Why and How of Trade Finance in Kyrgyzstan

Abstract

In light of the necessity of the development of Kyrgyz export, Kyrgyz traders should be provided with diverse financial tools to have the capacity to react quickly on the changing market conditions and requirements and to be competitive in international markets. But financial intermediation of Kyrgyz banks is still weak and Kyrgyz companies often cannot rely upon the external financing. The current study is focused on such trade finance tools provided by the Kyrgyz banks as letters of credit and documentary collections. The development of such services would enable Kyrgyz traders not only to effect secure payments for the cross-border trading transactions, but also to increase their financing possibilities. The main objective of this study is to survey the root causes of underdevelopment of trade finance sector of Kyrgyzstan and to propose ways for the development. The survey was conducted among the most developed banks of Kyrgyzstan and Kyrgyz trading companies. Six banks of Kyrgyzstan provide letters of credit and five of them work with documentary collections. The Trade Finance Programs are provided by three international organizations – the EBRD, the IFC and the ADB. Bank charges are in line with international practices, but collateral requirements under import letters of credit and complicated procedures scare away traders from the use of such trade finance tools. Many small and medium enterprises are not aware of such payment methods. Those companies that used them before find the charges too high and prefer to mitigate the risks in the cross-border trade in another ways. In order to improve the trade finance sector some of recommendations would be to increase awareness about the trade financing among managers and directors of the key export industries under the Export Development Strategy and to adjust the plan of action under the cross-sector “Access to finance” to the needs of the trade finance sector. The law regulating letters of credit should be updated and a special agency for dealing with the problems of financing could be created. There should be more attention paid to reporting of reliable statistics on trade finance tools to observe the trend of development. The promotion of competitiveness among banks can be achieved through providing of comparative information on a separate web site. Kyrgyz banks should encourage their clients for usage of trade finance tools by distribution of brochures, providing qualified consultations and advertisement of TFPs.