшения своей системы гарантирования кредитов в целях развития малого и среднего бизнеса.4 местных консультанта (2 эксперта из МЭРТ, 1 эксперт из АО «ФРП «Даму» и 1 эксперт из АО «ИЭИ») были привлечены для реализации технического задания (ТЗ) для дальнейшего сотрудничества с корейскими экспертами по исследованиям в рамках программы KSP 2011. Для представления промежуточной отчетности и семинаров в Сеуле, 10 делегатов были приглашены из Казахстана. Делегацию Казахстана возглавил г-н Кайрат Айтекенов, председатель Комитета развития предпринимательства МЭРТ и председатель Совета директоров АО «ФРП «Даму». На сессии по промежуточному отчету, были проведены дискуссии и обсуждения. Два казахстанских эксперта представили свои результаты по своим темам, и корейскими экспертами были сделаны 2 презентации по исследованиям и рекомендациям. Делегация также посетила несколько мест во время своего визита, такие как Министерство стратегии и финансов, Корпорация малого и среднего бизнеса (SBC) и сталелитейный завод POSCO, и получила информацию на местах.На заключительном этапе программы KSP, заключительный семинар по отчетности и политический диалог на высоком уровне состоялись в Казахстане с 5 по 10 декабря, 2011. Корейскую делегацию возглавлял уважаемый Ким Ен Чжу, бывший министр торговли, промышленности и энергетики Кореи. Заключительный семинар для предоставления результатов и рекомендаций в рамках программы KSP 2011 был проведен в Астане 6 декабря, в котором приняли участие более 40 представителей государственных органов и экспертов из государственных и национальных институтов, такие как МЭРТ, Национальный Банк Республики Казахстан, ГЧП, АО «ИЭИ» и АО «ФРП «Даму». 7 декабря, Вице-министр МЭРТ, г-н Кусаинов М.А. провел встречу с бывшим министром торговли, промышленности и энергетики Республики Корея, г-ном Ким Ен Чжу для обсуждения программы KSP 2011, где сосредоточили внимание на рекомендациях. Данный диалог в январе 2011 г. по итогам программы KSP 2011 был вторым диалогом между Вице-министром г-ном Кусаиновым М.А. и бывшим министром Ким Ен Чжу после завершения программы KSP 2010 года. Они договорились о дальнейшем сотрудничестве и укреплении отношений между двумя странами в рамках программы KSP 2011.

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Казахстан, является 9 страной в мире по величине территории и имеет большой запас природных ресурсов, является одной из наиболее быстро развивающихся стран среди стран Содружества Независимых Государств. С 2000 года перед началом мирового финансового кризиса в 2007 году, в стране ежегодный рост ВВП составлял около 10%. Растущие цены на нефть, природный газ и уран привлекли внимание мировой общественности и глобальные инвестиции в страну, которые обеспечивали ликвидность экономики. Современное экономическое положение Казахстана объясняется бумом на рынке недвижимости. Однако, учитывая, что нефтегазовая отрасль составляет 40% ВВП и 75% экспорта, ресурсная промышленность может парадоксально оказать негативное влияние на экономику Казахстана в долгосрочной перспективе. В частности, появление мыльного пузыря на рынке недвижимости во время мирового финансового кризиса 2008 года и последующий экономический спад и инфляция продолжают показывать уязвимость экономики. В то время как нефтегазовая отрасль получает существенную государственную поддержку и иностранные инвестиции, другие отрасли развиваются медленно. Хотя сельское хозяйство и промышленность имеет большой потенциал в производстве пшеницы, кукурузы и крахмала благодаря большой территории, тогда как другие сектора, особенно обрабатывающая промышленность, имеют слабое развитие. Несмотря на огромные территории Казахстана, его население составляет лишь около 16 млн. человек, что является недостаточным, чтобы создать надлежащий внутренний рынок. Кроме того, как и другие страны с

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Краткое содержание


переходной экономикой, Казахстан имеет плохие условия для развития малого и среднего бизнеса, такие как низкая активность предпринимательства и слабые системы поддержки малого и среднего бизнеса. В настоящее время, финансовый рынок является недостаточно сильным, чтобы обеспечить достаточное финансирование для МСП. Опираясь на бум в сфере недвижимости, банки резко начали расти до середины 2000-х годов, но после начала мирового финансового кризиса, они стараются изо всех сил бороться. В 2009 году четыре коммерческих банка объявили дефолт и едва спаслись от кризиса при поддержке правительства, которое предоставило субсидии для них. Тем не менее, средний уровень невозвратных кредитов (NPL) в банковском секторе по-прежнему превышает 30%, а их кредитные рейтинги находятся над или под оценкой спекуляции. Таким образом, они практически не могут привлекать кредиты за рубежом. Кроме того, банки установили кредитную систему на основе залогового обеспечения, и страдают от хронической нехватки депозитов для погашения зарубежных займов. В результате, монетарные источники для казахстанских отраслей почти иссякли. С момента разработки Стратегии - 2030 в конце 1990-х годов, Правительство Казахстана запустило ряд стратегических программ, в том числе Программа «Дорожная карта бизнеса 2020» в 2010 году, чтобы способствовать развитию стратегических отраслей и компаний в этих секторах. Тем не менее, стратегии не смогли достичь ощутимых результатов касательно содействия развитию МСП. После мирового финансового кризиса, Правительство сосредоточило свою поддержку на финансировании старт-ап компаний в несырьевых отраслях, а также на создании рабочих мест в этом направлении. В частности, основными направлениями Дорожной карты бизнеса 2020 являются гарантирование кредитов и поддержка создания новых предприятий и увеличение инвестиций.Система гарантирования кредитов Казахстана с 2010 года реализуется АО «ФРП «Даму». Учитывая, что Фонд является институтом для всесторонней поддержки малого и среднего бизнеса, 100% акций которого принадлежат национальному фонду «Самрук-Казына», и несет ответственность за реализацию различных программ поддержки МСБ, Фонд был определен оператором для предоставления гарантий в рамках государственной программы «Дорожная карта бизнеса - 2020». Несмотря на усилия АО «ФРП «Даму», результаты работы программы гарантирования за прошлые годы не демонстрируют хороших показателей. По состоянию на 3-й квартал 2011 года, только около 14 миллионов долларов были предоставлены для 17 компаний. Таким образом, был направлен запрос от имени Правительства Казахстана, предоставить рекомендации Корейскими экспертами, так как опыт Кореи по ведению системы гарантирования кредитов является наилучшим для сравнения.Это исследование направлено на предоставление рекомендаций на основе 50-летнего опыта Кореи по системе гарантирования кредитов, и для развития

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подходящей системы гарантирования кредитов в Казахстане. Однако, может быть так, что принятие аналогичной системы в Казахстане не даст таких же результатов как в Корее. Таким образом, усилия по поиску подходящей системы для Казахстана должны предшествовать другим мерам. С этой целью, тема исследования была выбрана на основе долгих и всесторонних обсуждений среди экспертов для того, чтобы лучшая модель системы гарантирования и системы оценки кредитов в соответствие с экономическим положением Казахстана были установлены. Прежде всего, эксперты проанализировали отрасли в Казахстане, финансовый сектор и МСБ, представили теоретические основы системы гарантирования кредитов Кореи, проанализировали казахстанскую систему гарантирования кредитов, и предложили рекомендации для определения и установления казахстанской системы. Между тем, корейские эксперты не только проводили исследование, а также участвовали в разработке государственных стратегий, предоставляя консультации по актуальным вопросам.В 1 главе приведен обзор структуры промышленности и система поддержки МСП Республики Казахстан. Были обозначены многие проблемы, препятствующие развитию МСП. В частности, финансовая система для поддержки малого и среднего бизнеса имеет значительные проблемы, такие как отсутствие кредитной системы, в связи с предоставлением кредитов на основе залогового имущества, долгосрочные обязательства, и отсутствие инструментов для финансирования старт-ап компаний МСП. Тем не менее, финансовые учреждения сами также подвергаются многим проблемам, и, следовательно, не в состоянии предоставить достаточное финансирование для других отраслей промышленности. Как таковые, они также остро нуждаются в государственной финансовой поддержке. В нефинансовом секторе, правительство пытается предоставить тренинги и консалтинговые услуги через спонсируемые государством агентства, такие как АО «ФРП «Даму», финансирование НИОКР через Национальный инновационный фонд и поддержка торговой деятельности. Несмотря на это, ощутимые результаты не были достигнуты. При таких обстоятельствах, для реализации целей, условия для развития малого и среднего бизнеса должны быть обновлены.В 2 Главе обсуждаются вопросы развития и функционирования корейской системы гарантирования кредитов. В целом, система гарантирования кредитов является эффективной политикой, которая не только помогает способствовать развитию малого и среднего бизнеса, но и расширяет рынок кредитов для продвижения финансового рынка и ослабления социального конфликта через поддержку экономически уязвимых слоев населения. Кроме того, система продвигает кредиты и побуждает компании и банки изменить свое отношение к финансированию. Тем не менее, было отмечено, что без принятия мер для предотвращения морального риска для компаний и банков, увеличение требований к суброгации может подорвать фискальную прочность агентств


по гарантированию и переместить финансовое бремя на государство. В Корее действует Фонд гарантирования кредитов с момента основания в 1976 году. Фонд гарантирования кредитов рассматривается в качестве одного из образцовых случаев с точки зрения размера гарантий, эффективности поддержки и финансовой устойчивости. Этот успех стал возможным благодаря сильной воле корейского правительства и усилий агентства по реформированию и совершенствованию соответствующей политики. В ходе преодоления ряда финансовых кризисов после азиатского финансового кризиса 1997, Правительство радикально расширило размер гарантий для того, чтобы частный рынок мог быть стабилизирован в кратчайшие сроки. Таким образом, корейская система и опыт будут хорошими примерами для ссылки для Казахстана. Тем не менее, Казахстан должен понимать и учитывать различия между двумя странами, как с точки зрения экономической стадии развития и социально-культурных факторов. В 3 главе обсуждается статус системы гарантирования кредитов в Казахстане. Как отмечалось ранее, АО «ФРП «Даму» предоставляет гарантирование с 2010 года. Тем не менее, система показала плохую производительность, а также не удалось привлечь внимание банков и компаний. Самое главное, инструмент гарантирование кредитов АО «ФРП «Даму» охватывает лишь ограниченное число компаний по их новым объектам инвестирования, таким образом, имея ограниченный спрос. Кроме того, чрезмерно сложные процедуры являются одной из основных причин, почему программа не стала популярной. Правительство уже признало, что необходимо срочно совершенствовать систему гарантирования, и для решения данной задачи прикладывает огромные усилия. Правительство планирует создать новый независимый институт гарантирования для замены АО «ФРП «Даму», упрощения процедуры и расширения полномочий. Не менее важным является снижение рисков суброгации за счет тщательной оценки кредита и гарантии. Тем не менее, казахстанские финансовые институты имеют мало опыта по кредитным займам, и пока только обеспечили кредитную информационную инфраструктуру. По этой причине практически невозможно завершить систему оценки кредитов в ближайшем будущем. Таким образом, для совершенствования системы оценки кредита в долгосрочной перспективе, необходимо собрать и правильно использовать информацию по кредитам. В главе 4 представляются рекомендации по казахстанской системе гарантирования и системе оценки кредитов по итогам вышеупомянутых обсуждений. Для того, чтобы создать агентство по гарантированию и учредить институт, необходимо изучить и планировать каждую деталь, и подробно реализовать план с самого начала. Прежде всего, важно определить цель агентства по гарантированию и вводить в действие закон или правила касательно закона. Для стабильной работы агентства, операционные рамки должны быть определены, в том числе, как финансировать этот фонд, и в

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какой степени государство будет участвовать в мониторинге. Кроме того, необходимо решить, кто должен проводить процесс оценки гарантий: банки или агентства по гарантированию. В дополнение к макро-аспектам, детали, касающиеся самой операции, также должны быть рассмотрены: упорядочение процедуры гарантирования и процедуры иска по суброгации, и определение подходящего уровня гарантийного взноса и частичное гарантирование, что имеет решающее значение для принятия банками гарантийного предложения. Несмотря на создание системы управления рисками, в том числе системы оценки кредитов, чтобы минимизировать убытки суброгации, что может снизить предложение на гарантирование, крайне важно облегчить финансовое бремя правительства и тем самым повысить долгосрочную устойчивость агентства по гарантированию. Например, несмотря то, что агентство по гарантированию рассматривает только оценку корпоративных кредитов при выборе наиболее решающих условий гарантирования, возможно ему понадобится частичное залоговое обеспечение с учетом высоких рисков дефолта казахстанских МСП. Кроме того, как было рассмотрены ранее, немедленное внедрение системы гарантирования кредитов не является приемлемым вариантом, так как еще можно принять базовую систему оценивание, которая применима к текущей кредитной информационной инфраструктуре. Попытки принять систему оценки и создать инфраструктуры для оценки кредита имеют решающие значения для долгосрочного развития системы оценки кредитов. Наконец, данное исследование представило комплексный план от создания фонда гарантирования кредитов до каждого операционного этапа. План включает в себя детали, связанные с созданием, работой, средне / долгосрочным управлением рисками и дальнейшим ростом системы гарантирования по периодам. Кроме того, все заинтересованные стороны, включая Правительство, агентство по гарантированию, банки и АО «ФРП «Даму», должны активно сотрудничать между собой и участвовать в процедуре гарантирования для решения возникающих проблем.

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KSP보고서표지_카자흐스탄_영문.indd 1 2012-06-20 오후 9:48:07