Summary of the Concept Note on “Greater Access to Retail Finance: Measures to Promote Microfinance in the Russian Federation”
In its concept note, “Greater Access to Retail Finance: Measures to Promote Microfinance in the Russian Federation,” the Russian Microfinance Center (RMC) highlights the links between financial inclusion and living standards, thriving entrepreneurship and SME, and other social and economic objectives. According to RMC, in 2008, “about half of Russia’s economically active population lacked adequate access to financial services.” RMC identified the biggest challenges in getting Russians access to finance as territorial and technological exclusion.
Territorial and technological exclusion: Lack of rural access
Territorial exclusion is a growing concern within Russia mainly due to the country’s population decline and demographic shift from rural to urban; the rural population constitutes 27 percent of Russia’s total population. Therefore, the low population density in remote areas makes transaction costs of opening retail banks very high.
Retail finance coverage in Russia is also very disproportionate: the average rate of financial coverage outside of Moscow is about four percent of that in the country’s business capital. Regions with the highest rates of retail finance coverage include St. Petersburg and Samara whereas the Jewish Autonomous Oblast, Republic of Chechnya, and Chukotka Autonomous District have an index ratio of zero. At this point, Sberbank and Rosselkhozbank are the only banks in Russia with developed retail networks in rural regions.
Even where rural access exists, it is usually limited both in terms of reach and services offered. RMC highlighted the importance of developing an “institutionally diversified model of retail finance” that will reach remote areas in Russia and offer a wider variety of services (e.g., savings in addition to credit). It is interesting to note that, in some of the rural communities, credit cooperatives are the single financial institutions where people can make important payments like paying their utility bills.
Technological exclusion has been a key issue in many remote areas in Russia as the majority of people do not own or have access to computers. Rural populations do have access to mobile phones and various related cell services. Therefore, the opportunity for branchless mobile banking is very high. Mobile banking is still in preliminary development stages, but it could be the catalyst needed to accelerate the goals of financial inclusion in Russia.
The importance of SMEs and the need for microfinance
The Concept Note also emphasized the importance of small and medium enterprises (SMEs) and the need to create financial entities that will meet their increasing demand for capital. According to the Russian Federal Statistics Service, the 1.13 million registered SMEs employ a total of 9.1 million people and combined with the 4.75 million taxpaying individual entrepreneurs, these micro, small and medium enterprises (MSMEs) represent nearly 10 percent of the country’s population. Despite being a critical segment of Russia’s economy and a major driver of innovation, these MSMEs face severely limited access to capital and affordable loans. In fact, RMC research shows that that only 650,000 Russians have access to microfinance. Therefore, the microfinance ratio in Russia is about nine percent, currently the lowest in the world.
The expansion of the Russian microfinance sector is impeded by several key factors, including the lack of credit bureaus or other rating agencies and a serious lack of available financing. Currently, the main source of funding for microfinance organizations in Russia still comes from credit cooperatives’ share capital. However, external funding in microfinance is increasing.
The Russian Ministry of Finance has committed a large funding allocation to support development of SMEs in Russia. This funding is channeled through Russian Development Bank (or Vnesheconombank) to be reissued in loans to commercial banks and large microfinance organizations. The Russian Development Bank acts as the facilitator of loans and the monitor, requiring long term commitment from all key beneficiaries. This initiative has the potential to make a large impact on SMEs’ access to microfinance.
Some of the steps that RMC suggested to promote financial inclusion in Russia are:
- Offer more online courses and workshops to increase financial literacy of borrowers of microloans. RMC suggested modeling financial literacy programs on the Financial Driver’s License in Australia, Stay Positive of Netherlands, and MoneyHelp of the UK. RMC further emphasized the importance of public private partnerships and government support in implementing such programs.
- Combine findings of this report with the Concept of Long-Term Social and Economic Development of the Russian Federation report finding in order to increase availability of standard financial services from the current €1.6 thousand per capita to €3.8 thousand by 2012(the level currently observed elsewhere in Central and Eastern Europe) and to €33 thousand by 2020 (the level observed in Western Europe).
- Increase use of mobile and web-based banking to make remittances and payments.
- Increase government-sponsored programs in support of microfinance in Russia to one half of district-level municipalities.
If these suggestions are implemented, RMC suggests that the number of SMEs in Russia will double by 2012 to reach 2.1 million and the number of entrepreneurs will increase by 2.5 times to reach 11 million. This, in turn, has the potential to reduce the nation’s poverty level by at least half.