20 Years of Financial Inclusion in Europe and Central Asia

2015 marked CGAP's 20th anniversary, and it was also 20 years ago when I started working for the first microfinance program in Russia – Opportunity International. I have stayed in the inclusive finance field ever since. While working for various microfinance programs and as a consultant in the Eastern Europe and Central Asia (ECA), I have witnessed several trends in microfinance – which over years has become understood as part of inclusive finance.

Turkish fishermen on a frozen lake
Turkish fishermen on a frozen lake. Photo by Bulent Suberk.

Growth and prevalence of microlending

What started as small microlending programs have now turned into a part of the mainstream financial sector serving millions of people – with official definitions and regulatory frameworks adopted in many countries of the region. In countries such as Azerbaijan, Bosnia and Herzegovina, Kyrgyzstan, and Tajikistan, microfinance organizations’ portfolios represent significant portions of the financial sector assets and reach large numbers of people (for example, in Kyrgyzstan, MFIs serve some 12% of the working population, according to the National Bank of the Kyrgyz Republic). Some MFIs – initially very small – have grown and transformed into full-fledged banks.

Digital payment terminals

The region has been home to unique innovations in the digital finance sphere – specifically the cash-in payment terminals that quickly came to dominate the landscape in ECA. Since about 2005, the terminals started spreading all over the region, showing 3-digit percentage growth rates every year. Used first as automated cash acceptance points for airtime, over time they started to be utilized for hundreds of other payments, loan repayments, and account top-ups. In a region that had never used checks, the terminals were filling a unique consumer need fast. In Russia alone, there are currently over 70 million people using the terminals at least once a month – this is half of the total population. In Azerbaijan with just about 10 bank branches per 100,000 adults, there are at least 7 times more payment terminals which are easy to find in remote places: I’ve seen them in villages lacking all other access points, located in post offices and corner grocery shops. The terminal business has now spread to most of the Russia’s neighboring countries and even further – countries such as Brazil, Colombia, India, Indonesia, Philippines and the USA.


A specific feature of the region is its high dependence on remittances in poorer countries: according to the World Bank, in 2014, in Georgia, remittances make up 12% of the GDP; in Armenia – 19%; in Moldova – 26%; in Kyrgyz Republic – 30%, and in Tajikistan – almost 42%. From the financial inclusion perspective, two areas are worth mentioning vis-à-vis the high migration flows and remittances in ECA. First, is that there has been a significant reduction of remittance fees in the last few years – making them the lowest worldwide, thanks to advances in technology – including the terminals mentioned above – and high competition among remittance providers. For example, compared to the global average total cost of sending remittances of 7.68%, the cost in ECA has recently been as low as 2.51% to send remittances from Russia, the main sending country in our region.


Yet over these last 20 years the path of the inclusive finance development has not been entirely rosy. The region has seen several crises, such as a major microcredit repayment crisis in Bosnia and Herzegovina in 2008 and a few similar crises of a smaller scale in several other countries. The repayment crises were due to a combination of factors, such as concentrated market competition and multiple borrowing, overstretched MFI systems and controls, and the erosion of MFI lending discipline. After the global financial and economic crises of 2008 – 2009 which hit microfinance all over the region additionally hard, a downscaling trend is being gradually reversed with an upscaling trend in lending. This came after the realization that focusing on funding microbusinesses alone may not be the best strategy for institutions that strive to be sustainable and support local economies.

Blurred lines between microfinance and consumer lending

Over the years, in several countries in the region – and notably Russia – there has been a departure from the traditional understanding of “microfinance.” Under the umbrella of the local microfinance laws, short-term, high-interest rate, and high write-off rate consumer lending businesses have been proliferating. Apart from the reputational damage among customers and the public at large, this phenomenon has already hurt customers, bringing about a regulatory backlash, such as the introduction of interest rate caps in multiple countries which had never before thought about this. In some ECA countries, policy makers had even advocated strongly against them – notably Kyrgyzstan, Kazakhstan, Russia – so the recent trend is striking. Most recently, Azerbaijan adopted caps on both consumer and micro loans.

Moving ahead

Time will tell how the inclusive finance sectors of the ECA region will overcome the challenges they currently face. There is now a renewed interest in and commitment of mainstream market players to responsible finance practices – as evidenced, for example, by a growing number of financial institutions – both banks and MFIs – already certified or striving to be certified by the Smart Campaign: out of the total of 37 institutions certified globally as of 2014, 18 were from ECA. This gives hope that microfinance will still have a role to play in advancing responsible financial inclusion in the region.

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