When Natalia Semenko started her own transport company, she didn't even consider approaching a bank for startup cash. Faced with interest rates of 20 to 25 percent, she sold her house instead.
According to the World Bank, this teenage former Soviet republic is the easiest place in Central Asia to start a business. But would-be entrepreneurs face some of the least accessible financing in the world. This slows development in a country that desperately wants and needs to grow, contributing to a sense of frustration that is one of the forces behind its continuing political instability, some experts say.
"There's this perception that they're not getting anywhere, that they're not growing," says Robert Anderson, an instructor in the business administration department at the American University of Central Asia in Bishkek.
In turn, that instability can dissuade investors. But the pool of available credit is growing and the country's commercial banking sector has grown from zero to 23 institutions since 1991, slowly improving the situation for entrepreneurs.
In "Doing Business 2008," a World Bank study of business climates that included 178 countries, the Kyrgyz Republic ranked 94th: more business-friendly overall than Russia and nearby Uzbekistan, but not as much as its Central Asian big brother, Kazakhstan. Entrepreneurs here say the mechanics of starting businesses, things like licenses and taxes, aren't major obstacles – a fact reflected in Kyrgyzstan's No. 1 regional ranking in that category. The key is finding capital.
Incomes are low here, so it's hard for Kyrgyzstanis to save enough to start businesses. A nurse might make $40 a month, while a professor might make up to $600. And borrowing is expensive.
While interest rates on small business loans from commercial banks average 20 to 25 percent, interest on microfinance loans can reach 48 percent. By comparison, in the US the average interest rate on small business loans is 8 percent, according to the National Federation of Independent Businesses.
There are two major reasons why bank loans are expensive here. First, the pool of available capital is small – though it's growing – and in high demand.
"In [Kyrgyzstan], everyone needs money: government, entrepreneurs, even simple consumers," says economist Bakhtiyar Bakas uluu, a research fellow at the Institute for Economic Strategies in Almaty, Kazakhstan. "Therefore, the low supply of money and high demand support high interest rates."
The second reason is that lending money in Kyrgyzstan is risky, according to Alima Nurgazieva, a spokeswoman for Asia Universal Bank, one of the country's leading banks. There's the risk that customers will be unable or unwilling to repay their debts. And there's also the risk of "general macroeconomic and political instability in the country," adds Mr. Bakas uluu.
In 2005, mass protests forced out the Kyrgyz Republic's government. Since then, the situation has quieted down, but it is still not entirely stable. After a disputed October 2007 constitutional referendum, the opposition parties formed a "revolutionary committee" dedicated to bringing down the government – again.
Despite this instability, the credit market here has been growing fast. The amount of credit extended to the private sector increased more than fourfold to $331 million in 2006 from $71 million four years earlier.
Much of this money goes to big borrowers, though, according to the World Bank. Banks here consider small business lending "too bothersome," Bakas uluu said.
Whether banks are eager to provide capital or not, Kyrgyzstanis unable to find jobs – or well-paid jobs – continue to turn to entrepreneurship.
While the official unemployment rate in recent years has been about 8 percent, this number is misleading since the government counts every landowner as employed, according to an Asian Development Bank report. "Lack of jobs in rural areas has led to mass migrations of young people to urban areas," the report said.
In the cities, these labor migrants often can't get work. So they create their own. About half the population of the country is involved in small business, according to Usen Kydyraliev, director of the Entrepreneur's Union of Kyrgyzstan. Despite the difficulties with bank borrowing, "people find ways to open businesses," he said.
Some borrow money from their families, as Zamira Kyrgyzbekova did to start a fruit store. Some sell houses or other assets to raise cash, as Ms. Semenko did to start her transport company. Some turn to informal financing, as Tajibek Arinaliev did to buy a minivan for his new private bus service. Others go to places with higher wages – such as Kazakhstan or Russia – to work and save money. And many turn to microcredit organizations, despite high interest rates.
The good news is, the situation is improving. As the years have passed and the banking sector has grown, access to finance has improved, and interest rates have fallen. "Overall," says Bakas uluu, "prospects for the banking sector look optimistic."