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LESSONS:

Uzbekistan: Small and Medium Enterprise Development Project

sector: Industry and Trade | country: Uzbekistan

The project completion report (PCR) included a number of lessons, including the need for accompanying credit lines with policy dialogue on real sector reforms and covenants that ensure sound and autonomous credit policies and practices by participating commercial banks (PCBs). Lessons identified by the Independent Evaluation Department (IED) in conjunction with this Project reconfirm earlier IED findings on ADB projects using state banks as financial intermediaries, which have been largely negative. State banks, particularly those operating in interventionist economic systems, are often used for non-commercial purposes, which reduces their incentives and capacity for adequate risk assessment and management. In the absence of meaningful financial sector reforms in Uzbekistan to strengthen the commercial orientation of the PCBs, ADB’s use of the financial intermediation lending (FIL) modality was inappropriate.

Even in a more conducive policy environment and in light of their limited experience with longer-term small and medium-sized enterprise (SME) lending, the three PCBs should have received assistance prior to the approval of the Project and during implementation to help build their credit risk assessment and management capabilities and assist directly in the appraisal of subprojects. Given the rather fluid situation of the banking sector, ADB’s inexperience in dealing with most of the PCBs, and a lack of access to reliable information regarding their financial condition, TA and loan proceeds should have been allocated on a first come- first served basis and taken into consideration the PCBs’ actual financial and operational performance instead of pre-determining maximum loan amounts for each PCB.

ADB should have suspended loan utilization when covenants were not being complied with.

In addition, the PCR recommended the inclusion of covenants requiring the PCBs to monitor the financial condition of sub-borrowers on a quarterly basis. While appropriate under other circumstances, it is doubtful that such a requirement would have made a difference in enabling banks to proactively identify potential repayment problems, given SME accounting systems and the limited predictive value of financial statements in Uzbekistan. Regular site visits would have been a more appropriate tool under these conditions.

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