Some time ago Charles Rudd asked me to write an article on "Microfinance in Uzbekistan" for the next issue of Business Connections. Excellent, I said, in all of the 18 months I have spent in Uzbekistan the establishment of the Microfinance Bank was the most important issue for me.

Then Charles sent an e-mail with a link to an article on Microfinancing and more details on the story he was expecting from me it should now cover my views on the history, current situation, and future prospects and benefits of microfinance for the Uzbek economy, all on 2 pages (maximum), great. Since this is obviously impossible, I decided to focus on the issue raised in the article "Microfinance is Not Enough for Rural Financial Development, Says the New ADB Book" (to be found at http://www.adb.org/Media/Articles/2006/10473-Central-Asia-microfinance).

The main point made in the book presented in the article is that "while microfinance institutions are certainly needed to provide access to financial services by poor households and micro enterprises, the book says that rural people, including poor people, need deposit and payment services as much as if not more than access to credit. Thus, commercial banking institutions will inevitably remain the predominant players in rural financial markets across the region for the foreseeable future."

There arc many stories about animosities, conflicts and wars between International Finance Institutions (IFIs); unfortunately, many of them arc true. The community of development bankers seems to be no different from any other international community. However, I am happy to state I could not agree more with the point made by ADB; indeed, it is not enough to provide just micro loans and that applies not only to rural people but to urban micro-entrepreneurs as well. They need a whole range of financial services tailored to meet their needs in many respects: localized close to where they live and work, not too expensive, etc.

So far in Uzbekistan, as in many other developing countries, the offer of support is limited to micro loans and even those are available to a very limited number of potential clients. According to a recent market study, out of an estimated 1.9 million entrepreneurs only 3.7% use credit from the formal financial sector, including commercial banks, Microfinance Institutions and Credit Unions. In terms of volume, the total unsatisfied demand for loans is estimated between 80% and 93%, depending on the anticipated average loan amount.

This statistics could be used as brief description of the history, current situation, and future prospects of microfinance in Uzbekistan. Whatever was done so far is not enough and the demand is huge. Institutions that would be able to fill at least part of this enormous gap between demand and supply would not only support development of private sector, but also should be a commercial success. Of course, such institutions should not be providing only micro loans, but full range of financial services: deposits, money transfers, overdrafts, etc.

I know that many people do not believe that such institutions could be a commercial success; they point out that getting close to micro-entrepreneurs and farmers is very expensive, that the scale of business is very small and it is impossible to make it profitable. It is true, that applying standard approach of retail banking to microfinance would, most probably, result in commercial losses. That is why special technology is needed. It is clear that completely different approach and tools arc required in corporate project finance and in consumer lending, similarly there arc financial technologies which make micro lending and providing of other financial services to micro and small businesses, including farmers, profitable.

In order to prove this ADB, IFC, KfW, OPEC and EBRD would like to establish a bank focusing on microfinance in Uzbekistan. The idea is to set it up, demonstrate that it could be a commercial success and in several years sell it to commercially oriented investors. It was done in other countries; there is no reason why it could not be done here. I visited projects financed by micro loans in many areas of Uzbekistan. One of them is the production of silk fabric in Margilan, where all technological processes are divided among 11 families living in one mahalla. In Kokand a group of entrepreneurs is using micro loans to finance production of clay tandirs (ovens used to make local bread 'lepyoski' and meat pies). Elsewhere a retired teacher is producing wooden cradles; he learned it from his father and is teaching his son, who will be already the sixth generation in this family of cradle producers. There are already thousands of examples here in Uzbekistan that micro financing can make peoples' lives easier and better.

Unfortunately, I will be watching developments in this area from some distance quite soon, but I will remain a great fan of the Uzbek micro and small entrepreneurs and fanners, as well as microfinance. Author: Andrzej Witak, Head of Office/Senior Banker, European Bank for Reeonstruetion and Development (EBRD) Tashkent Resident Offiee in Uzbekistan 2005-2006.