UI Housing Fiance KG PDF

Pre-Feasibility Study
on Housing Finance
in the Kyrgyz
Republic
Prepared for Prepared by
Raymond Struyk
The Urban Institute
Friedemann Roy
KfW Kreditanstalt fuer Wiederaufbau
Bankakademie International
Frankfurt, Germany
Assignment No. 43869
THE URBAN INSTITUTE

2100 M Street, NW
Washington, DC 20037 May 2006
(202) 833-7200 Version 2
www.urban.org UI Project 07941
Kyrgyz Republic 2
Pre-feasibility Study on Housing Finance
Executive Summary
This projects objective is to define alternatives for a KfW investment program in

housing finance in the Kyrgyz Republic. The TOR directed the team to begin by
defining the Republics substantial housing problems and then designing a project
to address some of them using housing finance as a tool. Further development of
market-rate lending for housing is another key project goal.
Present Situation
Banking sector. Nineteen commercial banks operate in the country.
Fifteen are owned by foreign investors, including 4 with 100 percent foreign
capital. Owners are mainly Kazakh and Russian banks. Some of the banks have
received ratings from Moodys and Fitch. In the past two years banks have grown
rapidly in terms of assets and have succeeded in expanding deposits significantly.
As per January 2006, 317 credit unions operate throughout the country. Most of
their lending activities concern agricultural finance. Lending activities are
financed by shareholders equity and a refinancing facility of the Financial
Company for Support and Development of Credit Unions in the Kyrgyz Republic
(FC). In addition, there are 103 micro credit institutions, with the biggest being
Finca and Bai Tushum. They offer a mixture of crop, livestock, agro-processing,
trade and mortgage loan products. Combined lending amounted to KGS 783 m (as
per 12/2005). The Kyrgyz Agricultural Finance Corporation (KAFC) also belongs
to this group, which has been extending micro loans to farmers with World Bank
financing.
For the past several years the banking sector has continued on a path to stability.
The IMF informed the team that all banks met the prudential requirements and
that stress scenarios did not reveal any irregularities. Overall, bank profitability
and the quality of the loan portfolios have improved, and banking competition has
intensified following the strong expansion of foreign (mainly Kazakh) ownership of
banks in recent years.
Mortgage lending. Mortgage lending has increased sharply since 2002. At

the end of 2005, these loans accounted for 2.4 percent of bank assets and 7.0
percent of outstanding loans. These figures give the upper limit to the
development of mortgage lending for home purchase and improvements because
the National Bank does not collect separate information on residential loans. But
even if one includes loans for other purposes secured by property, compared even
to the countries of Eastern Europe, mortgage volume is very small--0.4 percent of
GDP. Sixteen of 19 commercial banks with full banking licenses are originating
mortgages as are some micro finance companies.
Mortgage loans are characterized by high interest rates (20-24 percent annual)
and short loan terms (3 to 7 years). Average loan amounts are about $15,000
according to the IFC, although there appears to be considerable variation among
banks. Most lenders impose prepayment penalties. Loans are fixed rate, self-
amortizing. Most banks require property insurance but life insurance is viewed as
excessively expensive. It is common practice to charge a 1 percent origination fee.
Kyrgyz Republic 3
Under these conditions, a small share of Kyrgyz households is able to take a

mortgage loan for home purchase.
All banks and NBFI interviewed stated that they made home improvements loans
as well and in all cases these are also secured by a mortgage on the property.
Lending terms vary. At some banks the loan term (up to 5 years) and interest
rates are the same as for home purchase loans. But at others the loan term is as
short as one year, and both interest rates and loan origination fees are higher.
Mortgage lending in Kyrgyzstan entails significant credit and interest rate risk.
Banks are much more aware of the interest rate risk. They have found ways in
the short run to address most sources of credit risk and are pressing the
Government and parliament to strengthen provisions in the Law on Mortgage.
National housing problems. Based on statements of officials and experts

interviewed and a review of relevant consultant reports, the following problems
were identified:
Deterioration of the multi-family housing stock. With the former State housing
stock almost completely privatized by 1995, the State withdrew support for
housing maintenance and rehabilitation. Private action has done little to
organize owners in multifamily buildings to address these needs, despite
homeowner associations being formed in about 25 percent of the buildings.
Marginal housing rings or novostroika. The shuttering of plants and the

disappearance of other work opportunities during the transition in smaller cities
and in the countryside produced a major wave of migration to Bishkek and Osh.
These migrants created new marginal rings, i.e., unserviced sub-divisions,
around the destination cities. Around Bishkek, some 42 communities have been
established, with a total population of about 250,000. The marginal rings are
expected to continue to grow. Municipalities are charged with eventually
providing infrastructure services to these areas but progress is painfully slow.
Housing upgrading does occur, however, slowly and unevenly over time.
Insufficient affordable newly constructed dwellings. Government officials see the

lack of deeply subsidized new construction as related to the marginal rings
phenomenon. No one speaks of a general housing shortage. Rather it is of the
shortage of affordable housing for households in the lower middle income class
and below.
Affordability of basic housing services. The combination of Kyrgyzstans temperate

climate, the high incidence of poverty, the severe energy inefficiency of the
housing stock, and the necessity that the country must import to meet its energy
needs means that a large share of the population has problems paying for the
running costs of their dwellings. Compared with other housing problems, this one
has been relatively thoroughly addressed through government programs.
Shortage of mortgage finance. Several officials spoke of the need to develop

mortgage finance as a problem that required active government intervention. As
reported below, mortgage lending has been established and is developing at a
brisk pace without government assistance. A better statement of the problem is
the perceived lack of access by lower income families to mortgage finance.
Kyrgyz Republic 4
Government Housing Sector Initiatives

The governments program for 2006-2010 is focused on expanding
homeownership opportunities for households in the lower half of the income
distribution. The government has developed three new programs that tackle the
related areas of housing construction and mortgage finance, the initial funding for
which is included in the 2006 budget. The following provides an overview of the
three programs as defined in late February.
Housing for young teachers and doctors in rural areas. The program is
aimed at retaining these skilled professionals in rural areas for longer periods
through a 3-year accumulation scheme that leads to dwelling purchase. There is
no income testing, but the salaries paid are very lowthe expected monthly salary
in 2009 is Som 1,733. 1 One thousand persons are to be assisted annually.
Under the program, a savings account is opened in a commercial bank in the

participants name and the State contributes the equivalent of $100 per month for
36 months, i.e., $3,600 total. A 10 percent annual interest rate on deposits is
assumed. At the end of the accumulation period, the funds are used as a
downpayment for a dwelling. The participant receives a mortgage loan for the
balance of the purchase price as needed; an 18 percent interest rate is assumed.
Creation of a contract savings scheme for housing. This features the

implementation of a contract savings scheme of the closed type, i.e., following the
Bausparkasse model, by a publicly owned bank. The plan calls for an interest
rate on savings of 4 percent, with a 30 percent bonus (subsidy) paid with state
funds. The accumulation period is 2-5 years, with shorter periods for relatively
higher income households, i.e., those who can save at a higher rate. It is expected
that the accumulated funds will equal 40 percent of the purchase price. The
interest rate on the mortgage loan is set at 6 percent. A number of technical
questions about the scheme exists. Over the 2008-2010 period, a total of 3,625
families are to receive flats.
Social housing construction program. This program supports the

construction of modest flats (40 sq.m.) for moderate-income households.
Although this is called a social housing program, the units are provided to
beneficiaries on an owner-occupancy basis. Participant households are expected
to make a downpayment of 6.5 percent of the purchase price. Ten percent of unit
costs will be covered by a government grant. The balance of 83.5 percent of the
purchase price will be financed by a zero interest rate, 15-year mortgage. Total
housing production of 2,000 units by 2010 is planned.
Possible Objectives of a KfW Investment Program

The objectives listed below are based on an overall program goal of
maximizing the developmental impact of KfWs involvement. In selecting
objectives, the team considered Kyrgyzstans housing problems and the current
and planned activities of other donors.
1. Help control the deterioration of the multifamily housing stock. There is no

question that this is a major problem. KfW could provide finance to lenders
who make loans to comparatively strong homeowners associations (HAOs)
for rehabilitation projects.
1 The exchange in early March 2006 was about Som 49 = 1 EUR.

Kyrgyz Republic 5
2. Accelerate the rate of improvement in housing and infrastructure in marginal

housing rings. KfW could provide finance to micro finance companies or
commercial banks who would make loans for home improvements and
upgrading in these areas.
3. Accelerate the development of mortgage lending. Three nonexclusive options

are present. (a) KfW could provide finance to partner banks to fund
mortgage loans that meet standards agreed with KfW. Similar to what KfW
is doing in Armenia, a maximum loan amount could be set to channel
KfWs funds to moderate and lower income borrowers. As part of this
package, it could work with the same banks to improve risk management
systems and with the industry overall to improve professionalism in loan
underwriting and servicing, including the introduction of Minimum Quality
Standards; a variable interest rate mortgage product might also be
introduced to manage interest rate risk. (b) KfW could provide support for
the establishment of the contract savings scheme being launched by the
Government. (c) KfW could supplement the funds available for the
Governments social housing construction program by providing funds to
finance mortgage loans to dwelling purchasers.
Programs to implement both initiatives 1 and 2 would use a contract savings

period to establish the creditworthiness of potential borrowers. But this would
not be a full contract savings scheme for housing (CSSH). In the report, the three
program elements listed under the third goal, accelerating development of
mortgage lending, are developed and evaluated as separate options.
The mechanics of the programs to reach these objectives are spelled out in report
section II.B. Each program is then assessed against eight criteria including the
development impact on the financial system, the absorptive capacity of partner
financial institutions and of the market (demand for the product), sustainability,
and the complexity for and risk to KfW.
Recommendations
For two reasons the team believes that highest priority should go to
funding the program of home upgrading loans focused on novostroika areas.
First, the market is underserved. Targeted loans funded by KfW could
dramatically expand lending from current low levels. Second, the impacts on the
welfare of borrower households would be significant, both in the health effects of
upgrading dwellings from non durable mud-brick to durable construction
materials and in the savings in energy expenditures resulting from the
improvements.
Kyrgyz Republic 6
The second priority program is loans from KfW to lenders for financing mortgages
for home purchase and home improvement organized so as to strengthen the
lending at the partner lenders and to improve mortgage lending overall in the
country. One reason that this is given the second priority is that the IFC
technical assistance project, should it be funded, could be adjusted so as to
promote the general adoption of the MQS by all banks through a process of
consultation and mediation with all mortgage lenders and to institutionalize
training at the new Banking Training Center, rather than focus on development of
model standards and documentation working with specific banks.
In assessing the options, it is important to note the size of the envisioned KfW
program in relation to the present volume of mortgage lending for home purchase
and home improvement. Roughly, the volume of residential mortgage lending in
2005 was from EUR 2.6 and 3.9 mln. This illustrates that the KfW resources will
be large compared to likely lending even two years in the future. Under this
circumstance, KfW may well be able to fund multiple initiatives.
Kyrgyz Republic 7
Table of Contents
Executive Summary 2
Contents 7
Acknowledgements 8
I. SETTING THE STAGE 9

A. Overview of the Current Situation 9
B. Government Policies and ProgramsCurrent and Planned 19
C. Current and Planned Donor Activities 22
D. Balance of the Report 24
II. IINVESTMENT PROJECT ALTERNATIVES 26

A. Possible Program Objectives 26
B. Programs to Achieve the Objectives 26
C. Assessing the Objectives 38
III. RECOMMENDATIONS 43
A. Program Components 43
B. Criteria for Partner Lenders 44
Annexes
1. Persons with Whom the Team Met 45
2. One-Page Program Summary 48
3. Persons Attending the Seminar on Contract Savings
Schemes for Housing 49
Kyrgyz Republic 8
Acknowledgements
The project team received support from many quarters in preparing the study.
We wish first to recognize the consistent help offered by Felix Hartmann at KfW.
He and his colleagues provided extremely useful comments on the draft report.
Our principal counterpart in the Kyrgyz Republic, Sultanbek Usenov, at the
Ministry of Economics and Finance, was forthcoming and helpful throughout.
The team met with over forty individuals during the field work to obtain
information and insights about the workings of Kyrgyzstans housing, housing
finance, and financial markets. These individuals were without exception
cooperative, open, and informative. They are listed in Annex 1. We owe a special
vote of thanks to the IFC for giving the team advance access to material on the
Kyrgyz Republic developed under its Central Asia Primary Mortgage Market
Development Project.
Additionally, we were fortunate in having excellent support for the field work. The
Urban Institutes office in Bishkek, led by Charlie Undeland, helped organize our
visit to be maximally efficient. Consultant Beknazar Musaliev did a fine job of
scheduling meetings, adjusting to changing requirements.
While these individuals provided invaluable assistance to the team, the authors
are solely responsible for the report. The statements herein are the authors alone
and not necessarily the views of KfW, the Urban Institute, or Bankakademie
International.
Kyrgyz Republic 9
I. SETTING THE STAGE
One result of the negotiations between the German and Kyrgyz Republic
governments in 2005 was an agreement that KfW would explore options for future
involvement in the Kyrgyz financial sector. The Kyrgyz Government gives high
priority to the further development of housing finance and mortgage lending. This
report defines options for a KfW investment program in this sphere.
A. Overview of the Current Situation
This part outlines the current situation in several areas: the broad macro-
economic and political environment, national housing problems, conditions in the
banking sector, and the development of mortgage lending. Some sections rely
heavily on a recent report prepared by the IFC on mortgage lending in the
country. 2 Statements here that are based on this report are marked with an
asterisk (*) after the statement.
A.1 Macro-economic and political conditions
These two topics are best considered together, particularly in light of

developments since winter 2004-2005. As shown by the data in Table 1, by 2000
the Kyrgyz economy had emerged from the deep recession linked to the 1998
Russian financial crisis and, with the exception of 2002, enjoyed solid economic
growth, low inflation and rising foreign investment. This happy pattern was
reported to have been brought to a halt as a result of the turmoil associated with
the tulip revolution of February-March, 2005 (official figures for the year are not
yet released). GDP growth is said to have declined sharply in 2005 along with
foreign investment and inflation to have increased. Recovery in the GDP growth
rate to 5 percent is anticipated in 2006.
Table 1. Macro-economic Indicators, 2000-2005
Indicator 2000 2001 2002 2003 2004

GDP growth rate (%) 5.4 5.3 0 7.0 7.1
Inflation rate (%) 18.7 6.9 2.1 3.1 2.8
Unemployment rate (%) 7.5 7.8 8.6 8.9 9.0
Foreign investment ($ millions) -2.4 5.0 4.8 45.5 131.4
Exchange rate (Som/$) 47.2 48.4 46.9 43.7 42.7
Source: IFC report.
During the winter of 2005-2006, after the election of a new president in July
2005, political tensions again rose. At the time of this writing in early March, the
situation remains unsettled.
Despite the growth during 2000-2004, the country remains poor, with a per
capita GDP of only $400 in 2004; in 2000, 52 percent of the population lived
2 IFC, Kyrgyzstan Housing Finance Gap Analysis, draft February 27, 2006.
Kyrgyz Republic 10
below the poverty line. 3 The Kyrgyz Republic remains substantially rural in
character with 65 percent of its 5.1 million population still living in the
countryside. In 2003, agriculture and forestry accounted for 52 percent of
employment. 4
A.2 National housing problems
This section first provides an overview of the sector and then outlines several
major housing problems identified by government officials and external experts.
A.2.1 Tenure, housing conditions, housing construction

The Kyrgyz Republic, like Bulgaria and Hungary, is a so-called super
homeownership state, with 95 percent of the former state and municipal housing
stock having been privatized. State-owned units in 2002 accounted for only 3.8
percent of the stock and cooperatives and other tenures for the balance of the
stock. 5
About 500 homeowner associations accounting for about 1,300 buildings and 25
percent of all units have been formed throughout the country. 6 After
privatization, the State ceased all assistance for dwelling maintenance and
rehabilitation. The result has been widespread deterioration in the multifamily
housing stock. While some condominium associations have done well at
maintaining their properties, not all have; 7 and the other three-fourths of the
stock has been grossly neglected.
Table 2 gives basic statistics on the provision of dwelling units with basic services.
The information reflects the countrys poverty. Only 70 percent of urban families
have access to running water or are connected to a public sewage system. Under
half have piped hot water in their units.
The population growth rate is low at about 1 percent per year, partially as a result
of significant out migration by those in search of work. This would suggest that
the volume of required newly constructed housing should be modest. However,
during the transition there has been a substantial movement of households from
rural areas and smaller towns to major cities (see below) and this has increased
the need for new housing.
Residential construction rose significantly in 2004 (the latest year for which data
are available). Measured as a share of GDP, after resting at 1.2-1.4 percent of
GDP from 2000 through 2003, residential construction rose to 2.0 percent in
2004. Building permits were issued for 5,300 units and 5,000 were certified for
3 World Bank web site, Kyrgyz Republic Data Profile, as of January 2006.
4 Economic Intelligence Unit, Country Profile 2005: Kyrgyz Republic, p.40.
5 Information from, Institute for Urban Economics, Report for the Kyrgyz Republic: The
Environment Millenium Development Goal (MDG) in Europe and Asia, Degraded Housing
Target. (Moscow: IUE, 2004). The great majority of privatized units are owner-occupied
but some are rentals.
6 Unlike in Kazakhstan, for example, formation of these associations was on a voluntary
basis.
7 Reports of The Urban Institute on HOAs in Kyrgyzstan are available at:
http://www.ui.kg/inc/cond/rus/condo_rus.pdf ; http://www.ui.kg/cond_rus.shtml
Kyrgyz Republic 11
occupancy. Most years over 90 percent of the units built are single family
dwellings. 8
Table 2. Total dwelling square and percent of households with access to

services, 2001
Housing Percent of households with amenity
Indicator stock Total Urban Rural
(m2) (%) (%) (%)
Kyrgyz Republic 44 013
total
equipped with
Running water 16 577 40.0 70.4 16.8
Public Sewage 12 653 39.7 69.7 16.8
Flushing toilet N/A 26.7 56.3 4.1

Bathroom 9 847 24.8 51.9 4.2
(shower)
Hot water 6 358 20.9 45.2 2.4
District heating N/a 29.2 58.4 7.0
Central gas supply 22 714 36.1 55.3 21.4
Telephone 5 994 28.0 47.9 12.8
Electricity
interruptions less N/A 41.9 62.6 26.2
frequently than once
per week (%)
a. Source: Institute for Urban Economics, op. cit., Table 2.
A.2.2 Major housing problems

A.2.2.1 Deterioration of the multi-family housing stock. The origins of this
widespread problem were noted above. There are no reliable estimates of the
extent of the problem. 9
A.2.2.2 Marginal housing rings or novostroika areas. The shuttering of plants

and the disappearance of other work opportunities during the transition in
smaller cities and in the countryside produced a major wave of migration to
Bishkek and, to a less extent, Osh. These migrants created new marginal rings,
i.e., unserviced sub-divisions, around the destination cities. Around Bishkek,
some 42 communities have been established, with a total population of about
250,000. The marginal rings are expected to continue to grow. Municipalities
are charged with eventually providing infrastructure services to these areas but
progress is painfully slow. Housing upgrading does occur, however, slowly and
unevenly over time.
These settlements were created by occupancy of completely unserviced land. The

development of novostroika areas is often referred to locally as invasions. As
discussed further below, invasions is a misnomer. After a short initial
experience, the sub-division process has been organized by Bishkeks four
municipal raions (districts) that prepare sub-division plans and allocate plots to
qualifying households. Site plans developed prior to the invasion demark streets
and sites for schools and other public purposes. These plans have generally been
8 Source: background tables prepared for the IFC report cited earlier.
9 Institute for Urban Economics, op. cit.
Kyrgyz Republic 12
enforced. Road rights-of-way are generous and residential lot sizes large500 to
600 sq.m. is typical (5-6 sotka). Hence, these are low-density areas in contrast to
the invaded areas of Asia and Latin America. The settlements locations differ
sharply in their quality, with some being in areas subject to frequent flooding or
other hazards.
Some families brought doors, windows, and other elements from their former
units to use in constructing new units that begin really as shacks. Generally, the
development of dwelling units has followed the classic model of incremental
construction. Initially, a small unit is often constructed of mud bricks. It is then
improved and expanded over time. In the oldest novostroika areas, most
dwellings are now constructed of durable materials, although a large share is not
fully completed.
A.2.2.3 Insufficient affordable newly constructed dwellings. Government officials

see the lack of deeply subsidized new construction as related to the marginal
rings phenomenon. No one speaks of a general housing shortage. Rather, they
speak of the shortage of affordable housing for households in the lower middle
income class and below.
A.2.2.4 Affordability of basic housing services. The combination of Kyrgyzstans

temperate climate, the high incidence of poverty, the severe energy inefficiency of
the housing stock, and the necessity that the country must import to meet its
energy needs means that a large share of the population has problems paying for
the running costs of their dwellings. Compared with other housing problems, this
one has been relatively thoroughly addressed through government programs (see
section A.5).
A.2.2.5 Shortage of mortgage finance. Several officials spoke of the need to

develop mortgage finance as a problem that required active government
intervention. As seen below, mortgage lending has been established and is
developing at a brisk pace without government assistance. A better statement of
the problem is the perceived lack of access by lower income families to mortgage
finance.
A.3 The banking system
After independence in 1991, a two-tier banking system was implemented in

Kyrgyzstan. Chart 1 shows the structure of the banking system (as per 2005)
which consists of four different groups. Supervision is executed by the National
Bank of Kyrgyzstan (NBKR):
The 19 commercial banks operating in the country report assets of

Som 22.02 billion and equity worth Som 3.5 billon (as 12/2005). 10 Fifteen banks
are owned by foreign investors, including 4 with 100 percent foreign capital.
Owners are mainly Kazakh and Russian banks. Some of the banks have received
ratings from Moodys and Fitch.
As per January 2006, 317 credit unions operate throughout the country. Lending
amounted to KGS 559.6 mln to 21,215 customers. Their combined equity is
10 The current USD/KGS exchange rate is about 41.

Kyrgyz Republic 13
Som 312.9 mln. Most of their lending activities concern agricultural finance.
Lending activities are financed by shareholders equity and a refinancing facility of
the Financial Company for Support and Development of Credit Unions in the
Kyrgyz Republic (FC). 11 This institution was established in order to support the
development of the credit unions, which received a loan from the Asian
Development Bank (ADB) and technical assistance from GTZ. It may be privatized
or liquidated this year. 12
Chart 1: structure of Kyrgyz banking system
National Bank of Kyrgyzstan
Micro finance Currency exchange

Commercial banks Credit unions
institutions and Pawn shops
In addition, there are 103 micro credit institutions, with the biggest being Finca
and Bai Tushum. 13 They offer a mixture of crop, livestock, agro-processing, trade
and mortgage loan products. Combined lending amounted to KGS 783 mln (as of
12/2005). 14 The Kyrgyz Agricultural Finance Corporation (KAFC) also belongs to
this group, which has been extending micro loans to farmers with World Bank
financing. 15
For the past several years the banking sector has continued on a path to stability.
The IMF informed the team that all banks met the prudential requirements and
stress scenarios did not reveal any irregularities. Overall, bank profitability and
the quality of the loan portfolios have improved, and banking competition has
intensified following the strong expansion of foreign (mainly Kazakh) ownership of
banks in recent years.
11 Credit Unions were not allowed to collect deposits. For a pilot project, however, NBKR
granted 10 credit unions a temporary license for deposit collection last year.
12 For a final decision on the future of FC, an assessment is currently done. ADB informed
the team that the future existence of FC would depend on a further inflow of funds.
13 See International Business Council, Priority Recommendations to improve the Kyrgyz
Business Environment, summer 2005.

14 See Demir Kyrgyz International Bank, Annual Report 2004, page 5.
15 It will remain a non-bank institution until its privatization which is expected to be
completed by end-2006. See IMF, Kyrgyz Republic: First Review under the three year
Arrangement under the Poverty Reduction and Growth Facility Staff Report, November
2004, page 15.
Kyrgyz Republic 14
Table 3 shows some key data of the Kyrgyz banking system, excluding credit
unions and micro finance institutions.
Table 3: Key indicators of Kyrgyz banking system

(figures in millions of Som)
31 Dec. 2003 31 Dec. 2004 31 Dec. 2005

Credits and financial 2,867.9 5,801.4 7,963
lease to clients
Total Assets 11,313.3 17.702.9 22,020.4
Demand deposits of 2,616.9 4,750.6 7,888.4
legal entities
deposits of individuals 1,429.2 2,081.1 2,663.7
Time deposits of legal 733.4 1,143.8 1,536.1
entities
Total capital 2,104.4 2,692.8 3,513
Total provisions for 225.2 340 493
credits to clients
Current liquidity 93.2 % 90.8 % 86.9 %
ratio 16
Source: NBKR
From 2003 to 2005, lending to the private sector grew by 277 percent. In 2004,
credit to the private sector in relation to GDP amounted to 7 percent. For 2006
and 2007, these figures are estimated to increase to 8.7 and 9.7 percent,
respectively. 17 Credit growth was also accompanied by a rising inflow of deposits
from private individuals. From 2003 to 2005, deposits went up by 86 percent,
reflecting rising, though slowly, confidence in the banks. However, terms with a
maximum of 1 year remain short. Moreover, about 72 percent of deposits are in
USD. Net profit for the first half of 2005 reached KGS 0.2 billion. Annualized ROA
and ROE of all commercial banks as of 1st of July 2005 made up 2.3 and 17.3
percent, respectively. 18 The current liquidity ratios show that banks are highly
liquid. The IMF informed the team that they have pushed NBKR to absorb the
excess liquidity. However, The IMF considers NBKR to still lack the adequate
instruments for this task.
Chart 2 illustrates the development of interest rates for loans and deposits. Since
2001, spreads have fallen; but at 12 to 14 percentage points, they still remain
considerably high. These spreads are the result of perceived credit risk, interest
rate risk and liquidity risk. First, many banks are considered to pursue very
conservative lending policies. 19 Second, with their short-term liabilities, banks
have to bear the interest rate risk, since customers do not accept variable interest
rates. Third, most of long-term loans are financed by short-term funds with
16 This ratio is calculated over assets up to 30 days. NBKR requires a ratio at least 30
percent.
17 See IMF, Kyrgyz Republic: First Review under the three year Arrangement under the
Poverty Reduction and Growth Facility Staff Report, November 2004, page 21.
18 Source: NBKR.
19 For example, Demir Kyrgyz International Bank does not grant loans for terms longer
than 3 years.
Kyrgyz Republic 15
varying interest rates. Average costs of funds vary around 8 to 9 percent. 20 As a

result, lending is rationed and the costs of lending are spread over a small
number of loans.
Current market development is mainly driven by Kazakh and Turkish banks since
they have access to long-term funds. The IFC believes that Kazakh banks seek to
invest their excess liquidity in Kyrgyzstan since the rates of return are higher than
in Kazakhstan. These banks typically report higher returns on equity than their
Kyrgyz competitors. In terms of net profit, Ineximbank, Demir Kyrgyz
International Bank and Asia Universal Bank are reported as the most profitable
banks. 21 These banks are also better capitalized than Kyrgyz banks. A further
consolidation is currently not expected. 22
Further stabilization and growth of the banking sector depends on the political
development in the country and the governments determination to undertake
reforms. Both the Bankers Alliance (which represents the banks interests) and
International Business Council are pressing for further reforms. 23
Chart 2: development of interest rates in the Kyrgyz

banking sector
40
35
30
25
20
15
10
5
0
2001 2002 2003 2004
Interest rate on loans Interest rate on deposits
Source: IMF; NBKR 24
20 Interest rates on deposits fluctuate between 3 and 4 %. Banks also lend at other banks
in order to manage liquidity risk. In these cases cost of funds can soar up to 10 %. See for
example, Ineximbank, Annual Report 2004, page 25.
21 Data were delivered by Demir Kyrgyz International Bank which informed the team that
banks inform themselves about key figures. These figures correspond to the figures
collected by NBKR.
22 Rumors of a merger between Ineximbank and Energobank have been only reported once
to the team, but were not echoed by other banks or international donors active in banking
sector development.
23 The International Business Council (IBC) has among its members EBRD, Kyrgyz
Investment Credit Bank and Demir Kyrgyz International Bank. In summer 2005, IBC
mentioned in a paper several areas of necessary reforms in the banking sector such as
establishment of deposit insurance scheme, improvement of the legislative framework etc.
24 Lending interest rates are weighted average interest rates on KGS denominated loans.
Deposit rates reflect rates in KGS for about 6 months.

Kyrgyz Republic 16
Interest rates are likely to further decrease, albeit only slightly. The IMF noted
that reductions depend on the governments intention to develop the securities
market. In 2004, about USD 28 mln in government bonds and less than
USD 600,000 in corporate bonds were issued. All of these bonds are short-term in
nature with government bonds having the longest term of eighteen months.* The
local World Bank representatives informed the team that banks consider KAFCs
interest rates as a kind of benchmark due to their considerable farm lending
activities. Thus, KAFCs interest rate could be viewed as a replacement for a
lacking benchmark typically provided by government bonds.
A.4 Mortgage lending
Mortgage lending has increased sharply since 2002, reaching Som 540 million in
outstanding loans at the end of 2005. Year-on-year growth in outstanding loan
balances was: 2002-2003, 372 percent; 2003-2004, 230 percent; and, 2004-
2005, 90 percent. At the end of 2005, mortgage loans accounted for 2.4 percent
of bank assets and 7.0 percent of outstanding loans. 25 These figures give the
upper limit to the development of mortgage lending for home purchase and
improvements because the National Bank does not collect separate information on
residential loans. But if one includes loans for other purposes secured by
property, compared even to the countries of Eastern Europe, mortgage volume is
very small. For example, the stock of mortgage loans is the equivalent of 0.4
percent of GDP in Kyrgyzstan, compared with 5 percent for the Czech Republic
and Poland.*
Two banks, Energobank and Halyk Bank, accounted for 43 percent of the market
at the end of 2005, with the next two largest lenders, Kazkommerzbank and
Kyrgyz Kredit Bank, accounting for another 27 percent. Sixteen of 19 commercial
banks with full banking licenses are originating mortgages, and at least one of the
remaining three is initiating mortgage lending. Generally, banks with some
Kazakh ownership have been aggressive in the market, and they have built their
lending programs on the experience acquired in their home market.
Some non bank financial institutions are also originating mortgages for amounts
significantly lower than those of commercial banks. One example is the Bai
Tushum micro finance company, where home purchase mortgages in Bishkek
average about $10,000 and home improvement loans about $5,000. A few of the
countrys 300+ credit unions have recently begun making mortgage loans.
A.4.1 Mortgage products

As shown in Table 4, interest rates are high and lending terms short. Average
loan amounts are about $15,000 according to the IFC, although there appears to
be considerable variation among banks. 26 Many lenders impose prepayment
penalties, but these seem mostly to apply only to the first year or two of the loan
term. Maximum payment-to-income ratios are hard to define because the
presence of substantial income that goes underreported or unreported to avoid
taxes. Trying to determine true borrower income is a major challenge to loan
25 Data provided by the National Bank of the Kyrgyz Republic.

26 One bank with whom the team met stated an average mortgage loan amount of $30,000
to $35,000.
Kyrgyz Republic 17
underwriting. Banks interviewed report using very high standards for the
maximum share of monthly income for the mortgage payment as a percentage of
net income (PTI), i.e., 50 percent and even higher.
Loans are fixed rate, self-amortizing. Most banks require property insurance but
life insurance is viewed as excessively expensive. It is common practice to charge
a 1 percent origination fee.
Under these conditions, a small share of Kyrgyz households is able to take a

mortgage loan for home purchase. The affordability problem associated with the
short loan term and high interest rates is worsened by the extremely high tax on
property sales (5 percent).* 27
Table 4. Home Purchase Mortgage Product Examples at the End of 2005
Minimum Annual Annual Term Prepayment

down interest rate interest rate (years) penalties?
payment (%) ($) (Som)
Energobank 30 20 20 5 Yes
Kyrgyz Credit 50 24 24 3 No
Halyk Bank KYG 40 16 16 7 Yes
Demir Kyrgyz Intl Bank 30 20 N/A 3 Yes
IneximBank 30 20 24 5 No
Bai Tushuma 40 N/A 24 5 Yes
a. Micro finance company
Source: IFC report with authors additions.
All banks and the NBFI interviewed stated that they made home improvement
loans as well and in all cases these are also secured by a mortgage on the
property. Lending terms vary. At some banks the loan term (up to 5 years) and
interest rates are the same as for home purchase loans. But at others the loan
term is a short as one year, and both interest rates and loan origination fees are
higher. 28
Several banks stated that they were making loans for the construction of
multifamily housing projects. 29 Later stages are secured by the building itself.
Lenders interviewed had experienced few problems with such loans, but the
experience is over a very limited time period. Moreover, the responses to the few
questions the team was able to ask did not suggest a high degree of
professionalism in underwriting these loans.
A.4.2 Risks in mortgage lending

The two larger risks associated with mortgage lending are credit and interest rate
risk. Liquidity risk is also a problem with long-term loans reducing the ability of
27 The high charges create strong incentives for collusion between the buyer and seller to
understate the sales price.
28 For example, at one lender the terms for a home purchase mortgage are a 5 year loan
term, with a 20 percent interest rate and a 1 percent origination fee; for a home
improvement loan the term is 1 year, the interest rate 27 percent and there is a 3 percent
origination fee.
29 Until an amendment in 2006 to the Law on Registration the law did not permit pledge of
a construction project until it had reached a certain stage of completion. So loans for
early stages of construction were secured by the building site and other collateral.
Kyrgyz Republic 18
banks to generate cash quickly should it be needed. On the other hand, exchange
rate risk associated with dollar denominated loans is manageable as 73 percent of
deposits in commercial banks were in foreign currency at the end of 2005. 30
A.4.2.1 Credit risk. There are four significant sources of credit risk.
At least at some lenders, underwriting practices and elements of loan

servicing are not well-developed, with an absence of clearly defined
procedures and staff training.* There are presently no publicly offered
training courses for mortgage loan officers or on housing finance topics in
general. 31
The process for registering the mortgage is not only cumbersome but also
entails risk because there is a several day period between the recordation of
the sale, and probably the payment of the seller by the bank, and the
recordation of the mortgage lien.* Worth noting is that amendments to the
Law on Registration were passed in January 2006 that permit private
persons to access full records on individual properties, something that was
not previously possible. Actual registration fees are low.
The foreclosure process contains a good deal of uncertainty in principle.

This arises from the ability of the borrower-in-default to exercise the option
of having the banks claim adjudicated in court at any time, even when an
out-of-court settlement is near completion. It is also possible for the
borrower-in-default to drag out the court process for as long as two years.
Finally, proceeds obtained by the bank from in-court settlements are
subject to taxation which can be as high as 16 percent.* Clear eviction
regulations and procedures are absent.*
Property appraisals are done by bank staff who do not have specialized
training in appraisal, putting lenders at risk of inflated value estimates. 32
Most banks interviewed cited few problems in practice with registration and
foreclosure. They are, however, pressing for amendments to the Law on Mortgage
that would make the process more certain and efficient. 33 Moreover, the EBRD
representative and some bankers indicated that they saw the foreclosure process
as quite uncertain with respect to timeliness.
30 Data from the NBKR web site. 97 percent of new deposits were in foreign currency,
reflecting the political uncertainty in the country.
31 A Bank Training Center has recently been founded that is associated with the National
Bank. The team was unable to meet with the director.

32 This is according to the Association of Kyrgyz Appraisers. It is worth noting that thanks
to a donor-financed technical assistance program, the Association offers a range of course

on appraising various types of property using international standard methods. The
Association certifies qualified members; certificates are signed as well by four government
agencies. There are no licenses. The Association reported that generally bank staff are
not interested in this type of training. It appears that prior donor SME finance programs,
for example, have not required banks to use certified appraisers.
33 In late February when the team was in Bishkek amendments to the Law on Mortgage
were being considered by the parliament that would strengthen banks position in the
process.
Kyrgyz Republic 19
Other tools absent for managing credit risk include title insurance and affordable
life insurance.
In contrast, a credit bureau (Credit Information BureauTrust) was established

two years ago as a for-profit entity. It provides reports on juridical and physical
persons. Presently about seven banks contribute data and get credit reports.
Others complain of the high fees associated with membership and individual
credit reports.
A.4.2.2 Interest rate risk. Banks are often making 5-7 year loans funded by short-
term deposits. As long as mortgages and other long-term loans accounted for only
a few percentage points of a banks assets, the risk is clearly manageable. But if
mortgages begin to account for a greater share of assets, they will represent a
significant risk in the event that the cost of liabilities rises significantly. Banks
have no way to hedge this risk.
A.4.3 Summary
Mortgage lending is currently subject to significant risks and inefficiencies.
Importantly, major inefficiencies and certain sources of credit risk are caused by
government policies and therefore could be eliminated with legislation changes.
Banks have found ways of operating that work around these problems but do not
really manage them. It is unclear whether loan pricing realistically accounts for
the various risks. The IFC report cites major deficiencies in risk management
generally.
The risks stemming from poor underwriting and loan servicing practices can be
addressed by a good training program for loan officers that is available to all
banks combined with development of good procedures manuals at the bank level.
The training course could be sponsored by the Association of Banks and offered
by a local training institute.
B. Government Policies and ProgramsCurrent and Planned
B.1 Deterioration of the multi-family housing stock
The national government has no programs to address this problem operating at

this time and, as described below, its thrust in the near term is on the
development of new housing that will be affordable to lower income households.
B.2 Marginal housing rings
Experience in developing countries has fully demonstrated the complexity of

defining and implementing a successful approach to upgrading squatter areas or
marginal housing rings. A few countries have succeeded in organizing initial land
occupancy by the invaders so that it is orderly, thereby greatly facilitating the
eventual provision of basic infrastructure. 34 The orderly process in Kyrgzstan is
notable in this regard.
34For a good discussion of the components of a comprehensive upgrading program, see L.

Antolihao and B. van Horen, Building Institutional Capacity for the Upgrading of
Kyrgyz Republic 20
As noted, in Bishkek the term invasion is something of a misnomer. The current

reality is that households wanting a land plot in a new area apply to government
of the municipal raion where the land sought is located. This procedure was
created in 1989 to accommodate those wanting to move to Bishkek. Qualifying
for a plot is demanding. Among the requirements in principle is that the
household resident in Bishkek demonstrate that it has had at least one employed
member for three years, someone is currently employed, and the household does
not own a dwelling in the city. The raions have prepared the layouts of the
novostroika areas and allocated the plots to those on the approved waiting list.
Land rights come with the allocation, which the household can then register quite
inexpensively.
The land allocated by the raions has all been publicly owned. Land, mostly from
collective farms, has been transferred to the municipality by a series of
Government Resolutions. No private land has been taken. When households
have claimed private plots, municipal officials have required them to give up the
land. In 2006 the Government decided that it would not allocate additional land
to the municipality and that further novostroika around Bishkek would be in the
Chui Oblast.
The municipality has the responsibility for providing infrastructure services,

including roads, water, electricity, schools, and poly-clinics. Since 1996 funds for
this purpose have been transferred from the Republic budget. In 2005, the
agency responsible (OGUKS) had a budget of Som 162 million of which Som 104
million came from the Republican budget. 35
In oldest novostroika areas roads have been paved, electricity provided, schools
built, and water pipes laid, although water-borne sanitation is not present. But
the municipality is constrained by low budget resources and areas already 5-6
years old have only electricity installed. Transportation everywhere is provided by
private vans that operate on municipally approved routes. In short, the
municipality has the responsibility for providing these services but is able to
finance a small part of the needed investment.
The national government does not acknowledge any responsibility for improving
the housing in the novostroika. An official at the Ministry of Economics and
Finance stated simply that upgrading the housing in these areas was not a task of
government.
Barangay Commonwealth in Metro Manila, Housing Studies, vol. 20, no.6, 2005, pp. 873-
96. Indonesia is an example of a country where informal land development has been
regularized. See Chapter 4 in R. Struyk, M. Hoffman, and H. Katsura, The Market for
Shelter in Indonesia Cities (Washington, DC: Urban Institute Press, 1990).
35 OKUGS has a program to service all areas by 2010 but the director says that funding is
totally inadequate for this schedule.

Kyrgyz Republic 21
B.3 Insufficient affordable newly constructed dwellings

Shortage of mortgage finance
At present there is one operating government program addressing these issues. 36

This program is targeted at persons whose housing has been destroyed or severely
damaged by natural disasters. In 2005, the State budget contained Som 127
million for this purpose. The program provides interest free, 15-year loans, with a
three year grace period, of up to Som 200,000 to these families for dwelling
construction, purchase, or rehabilitation. The program is administered directly by
a government agency, the Fund for Housing Loan Development.
Going forward this is the area where the Governments program is focused. The
MOEF has developed three new programs that tackle the related areas of housing
construction and mortgage finance, the funding for whichSom 200 million, as
reported by the ministry--was included in the 2006 budget. The following
provides an overview of the three programs. 37 Note that at the time of the teams
visit the specific definitions of the programs were evolving rapidly so that the
description below may be quickly out of date. All programs are directed at
households in the lower half of the income distribution.
B.3.1 Housing for young teachers and doctors in rural areas

The program is aimed at retaining these skilled professionals in rural areas for
longer periods through a 3-year accumulation scheme that leads to dwelling
purchase. There is no income testing, but the salaries paid are very lowthe
expected monthly salary in 2009 is Som 1,733. One thousand persons are to be
assisted annually.
Under the program, a savings account is opened in a commercial bank in the

participants name and the State contributes the equivalent of $100 per month for
36 months, i.e., $3,600 total. A 10 percent annual interest rate on deposits is
assumed. At the end of the accumulation period, the funds are used as a
downpayment for a dwelling. The participant receives a mortgage loan for the
balance of the purchase price as needed; an 18 percent interest rate is assumed.
A bank will be selected on a competitive basis to administer the program.
B.3.2 Creation of a contract savings scheme for housing

Under this program a government-owned organization will be created to operate a
contract savings scheme of the closed type, i.e., following the Bausparkasse
model. This agency, the State Housing and Savings Company (SHSC), may
eventually be privatized.
36 Existing legislation calls for the construction of over 4 million sq. m. of housing at
government expense by 2010. But the Ministry of Economy and Finance reports that
there are no funds for it and that the whole program is unrealistic. There have been
special cases where government-sponsored construction has been executed or at least
initiated. One example is three buildings started in Bishkek initially with municipal
financing and later national government financing that remain uncompleted.
37 The description is based on the information contained in the memorandum from the
Acting State Secretary of the Ministry of Economy and Finance, A. Dikambaev, to the
World Bank, IMF, ADB, and EBRD representatives of February 13, 2006, no. 09-1-4-
5/1168.
Kyrgyz Republic 22
The plan calls for an interest rate on savings of 4 percent, with a 30 percent
bonus (subsidy) paid with state funds. The accumulation period is 2-5 years,
with shorter periods for relatively higher income households, i.e., those who can
save at a higher rate. It is expected that the accumulated funds will equal 40
percent of the purchase price. The interest rate on the mortgage loan is set at 6
percent.
The SHSC will order new flats constructed for participants. Over the 2008-2010
period, a total of 3,625 families are to receive flats, increasing from 625 in 2008 to
1,875 in 2010. This implies that the program begins accepting deposits more or
less immediately.
The commercial banks with whom the team met generally expressed little interest
in offering a CSSH product.
B.3.3 Social housing construction program

This program supports the construction of modest flats (40 sq.m.) for moderate-
income households. Per meter housing costs is targeted at the equivalent of
$286. Although this is called a social housing program, the units are provided to
beneficiaries on an owner-occupancy basis.
Participant households are expected to make a downpayment of 6.5 percent of the

purchase price. Ten percent of unit costs will be covered by a government grant.
The balance of 83.5 percent of the purchase price will be financed by a zero
interest rate, 15-year mortgage. Total housing production of 2,000 units by 2010
is planned.
B.4 Affordability of basic housing services

This is an area where considerable assistance is provided through three separate
programs targeted on the poor. 38 The programs include a housing allowance
program that operates only in Bishkek, discounts on the tariffs for electricity, gas,
and district heating, and the Unified Family Benefit. In 2001 these programs
provided assistance to 531,000 households at a cost that is the equivalent of over
1 percent of GDP. 39
C. Current and Planned Donor Activities
The discussion is organized by donor. Our inquiries went beyond commercial

bank mortgage lending to include SME programs that may be extending housing
loans and programs to assist in the development of the novostroika settlements. 40
The overall conclusion is that the possible KfW investment programs outlined
below do not overlap with ongoing or planned programs by other donors.
38 Excluded here are discounts on rent and communal services provided to certain classes
of citizens, such as World War II veterans, Labor Heroes, etc.
39 E. Teslic, Mitigating Social Risks in Kyrgyz Republic. Washington, DC: World Bank,
Social Protection Discussion Paper No. 0408, 2004.

40 Information is missing for USAIDs programs. The meeting with USAID staff, that had
been confirmed some days ahead, was canceled by USAID at the last moment; and it was
not possible for USAID to reschedule it during the balance of the teams stay. A review of
information on the USAID web site did not indicate any ongoing programs that overlap
with those outlined below.
Kyrgyz Republic 23
C.1 IFC
IFC has established the program, Central Asia Primary Mortgage Market
Development Project, for developing mortgage lending in the region. It is funded
by the Swiss agency, SECO. The IFC report cited earlier is an early project
output. The report includes an action plan for mortgage sector development in
the Kyrgyz Republic. Similar reports are being produced for another four Central
Asian countries and will be combined into a final report to SECO
(Staatssekretariat fuer Wirtschaft). IFC will implement the action plans for all the
countries if funding from SECO is forthcoming. A decision is expected in March.
The action plan envisions providing training and mentoring to selected banks.
While the banks have not yet been selected, key selection factors include: (a)
banks where the IFC has an investment; (b) banks that have received donor
support for SME lending; and, (c) local banks over foreign-owned banks. The
project does not include establishing any type of training program available to all
banks. No investment by IFC is presently envisioned as part of the program.
On the other hand, the IFC has been active in providing loans for SME lending.
In 2006 it committed $2.2 million to the micro finance agency, Bai-Tushum. Of
this $1.2 is a loan for Bai-Tushum to expand its lending. The other $1 million will
be a contribution to equity for a new commercial structure--Bai Tushum and
Partnersthat will be a closed joint stock company that will be able to take
deposits. It is scheduled to become operational at the beginning of 2008. Bai-
Tushum will use these funds to expand its lending to farmers, private
entrepreneurs and small businesses and to develop lending in more remote areas.
Some of the funds could fund home purchase and home improvement mortgage
lending.
The IFC has also provided loans to KICB, Ineximbank, and AKB Kyrgyzstan Bank
for on-lending to SMEs. Additionally, it provided a large grant to the Central Asia
Micro and Small Enterprise Facility to foster lending in this direction throughout
the region.
C.2 EBRD
The Bank has made loans to a half-dozen banks and both FINCA and Bai Tashum
for SME on-lending. It has reached its internally imposed limit in lending to
several of these lenders. 41 Among NBFIs, Bai Tashum and FINCA were cited as
particularly capable overall. EBRD is actively involved in improving banking
system legislation and policies. It is, for example one of the authors of the
amendments to the Law on Mortgage to strengthen foreclosure provisions.
EBRD does not envision any lending programs competitive with those outlined in
section II.B. The representative was quite positive about lending to
condominiums.
41 The limit is 100 percent of the banks net worth.

Kyrgyz Republic 24
C.3 ADB
In pursuit of its overall program objective of poverty reduction, the ADB has
projects in four sectors: transportation (road construction and improvement),
agriculture, education, and banking. Banking sector projects are aimed at
systemic improvements, with the Bank providing the Government funds in
exchange for policy changes; it has also worked closely with the NBKR. It has at
present no active or planned projects relevant to the possible KfW initiatives
described in section II.B.
Of the possible KfW initiatives the team outlined, the representative saw the most
merit in lending to residents of novostroika areas to improve their dwellings and
possibly infrastructure services.
C.4 GTZ
GTZ has been heavily engaged in the development of credit unions over the past
several years. It provided the technical assistance to the Financial Company for
Support and Development of Credit Unions, a project implementation unit created
to manage the project. The ADB was the investor-donor, providing equity to the
300+ CUs. The project is nearing completion and no follow on activity in the
financial sector is planned. GTZ also has no ongoing or planned programs that
relate to improving the existing housing stock or upgrading the novostroika areas.
C.5 World Bank
Over the past 18 months Bank staff have provided a great deal of advice to
Government, particularly to the Ministry of Economics and Finance, on the
development of the housing finance sector. This role is continuing.
With respect to loans, the Bank is the principal supporter of the Kyrgyz
Agricultural and Finance Corporation that makes micro and small loans in rural
areas, principally for agricultural purposes. Also ongoing is the 100 Villages
Project that is rehabilitating and extending infrastructure in rural communities.
Under a just-signed agreement, the Water Rehabilitation Project will fund
rehabilitation and expansion of urban water systems. The Bank staff interviewed
did not know if this project will support the provision of water to the novostroika.
None of these programs would substitute for any of the possible KfW initiatives
described below.
The two staff members interviewed were very positive about the use of KfW funds
to finance loans to homeowner associations and to homeowners in novostroika
areas to improve their housing. They thought that using fulfillment of a savings
contract to prove creditworthiness was a good approach in both cases.
D. Balance of the Report
The remainder of the report consists of two parts that build on the information
reviewed thus far. The first (Section II) defines alternative objectives of a KfW
investment project, describes investment programs to realize each of the
Kyrgyz Republic 25
objectives, and then assesses the programs against a set of six criteria. The
second (Section III) presents the teams recommendations and indicates the types
of lenders that might participate in this investment program.
Kyrgyz Republic 26
II. INVESTMENT PROJECT ALTERNATIVES
A. Possible Program Objectives
This part describes possible objectives for the investment program. The objectives
are based on an overall program goal of maximizing the developmental impact of
KfWs involvement. In selecting objectives, the team considered Kyrgyzstans
housing problems and the current and planned activities of other donors. The
organization of the presentation of the three objectives listed below follows the
classification of housing problems presented in section I.A.2.2.
1. Help control the deterioration of the multifamily housing stock. There is no

question that this is a major problem. KfW could provide finance to lenders
who make loans to comparatively strong homeowners associations (HAOs)
for rehabilitation projects.
2. Accelerate the rate of improvement in housing and infrastructure in marginal

housing rings. KfW could provide finance to micro finance companies and
banks that would make loans in these areas for home improvements or,
possibly, the borrowers contribution to an area infrastructure
improvement, e.g., the installation of piped water.
3. Accelerate the development of mortgage lending. Three non exclusive options

are present. (a) KfW could provide finance to partner banks to fund
mortgage loans that meet standards agreed with KfW. As KfW is doing in
Armenia, a maximum loan amount could be set to channel KfWs funds to
moderate and lower income borrowers. As part of this package, it could
work with the same banks to improve risk management systems and with
the industry overall to improve professionalism in loan underwriting and
servicing, including the introduction of Minimum Quality Standards; a
variable interest rate mortgage product might also be introduced to manage
interest rate risk. (b) KfW could provide support for the establishment of
the contract savings scheme being launched by the Government. (c) KfW
could supplement the funds available for the Governments social housing
construction program by providing funds to finance mortgage loans to
dwelling purchasers.
B. Programs to Achieve the Objectives.
B.1 Loans to homeowner associations
An estimated 100 of the 500 HAOs in Kyrgyzstan have strong governance and are
succeeding in regularly collecting fees from members and maintaining and even
improving their properties. These associations would be the initial target group
for the loans that would be used to upgrade their common elements.
Under the program, KfW would lend to a bank or micro finance company that
would on-lend at market rates to creditworthy HAOs. 42 An HAO would present an
42Under Kyrgyz legislation HAOs are permitted to take out loans. The Law on HAO does
not contain specific language on this point but the ability to borrow is clarified in the
Kyrgyz Republic 27
initial application to the bank that outlined the improvements to be made and
their estimated costs, and that demonstrated the HAOs ability to repay a loan,
e.g., records on HAO monthly fee collections. The bank would work with a
promising applicant to prepare a detailed application, i.e., refining the cost
estimate and investigating the HAOs governance structure and past ability to
collect funds from its members. Based on this information, a full loan application
would be prepared.
The creditworthiness of an HAO would be established by the Association fulfilling

an 18-24 month savings contract with the lender. The savings would be used to
help finance the improvement. The required amount of monthly savings would be
related to the size of loan repayment that the HAO would have to make for the
loan it is seeking, after taking due account of the downpayment.
Information on the cost of projects likely to be proposed can be inferred from the
results of a competition for building rehabilitation grants conducted by the Urban
Institute in Bishkek with USAID funds that was launched in January 2005. One
element in the competition was the co-financing contribution made by the HAO.
Seventeen grants were made for a total of $90,000 or EUR 75,000. Seven grants
were to repair roofs and four more were to repair roofs plus repairing doors or
something similar; some grants were for the repair of heating systems or water
supply. The average total cost of the projects was Som 233,000 or about $5,800
(EUR 4,833). 43
It is quite possible that the investments undertaken would be directed to roofs

and improvements to conserve energy. The latter would cut monthly operating
expenses and give homeowners higher disposable incomes, i.e. help alleviate
poverty in some instances. The emphasis on energy savings could be built into
the project, with TA funding being included for a formal diagnosis of the buildings
energy efficiency and a corresponding plan for making the most effective
investments. The team was told that a local firm is now making such diagnoses.
If successful, the project could in principle encourage weak HAOs to become more
active in building a basis for applying for a loan and improving their building. It
could also serve as a catalyst to other banks entering the market.
The program has two clear limitations as an investment project for KfW. First, the
program is unlikely to disburse much money nor to disburse it very quickly. If 40
loans at $6,000 were made over a four-year period, $240,000 would be disbursed.
Even 100 loans at an average amount of $10,000 is only $1 mln. The savings
period slows dispersal. In short, this program would have to be one element of
the overall investment program of the size contemplated by KfW.
Second, the TA requirements could be significant. The project would need to train
banks in conducting outreach to HAOs and in working with them to prepare the
applications. Bank staff would likely have to meet several times with HAO
members to provide explanations and assurances. If the energy conservation
Model By-laws/Charter of a HAO that was approved by a Government Resolution. The

HAOs decision to take a loan must be made at a general meeting and 75 percent of those
present must agree to taking the loan.
43 Source: Report on Implementation of a Grant Project on Using Housing Associations as
a Vehicle for Urban Poverty Alleviation, (Bishkek: Urban Institute Field Office, 2005,
processed).
Kyrgyz Republic 28
element were included, contracting with the third party would be an essential task
and coordination of the various elements somewhat demanding.
B.2 Upgrading loans to borrowers in novostroika areas
During the field work, the team learned that some lending to customers from
novostroika areas is already underway. For example, Bai Tushum grants loans
for home improvement to this group. Loan amounts are up to USD 5,000. In
addition, some banks expressed an interest to do lending to this customer group.
Thus, this program would serve to give Kyrgyz lenders an incentive to expand
lending for home improvement to this group very substantially.
Chart 3 illustrates a possible structure of this program. KfW would lend to a

bank, micro finance institution or credit union that would on-lend at market rates
to creditworthy borrowers living in novostroika areas. The program would include
a technical assistance (TA) package aimed at assisting the partner financial
institutions in the development of this program.
Chart 3: possible outline of home improvement loan

program for customers living in novostroika areas
KfW
Credit line TA package
Due diligence
Needs analysis Product standards
Pricing
Risk management
Training of LO
Lender IT support
Marketing/outreach campaigns
Savings schemes (optional)
Loan amounts for such a program would vary from USD 500 to USD 5,000 to
cover simple repair cost or the cost for a more extensive modernization or
upgrading measures. In view of the low household incomes typical in these areas,
repayment capacities could be rather limited, 44 resulting either in a longer
repayment period or in smaller loan amounts to keep monthly payments
manageable.
44In 2005, the average income amounted to USD 56 per month. Workers in the healthcare
and agricultural sectors earn only one-half of the national average. See The Economist
Intelligence Unit, Country Profile 2005 Kyrgyz Republic, page 25.
Kyrgyz Republic 29
Table 5. Annual repayment schedule for a USD 4,000 loan with an interest rate of 24
percent repayable in 5 years
Repayment of
Year Loan balance Interest principal Total payment
Initital
payment 4.000,00 960,00 496,99 1.456,99
End year1 3.503,01 840,72 616,27 1.456,99
Year 2 2.886,74 692,82 764,17 1.456,99
Year 3 2.122,57 509,42 947,57 1.456,99
Year 4 1.174,99 282,00 1.174,99 1.456,99
Year 5 0,00 0,00 1.456,99 1.456,99
Tables 5 and 6 show exemplary calculations of probable loan structures. Table 5

illustrates that a loan for $4,000 under current conditions would probably not be
affordable for this customer segment since a monthly repayment rate of USD 121
might be too high. Affordability would rather depend on the size of the hidden
incomes and the incomes other family members earn.
If the loan amount was reduced to $2000 and the loan term extended to 10 years,
the monthly repayment rate would decrease to about USD 45 as illustrated in
table 6.
Table 6. Annual repayment schedule for a USD 2,000 loan with an interest rate of 24
percent repayable in 10 years
Repayment of
Initial
payment 2.000,00 480,00 63,20 543,20
End year1 1.936,80 464,83 78,37 543,20
Year 2 1.858,42 446,02 97,18 543,20
Year 3 1.761,24 422,70 120,51 543,20
Year 4 1.640,73 393,78 149,43 543,20
Year 5 1.491,30 357,91 185,29 543,20
Year 6 1.306,01 313,44 229,76 543,20
Year 7 1.076,25 258,30 284,90 543,20
Year 8 791,35 189,92 353,28 543,20
Year 9 438,07 105,14 438,07 543,20
Year 10 0,00 0,00 543,20 543,20
As a result, lower loan amounts and longer repayment terms might serve to raise
loan attractiveness to borrowers.
The team recommends that the program should encompass technical assistance
in the following areas: advice on risk-adjusted pricing and risk management of
mortgage loans, work on lending guidelines and product features, and IT
specification, as well as assistance in the development of a marketing strategy in
order to boost the outreach of the product in these areas. One possibility for the
latter could be the distribution of leaflets in the mini vans that link the
novostroika areas to Bishkek center. A partner lending institution may not need
Kyrgyz Republic 30
assistance in all these areas. The actual TA package can be more precisely
defined in the feasibility study.
A further way to improve outreach and to enhance the number of borrowers is to

combine the program with a simple savings scheme that would serve as a pre-
screening instrument to select future reliable borrowers. According to experiences
of applied savings scheme in European countries, customers with a savings
contract prior to the loan disbursement have shown lower default rates than
customers without a pre-savings contract. 45
However, this product should be only offered as an option to those clients whose
creditworthiness cannot otherwise be determined. Typically, such a scheme
would be unnecessary for those clients who have already received a loan.
The team suggests modeling such a savings scheme as follows (see chart 4):
Table 7. Suggested features of an optional savings scheme within the home loan
improvement program for novostroika areas
Feature Comment
Contract amount in savings Defined amount (e.g., $3,000) linked to individual savings effort per
period month in relation to duration of savings contract
Contract savings term e.g., 1-3 years
Interest rate on savings Current market rates for at least one-year deposits
Payment of savings Monthly
installments
Loan promise Depends on savings contract, i.e., loan amount should be same as
the value of the savings contract
Allocation of loan On completion of the contracted savings term
Redemption of loan In equal monthly installments; annuity mortgage
Loan interest rate Market rate possibly adjusted for strong credit rating of borrower
Security Up to $1,000 the bank may not want to ask for property as
collateral
The underlying idea of this model is that a savings effort would lead to a loan
promised for after successful completion of the savings contract. Both the savings
and the loan periods would be aligned to the individual participants capability to
set aside a certain amount of money every month. For example, a customer who
would be able to save USD 50 per month could save within 2 years USD 1,200. 46
Consequently, she would be entitled to a loan amount of USD 1,200 which would
result in an amount of USD 2,400 to be available for financing a modernization or
upgrading measure. Table 8 shows the loan repayment schedule for this loan
type.
The monthly installment would be about USD 68 which would correspond to the
savings installment. Were the repayment period expanded by 1 year, the monthly
repayment rate would decrease to USD 50.
45 The combined default ratio of the whole Bausparkassen industry in Germany was
0.04 % of the total loan portfolio (data per September 2004). In Slovakia this ratio
amounted to 0.56 % (as per end 2003). Source: Association of Private Bausparkassen.
46 The income from the interest rate payments on the savings are added to this amount.
Kyrgyz Republic 31
Table 8. Annual repayment schedule for a USD 1,200 loan with an interest rate of
24 percent repayable in 2 years
Repayment of
Initial
payment 1.200,00 288,00 535,71 823,71
End year1 664,29 159,43 664,29 823,71
Year 2 0,00 0,00 823,71 823,71
The length of the savings period could be individually negotiated but should be
not shorter than one year. 47 Interest rates on the savings should be market rates.
Customers who might cancel the savings contract prior to completion would be
not put at a disadvantage.
In order to enhance the attractiveness of the product, the bank might consider
offering a longer repayment term or a rebate from the current market loan interest
rate (e.g. 200 basis points). Such measure would be justified in view to the lower
credit risk associated with these loans.
Up to a certain loan amount, the bank could also consider doing without a
collateral requirement. This measure would be again linked to the lower credit
risk these loans entail and to the probable desire to reduce cost (in view of the low
loan amounts).
This program has the potential for improving living conditions of families living in
novostroika areas. Demand for modernization or upgrading is estimated to be
considerable, especially in the more recent squatter areas. Through the optional
savings scheme, the program could also reach persons who have not been
creditworthy to date since they have not been able to establish a positive credit
history. In this context, the pre-savings element would serve as a replacement for
conventional proofs of creditworthiness. Moreover, it would assist the Kyrgyrz
government in tackling these areas by also involving financial institutions which
would be pushed to go further down market.
Since only few financial institutions have been active in these areas, most of the
people may have very limited access to financial services. Thus, an extensive
marketing campaign may be required to reach them and to raise their confidence
in dealing with formal financial institutions. In addition, there might be a high
demand for low loan amounts and long repayment terms. Otherwise, these people
might not afford to participate in this program. Therefore, the final loan design
would require further analysis.
The absorptive capacity of the program would require further scrutiny. At

present, about 250,000 people live in these areas, which means 40,000 to 50,000
households. A further increase in these numbers is likely and could add at least a
further 5,000 households in the next 3 5 years. 48 If one assumes that 10 to 20
47 Participants might ask relatives or friends to make the savings installments. As a result,
the effectiveness of pre-screening instrument would be diminished.
48 The team assumes that on average 4-5 persons live in one house (based on the report
by Institute for Urban Economics, op. cit.

Kyrgyz Republic 32
percent of these families would ask for a loan and the average loan size ranges
from USD 1,000 to 3,000, then the total loan demand would be in a range of
USD 4 mln. to 15 mln. Better estimates should be prepared in the feasibility
study, if this option is selected.
The team views the TA requirement similar to home improvement loan programs
which KfW has already initiated in other transition countries (e.g. Kosovo or
Serbia). TA would focus on a marketing program and the assessment of
borrowers repayment capacity. The selection of potential partner banks may not
require extensive analysis because those who have expressed interest have loans
from international donors for SME lending. These financial institutions should
prove a clear interest to expand into this market.
A final consideration is the political acceptability of this option. In particular,

would the KfW-assisted lending program signal the GOKRs approval of seizing
land? A key point is that Governments policy through the granting of land rights
to the invaders in many instances and providing infrastructure has already
signaled approval. KfW finance would only support loans only to households who
could demonstrate a legal right to their land. By making loans available only to
households with title, the program would reinforce the Governments policy of
limiting future invasions to certain locations. When the team presented this
option to MOEF at the conclusion of the mission, no objection was raised.
B.3 Support the development of mortgage lending
This program includes two options: first, the provision of credit lines to partner
financial institutions for residential mortgage lending, and, second, the support of
government initiatives.
B.3.1 Loans to partner financial institutions for mortgage lending
As illustrated in chart 5, this program would include several components. The

first would consist of credit lines to eligible partner financial institutions that
would finance mortgage loans. The program could come with up to three TA
components outlined below. In order to ensure a specific target group, KfW
could place a limit on the size of the individual mortgage.
The team views the first TA component as a contribution to improve the banks
overall ability to manage all risks. In order to address weak loan underwriting and
servicing standards at some banks, KfW could work with NBKR and the Bank
Alliance to adopt industry wide minimum quality standards for mortgage lending
(MQS). MQS are an important prerequisite for the inclusion of mortgage loan
portfolios and mortgage bond or mortgage backed securities (MBS) issues.
Investors will refuse to assess every tailor-made mortgage loan before the
purchase of such a bond.
Kyrgyz Republic 33
Chart 5: Development components for program alternative loans to partner financial

institutions for mortgage lending
KfW
Credit lines to Work with NBKR

Introduction of Institutionalize
partner and Bank Alliance
variable mortgage
financial institutions to adopt industry
rate mortgages training course
including TA wide MQS
This component would require extensive work with the banks to get a consensus
on the MQS. The team believes that this objective could be best achieved through
a consultative process in which financial institutions would inform others about
their lending practices and also confront international banking practices.
The second component should be linked to the previous one. The just-created
Bank Training Institute which is affiliated with NBKR could be used to
institutionalize a mortgage lending training course. This training program would
be aimed at training bankers for example in legislative and regulatory framework
for mortgage lending operations and standard loan document forms, loan
underwriting and origination procedures, servicing of mortgage loans and
ensuring their repayment, and loan instruments. This training should be aligned
to the MQS to promote development in the Kyrgyz financial sector. 49
This program would allow KfW to establish international banking practices in the
Kyrgyz financial sector by supporting the introduction of uniform standards and
procedures in mortgage lending. Note that in principle technical assistance with
adoption of the MQS and the training program could be provided by GTZ as well
as KfW.
The third TA area, the promotion of variable rate mortgages, is one where KfW
could offer to work with banks to improve interest rate risk management. Interest
rates could be linked to a cost of funds index that could be established with the
cooperation of the NBKR or to another index such as the government debt interest
rates that could be appropriate as maturities lengthen. In this context, KfW
should push the participating banks to pass on the lower interest rate risk to the
customer thereby improving affordability and expanding the market. Based on
49A good model for this training is the Certified Mortgage Lender course that was
developed some years ago in Russia by the Institute for Urban Economics (Moscow) and
the Urban Institute (Washington) that has been taught in Russia on a commercial basis
and was transferred to Kazakhstan as part of a technical assistance program. KfW also
plans to base a housing finance training program in Armenia on it.
Kyrgyz Republic 34
experience in other countries, the team believes that the interest rate could be
reduced by 300 to 400 basis points thereby increasing overall affordability. 50
Variable rate loans, per se, are fairly common in the region. But it is worthwhile
noting that other indexing of mortgage payments is as well. In most CIS countries
loans tend to be dollar-denominated, i.e., monthly payments in local currency are
linked to the exchange rate. In Kazakhstan, most loans are indexed to the
inflation ratewhich in effect is a proxy for movements in interest rates. 51 Both
forms of indexing are widely accepted. The proposal to adopt a variable rate
mortgage is a more direct form of indexing to movements in the price of lenders
liabilities and therefore better than the proxies now in use in CIS countries.
Among Central European and South Eastern European nations, variable rate
loans are either the norm or enjoy equal status with fixed rate loans in Hungary,
Poland, Romania, Serbia and Slovenia. 52
The TA component for introducing variable rate loans in Kyrgyzstan would

necessarily demonstrate the relative advantages of different indexing schemes for
controlling interest rate risk. Based on this, a somewhat lower interest rate from
KfW to banks offering variable rate loans, and strong marketing by banks of their
lower interest rates for this product, consumer acceptance for at least a modest
share of the market is likely to emerge.
Lower interest rates on mortgage loans would probably attract more customers
since mortgage loans would be cheaper. However, credit risk would likely rise if
the cost of funds went up. Since this product has not yet tested in the market,
extensive training of loan officers would be required so that customers would
understand its mechanics. In this context, TA would focus on the work of an
adequate communication strategy with the partner financial institutions.
Absorptive capacity of the financial institutions for the loan component would
depend on the demand for mortgage loans. The amount of outstanding mortgage
loans was about EUR 7.7 mln. (at the end of 2005). If KfW would deploy, for
example, EUR 3 mln. to this program, the volume of outstanding mortgage loans
would increase by about 40 percent. Thus, the team sees in this regard a need for
a thorough demand analysis. This assessment should also analyze potential
overlaps with the IFC Central Asia Primary Mortgage Market Development
Project.
50 In March 2006, the difference in the interest rate on a 30-year fixed rate mortgage and a
variable rate mortgage with an annual interest rate adjustment in the U.S. was the
equivalent to about 11 percent of the variable interest rate. (Source: website of the
Mortgage Bankers Association). This figure, however, provides little useful information for
the Kyrgyz situation because of the very long term of the fixed rate mortgage and, more
importantly, because U.S. lenders have various options for hedging interest rate risk that
are not available in Kyrgyzstan.
51 F. Roy, A. Mananbaev, and M. Yuldasev, Mortgage Lending and Risk Management in
Kazakhstan, in J. Hegedus and R. Struyk (eds.), Housing Finance: New and Old Models in
Central Europe, Russia, and Kazakhstan. Budapest: Local Government and Public Service
Reform Initiative, 2005, pp. 255-76.
52 Sources: For SerbiaAnalisttas Financieros Internacionales, Registra, and Balkan
Advisors Co., Housing Finance in Serbia and Montenegro, 2005; for the other countries--
Table 1.11 in J. Hegedus and R. Struyk, Divergences and convergences in Restructuring
Housing Finance in Transition countries, in J. Hegedus and R. Struyk (eds.), Housing
Finance: New and Old Models in Central Europe, Russia, and Kazakhstan. Budapest: Local
Government and Public Service Reform Initiative, 2005, pp. 3-40.
Kyrgyz Republic 35
B.3.2 Support for the contract savings scheme for housing (CSSH)
Under this component, KfW would provide assistance for the establishment of a
CSSH system which would consist of TA on the design of CSSH and an
investment project, probably directed to the financial institution that would
introduce this scheme. 53
Work on the design of CSSH should take into consideration the following
elements:
1. Economic situation. CSSH is particularly sensitive to the development of the
inflation rate, incomes, banking sector 54 and legislation (both the overall legal
framework and CSSH). 55 For example, in a volatile inflation background, it
would be hard to convince people to save because the rising inflation will erode
the value of their savings.
2. View of the customer. A CSSH scheme consists of three products: a savings
product, the option to benefit from a preferential loan interest rate (interest
rate option product) and the option to receive a loan proportional to savings
(credit option product). The customer assesses each of these sub-products
differently. For example, if he expects interest rates to rise, he will value the
interest rate and credit option higher and probably be more willing to accept a
lower return on his savings.
3. Risk management of CSSH (view of the bank). The MOEF envisages a closed
system which would be exposed to a host of risks such as liquidity risk,
interest rate risk and credit risk. 56 The concept on CSSH should outline to
what extent the instrument is subject to these individual risks and which
measures can be introduced to mitigate these risks. This should be also done
for any alternatives (e.g. CSSH in form of an open system).
4. View of the government. The MoEF also intends to provide a savings subsidy.
An analysis should focus on possible instruments to support CSSH, cost of
these instruments and their expected benefits.
Bearing these prerequisites in mind, the team recommends structuring a project
on establishment of CSSH in the following way. The structure of the project is
illustrated in chart 6:
53 It is our understanding that the government has recently decided to launch the
system through a private financial institution which will be selected through a public
tender.
54 The short terms of savings in the Kyrgyz banks and the preference for savings in
USD suggest a low confidence of people into the banks.
55 A poorly functioning legislation could be an obstacle to long-term contractual
obligations since people may face difficulties retrieving their savings especially when
banks go bankrupt.
56 If the currency of the savings contract differs from that of the loan contract, one
would need to add currency exchange rate risk to this list.
Kyrgyz Republic 36
Chart 6: tentative outline of programme to support the

establishment of CSSH
Design of CSSH (in particular scheme,

ALM tool and individual products)
TA package Design of support mechanisms
Incentive scheme for loan officers
Training of LO
IT support
Marketing/outreach campaigns
KfW
Funds CSSH bank
Equity investment
Refinancing facility for bridge loans
Partial financing of incentive scheme
Source: Roy
The TA component should cover at least the following aspects:

Design a CSSH model of loan-link deposit contracts, so that simulations of
various scenarios, including stress situations, can be conducted and provide
guidance for the definition of lending parameters, pricing and funding
strategies.
Connect this model with the existing information system of the selected
financial institution, especially its accounting system, so that the model does
not remain a theoretical tool, but allows the measure of the actual risks
embedded in the financial institutions portfolio. In this regard, assistance
should also cover advice on an appropriate IT architecture to manage the
individual contracts and the overall CSSH system (Asset-Liability Management
(ALM), reporting etc.)
Provide the Ministry of Economics and Finance and NBKR with a transparent
description of the functioning of savings-for housing schemes, and to enable
them to design matching prudential rules as well as an appropriate risk
management framework.
Advise the Ministry of Economics and Finance on the design of an adequate
support mechanism for CSSH based on the analysis of outreach capacity and
estimations of budgetary payments for the scheme. It should also take into
consideration effects on other planned and existing housing programs of the
government.
Assist the financial institution in development of a marketing campaign as well
as design of training for loan officers. CSSH is a mass product. Typically, a
CSSH-bank deals with a considerable number of CSSH contracts with small
amounts. In order to be profitable, the financial institution must ensure a
constant intake of new contracts. Both the marketing campaign and the
training should reflect this requirement.
Kyrgyz Republic 37
For the investment component, it is important to note that the closed nature of
the system, standard term loans from KfW to the lender for on lending is not an
option. The team sees the following possible alternatives for KfW:
Equity investment. KfW could become a shareholder in the CSSH bank. Since
KfW would be a member of the supervisory board. This measure would allow
for a close scrutiny of the viability of the CSSH system. The equity investment
may also help to underline the stability and the reliability of the CSSH bank,
thereby eventually facilitating the attraction of new customers.
Refinancing facility for bridge loans. A common feature of many CSSH systems
is a bridge loan customers could ask for in order to bridge the period between
the completion of the savings period and the loan take-up. 57 This would help
the bank manage liquidity risk. The team recommends that this measure
should be linked to strict criteria which would define the customers eligibility
for this type of loan in order to prevent a depletion of the savings effort.
Partial financing of an incentive scheme for loan officers. In order to support
the outreach of the program, KfW could assume a part of the cost for an
incentive scheme for loan officers. This could also include stipends for
education and remuneration of loan officers during the first 6 12 months of
the programs existence.
Technical Assistance on the design of the CSSH would probably be required
before and investment project would be launched, since the government intends
to introduce the CSSH scheme during this year. 58 In case KfW would opt for this
program, the team recommends that KfW should closely co-ordinate the launch of
the CSSH scheme and the required TA with the Kyrgyz counterparts.
The absorptive capacity of the program would require further scrutiny. It should
focus on the acceptance of the population to adhere to such a scheme. During its
field work, the team learnt that banks were very skeptical of CSSH under the
current conditions in the country. Additionally, the size and the structure of the
refinancing facility of the bridge loan would require analysis.
Since the MOFE intends to establish CSSH through one financial institution, this
measure would primarily be aimed at improving the access of low and middle
income groups to a loan since the savings effort could be viewed as a form of
replacement for a lacking credit history.
In order to have a stronger focus on competition in the financial sector, one could
raise the idea of expanding the suggested subsidy scheme to CSSH contracts
offered by other banks. In any event, the suggested mechanism by the MOEF
should be subject to further analysis. It should focus on the possible investment
multiplier that could be generated through CSSH funds and on the distribution
and substitutions effects of other housing finance mechanisms. The team
highlights that these effects could be only verified after the introduction of a
saving subsidy scheme. However, once implemented, the government might face
substantial difficulties revoking it.
57 Typically CSSH banks grant these loans in cases where is an immediate financing
need or the customer is close to the completion of the savings period. Legislation on
CSSH, however, only allows a part of the CSSH funds in the pool to be used for such a
purpose.
58 KfW is expected to launch a program at the earliest in 2008, depending on the
outcome of the German-Kyrgyz negotiations.
Kyrgyz Republic 38
B.3.3 Support for the social housing construction program
Under this alternative KfW would provide funds to the Government to expand the
planned program by increasing the funds available for mortgage loans. The
MOEF estimates that the loan amount will be about som 400,000, or around
$10,000, per participant household. So each $1 million in KfW funds would
finance loans for an additional 100 households. To put this in perspective, the
plan is now for the program to have 400 beneficiaries per year. So KfW support
could produce a major program expansion. 59
Our understanding is that a government agency will administer the program. The
agencys capabilities are not known to the team and so the corresponding amount
of possible technical assistance that would be required is unclear. In any case,
KfW would need to be certain that its funds supported loans to households who
were clearly eligible for assistance under the programs criteria. Methods for
determining actual applicant incomes have not yet been defined.
Noteworthy is the fact that because the loans carry a zero interest rate, the
subsidy per household is very great. Therefore, the KfW loan would be largely
repaid not by the borrowers but by the Government.
C. Assessing the Objectives
This section first defines seven criteria used to judge each of the initiatives
outlined above. The second part then applies the criteria to the three initiatives.
C.1 Criteria
The eight criteria relate to alternative program impacts, project complexity, and
the possible risks in the program to KfW.
Improved access to better housing for marginal home purchasers

The question is the extent to which the program makes it possible for
households who presently are close to being able to purchase a dwelling
but cannot do so are enabled to become purchasers as the result of the
program.
Potential for providing home improvement loans economically to families

living in squatter housing
Is the program likely to result in loans being made available to such
households?
Developmental impact on the residential finance system, particularly with

respect to improved risk management and increasing mortgage volumes
overall
59Because the government would give KfW-supported participants, like others, a

downpayment subsidy equivalent to 10 percent of the units cost, the net program
expansion will be somewhat less than suggested by this statement.
Kyrgyz Republic 39
Impacts here include increased professionalism in loan underwriting and

servicing and in managing the risks associated with mortgage lending; and
a greater preparedness for the eventual introduction of a secondary
mortgage market in some form.
Share of the problem positively affected by the program (i.e., program

coverage)
Is the programs assistance essentially demonstration in nature, i.e., a pilot
program, or will it have by itself a significant impact on the problem
addressed? What are the possibilities for a limited program to have
substantial demonstration and multiplier effects?
Overlap of initiative with other donor activities

To what extent will the program compete with others underway or
contemplated by other donors? The scale of other donor initiatives is
important in this regard: more than one small program may work well
together.
Absorptive capacity of partner finance institutions (PFIs) and of the market

Two issues are prominent. The first is the probable attractiveness of the
KfW loans to PFIs, e.g., will highly liquid banks want the funds sufficiently
to pay the price determined by KfW and to meet non price loan
requirements such as adopting certain underwriting standards? The
second is the size of the market demand for the product and the time
profile of such demand. How many years might be required for loans to
PFIs to be disbursed to end borrowers?
Degree of project complexity and risk for KfW

Issues here include the volume of technical assistance likely to be involved
in executing the investment program, the number of different actors
required to work together to achieve a successful outcome, the possible
sensitivity of success to modest changes in the economic environment, and
an extended loan disbursement period that could drive up technical
assistance and project management costs.
Sustainability
The question here is whether the KfW investment will lead to continuing,
self-financed operations for lenders and whether the loans made by PFIs
are likely to be sufficient to pay off the KfW loan.
C.2 Applying the criteria
The teams ratings of the programs against the criteria are summarized in Table 9.
While most of the entries are self-evident in light of the prior discussion, some
entries require some further explanation.
Regarding the loans to HAOs, the loan program would cover a small share of the
total housing stock, even if loans were made to as many as 100 HAOs. There is,
however, the possibility of a significant demonstration effect, with more HAOs
strengthening their governance to be able to take a loan to improve their common
areas and infrastructure. But this is far from certain.
Kyrgyz Republic 40
This program would be quite complex in terms of the TA requirements. An

external consultant would have to train banks in working with HAOs. Lender
staff or possibly that of a NGO hired by the lender, would have to work with
interested HAOs, to explain the program to members and motivate them to save
for a loan, assess the quality of the HAOs governance and organization, and then
develop a concrete plan for improvements that would be presented in the loan
application to the bank. Additional TA would be required if an explicit component
for energy conservation were added.
Table 9. Application of criteria to possible investment programs
Panel A.
Criterion (1) Loans to (2) Loans to (3) Accelerate
HAOs Improve Housing Mortgage
in Novostroika Lending
Better housing access for marginal N/A May be possible Yes
home purchaser
Providing home improvement loans N/A Very strong Some, depending
in novostroika areas on project design
Development of residential finance Little Little Substantial
system
Program coverage Modest Significant Significant
Overlap with other donor activities No No Possibly some
Absorptive capacity Limited Large Questionable
Degree of complexity and risk for serious Relatively simple Moderate
KfW
Sustainability Strong Strong Strong
Panel B.
Criterion (4) Support to (5) Support to social
CSSH housing construction
program
Better housing access for marginal Strong Strong
home purchaser
Providing home improvement loans Depends on N/A
in novostroika areas program design 60
Development of residential finance Neutral Negative
system
Program coverage Low Low
Overlap with other donor activities No No
Absorptive capacity Unclear Large
Degree of complexity and risk for Possibly significant Relatively simple
KfW
Sustainability Unclear Negative
This program also entails some risk in that the number of loans made could be
small, making the TA cost per loan very high. Moreover, the first loans to HAOs
would not be made for 2.5 to 3 years after project initiation because of the
combination of bank training and the savings period for HAOs. Thus, active
technical assistance, at least on an episodic basis could be needed for four years.
Potential demand should be assessed in the feasibility study if this program is still
60The original design called for participants to purchase new units in specially
constructed blocks of flats but this may change.
Kyrgyz Republic 41
under consideration. Our interviews indicate that the program will be of greater
interest to micro finance companies than to most commercial banks.
Government officials and the donor community, particularly the World Bank, gave
this investment option high marks.
The lending program by micro finance companies and/or commercial banks for
home improvement loans in novostroika areas has several merits as indicated in
the table. Depending on the volume of KfW loan funds devoted to the program, it
could have quite substantial impact in accelerating housing consolidation. The
technical assistance is quite straightforward with the possible exception of the
element for marketing these loans to potential borrowers. This program, like the
loan program for HAOs, would meet a development need being addressed by
neither any other donor nor by the State. Importantly, some banks and at least
one micro finance company are already extending loans to households in these
areas, and they report good repayment patterns. Hence, the risk associated with
this credit line appears quite manageable.
This program was strongly supported by various government officials. The donor
community representatives with whom we met generally had little knowledge of
the novostroika areas and tended to support this project in principle rather than
on the base of concrete knowledge. A couple of members of the international
community appreciated the impacts that improved housing would have on
increasing the after-housing-expenses income of those who improved their units
and in improving the health of participant familiesboth clear advantages in
reducing effective poverty.
The third program, with the explicit objective of accelerating mortgage market
development, holds considerable promise. It may have the effect of expanding
lending for dwelling upgrading in the novostroika if the higher value loan market
is saturated or KfW limits maximum loan amounts relatively severely.
Absorptive capacity is a complex question. How badly banks would want the
funds, given the conditions attached to their use, would depend on the liquidity
situation when the funds are actually on offer. But even if banks are liquid, they
may be interested in taking the funds to control interest rate risk. It is possible
that KfWs funds will be substituted for the banks own resources, thereby limiting
the intended expansion of mortgage lending. Because of the uncertainty
surrounding future liquidity, choice of partner banks should be deferred until the
project is funded and operational.
This program entails some risk, given the changes it may require from partner
banks in their loan underwriting and servicing practices and in the home
mortgage loan products offered, particularly the variable interest rate loan. These
conditions may be too arduous for banks to accept. The program also involves
moderate complexity in the TA to be delivered. Possibly the most demanding will
be for the consultant to work with other donors, the Bankers Alliance, its partner
banks, and other banks to gain acceptance on generally-agreed minimum quality
standards in underwriting and servicing that will be adopted by most residential
mortgage lenders.
Kyrgyz Republic 42
Those donors active in the financial market were supportive of this program. The
IFC technical assistance program on mortgage lending development would
complement this program.
For the program of providing support for the CSSH, a principal question concerns
the acceptability of this product in the market. Should it not gain a wide
acceptance, then KfW will have spent funds on TA with little return and will have
delayed the productive use of the loan funds for several years while experience
with CSSH was being gained. This uncertainty is the reason for the possibily
significant rating of the degree of complexity and risk for KfW. The uncertainty
about acceptance also influenced the team to rate probable coverage of the
program as low and absorptive capacity as unclear.
Also working against this program as a candidate for KfW funding is the timing.
The Government is hoping to create the program in the very near term. With
funding for the KfW investment program likely to materialize in 2008, KfW would
have to find another source of funds to pay for the front-end TA that would be
essential to ensure a strong base for the CSSH. On the other hand, the
contribution to capital could be disbursed very quickly at project start-up.
The team found few lenders with much interest in a CSSH program aimed a
dwelling purchase, and therefore it is unlikely that government sponsorship of
such a program will displace private bank initiatives.
Sustainability is rated as unclear because of uncertainty about future

Governments commitment to continued funding for the savings period subsidies.
It should also be noted that should the program prove to particularly popular, the
Government could face uncontrolled budget commitments to fund the savings
bonus, as happened in the Czech Republic when a CSSH scheme was introduced
there. 61
The program for social housing construction has two significant limitations. First,
the zero interest rate loans are market distorting and will result in borrowers
seeking these free government loans rather than going to private lenders. In this
respect, the program actually works against development of market-based
mortgage lending. Second, program sustainability is negative. As soon as the
subsidies are exhausted, the program will cease. And, as noted, it is the
Government, not the borrowers that will ultimately generate much of the funds to
repay KfW.
61F. Roy, Contractual Savings Schemes for Housing (CSSH)An Assessment of Past
Experiences and Current Developments, Bankakadamie, 2006.
Kyrgyz Republic 43
III. Recommendations
This concluding section presents the teams recommendation on program

structure and on the criteria to be used in selecting partner banks or micro credit
organizations.
A. Program Components
Before turning to specific recommendations, it is important to note the size of the

envisioned KfW program in relation to the present volume of mortgage lending for
home purchase and home improvement. At the end of 2005, the stock of
mortgage loans at commercial banks was Som 540 mln. If one assumes that 70
percent of these are home purchase or improvement loans, then the value of the
stock of residential mortgages was about EUR 7.7 mln. If between one-third and
one-half of these loans were originated in 2005, which allows for sharp growth in
lending volume and prepayments, then total originations were from EUR 2.6 and
3.9 mln. This illustrates that the KfW resources will be large compared to likely
lending even two years in the future. Under this circumstance, KfW may well be
able to fund multiple initiatives.
For two reasons the team believes that highest priority should go to funding the
program of home upgrading loans focused on novostroika areas. First, the
market is underserved. Three lenders with whom we met said they were
extending loans in these areas but all in small volumes to date. Targeted loans
funded by KfW could dramatically expand lending. Second, the impacts on the
welfare of borrower households would be significant, both in the health effects of
upgrading dwellings from non durable mud-brick to durable materials
construction and in the savings in energy expenditures resulting from the
improvements.
The second priority program is loans from KfW to lenders for financing mortgages
for home purchase and home improvement organized so as to strengthen the
lending at the partner lenders and to improve mortgage lending overall in the
country. One reason that this is given the second priority is that the IFC
technical assistance project, should it be funded, could be adjusted so as to
promote the general adoption of the MQS by all banks through a process of
consultation and mediation with all mortgage lenders and to institutionalize
training at the new Banking Training Center, rather than focus on development of
model standards and documentation and work with specific banks. 62
The team recommends against adoption of the loans-to-HAOs option because of

the large TA requirements and the slow funds dispersal. It also recommends
against support for the social housing construction program because of its lack of
sustainability and its probable negative effects on private mortgage lending
development.
Finally, the large number of questions about the CSSH program raised above
make it a weak candidate for funding. This, however, might change when the
62Our understanding of the intentions of the IFC project, which are not fully clear from
their draft report, comes from a meeting with the team in Bishkek.
Kyrgyz Republic 44
programs design is more mature and if a marketing analysis showed substantial

interest in such a program by lower income households in need of improved
housing.
B. Possible Partner Lenders
During the field work, the team met with several lenders. Some lenders expressed
an interest in participating in the outlined investment alternatives. The time was
too short to allow for an extensive analysis of banks capability to be eligible for a
partner financial institution status. In principle, commercial banks, credit unions
or micro finance institutions could partner with KfW in one of the suggested
measures.
The team believes that the following criteria would be worthwhile taking into
consideration in making a final decision on a partner financial institution status:
Potential partner financial institutions should demonstrate an obvious

interest in co-operating with KfW. For example, as far as program
alternative two is concerned, financial institutions have already disbursed
loans to customers from novostroika areas or are planning to do so.
They would also be prepared to adapt internal procedures and processes to

international banking practices. This would imply that they share
knowledge with KfW during the selection phase and during the project
implementation phase with KfW and the selected consultant.
Financial institutions have already undertaken efforts on their own to

adopt international risk management practices and to embrace
international servicing standards (including a customer oriented approach).
Banks should fully comply with the prudential rules of NBKR and provide
KfW with financial data for assessment on eligibility.
As a first step in the selection process of eligible partner banks could be a beauty
contest, in which interested financial institutions would present their institutions
and state reasons why they would be an appropriate partner for KfW in
implementing the project. Such a process would also assist KfW in determining
the scope of TA which would be required during the implementation of the
suggested programs.
Kyrgyz Republic 45
Annex 1
Gulnara Satybaldieva
Persons with Whom the Team Met Head of Department of Housing
Construction
State Committee for Architecture and
Government and Central Bank Construction
Officials 28 Manas Str.
72001 Bishkek
Sultanbek Usenov tel: 996-312-210-666
Adviser to the Minister
Ministry of Economics and Finance of the Irina Lapko
Kyrgyz Repblic Head, Department of Housing
Erkindyk Ave. 58 Construction and Mortgage Department
720040 Bishkek State Committee for Architecture and
tel: 996-312-625-934 Construction
s.usenov@mf.gov.kg 28 Manas Str.
72001 Bishkek
Azahmet Dekombayev tel: 996-312-211-922
State Secretary
Ministry of Economics and Finance Askarbek Z. Zaripov
Chairman, Municipality of Bishkek
Sadat E. Djanybekova Housing Committee
Deputy Chairman Tel: 966-312-283-770
National Bank of the Kyrgyz Republic
101 Umelaliev Str. Persons in the Private Finance
720040 Bishkek Community
tel: 966-312-652-328
sdjanybekova@nbkr.kg K.Y. Choi
Chief Executive Officer
Saltanat Alybaeva Kyrgyz Investment and Credit Bank
Deputy Head, Department of Dordoi Plaza Business Center
Supervision, Methodology and Licensing 115A Ibraimov Str.
National Bank of the Kyrgyz Republic 720021 Bishkek
101 Umelaliev Str. tel: 996-312-690-555
720040 Bishkek kychoi@kicb.net
tel: 966-312-652-437
salybaeva@nbkr.kg Murat Temirhanov
Chief Corporate Banking Officer
Chinara Japarova Kyrgyz Investment and Credit Bank
Chief Inspector, Methodoly of Banking Dordoi Plaza Business Center
Supervision Department 115A Ibraimov Str.
National Bank of the Kyrgyz Republic 720021 Bishkek
101 Umelaliev Str. tel: 996-312-690-555
720040 Bishkek muratt@kicb.net
tel: 966-312-652-328
shjaparova@nbkr.kg Gulnara Shamshieva
General Manager
Mamyrbek Dzgeenbayev Bai Tushum and Partners
Head of Department of Housing 216 Toktogul Str.
Construction 720001 Bishkek
State Committee for Architecture and tel: 996-312-211-642
Construction gshamshieva@baitushum.kg
28 Manas Str.
72001 Bishkek
tel: 996-312-211-444
Kyrgyz Republic 46
Kastora K. Mamytova Ahmet K. Parmaksiz

Chairwoman General Manager
Halyk Bank Kyrgyzstan DEMiR Kyrgyz International Bank
390 Frunze Str. 245 ChuiAve.
720033 Bishkek 720001 Bishkek
tel: 996-312-218-932 direct: 996-312-610-510
email:ahmet@demirbank.kg
Almazbek A. Cholponkulov
Head of Operations, Member of the Board Aigul Teleusheva
Halyk Bank Kyrgyzstan Head of Marketing and Corporate Credits
390 Frunze Str. Department
720033 Bishkek DEMiR Kyrgyz International Bank
tel: 996-312-218-932 245 ChuiAve.
720001 Bishkek
Samat Jumashev direct: 996-312-666-132
Deputy Director email:aigult@demirbank.kg
Financial Company for Support and
Development of Credit Unions in the
Kyrgyz Republic, Ltd. Representatives of International
219 Chuy Avenue Donors
720001 Bishkek
tel: 996-312-21-95-66 Olga Gorowenko
email: samat@focu.in.kg KfW Bishkek Representative
B. Erkindik 58a
Ruslan A. Boronbaev 720040 Bishkek
First Vice-Chairman of the Board tel: 996-312-625-910
Ineximbank
118 Moskowskaya Str. Stephen Orlesky
720040 Bishkek Project Manager, CA Primary Mortgage
tel: 996-612-905-050 Market Development Project
email: RuslanB@ineximbank.com 41 Kazybek Bi, bld.A, 4th floor
050010 Almaty
Orozbek Kenjetaev tel: 7-3272-980-580 ext.224
Financial Consultant, CA Primary email: sorlesky@ifc.org
Mortgage Market Development Project,
Kyrgyz Republic Fatima Eshimbekova
214/4 Moskovskaya Str. Legal Advisor, CA Primary Mortgage
720010 Bishkek Market Development Project, Kyrgyz
tel: 996-312-610-650 Republic
email: okenjetaev@ifc.org 214/4 Moskovskaya Str.
720010 Bishkek
Beibut Kapyshev tel: 996-312-212-709
First Deputy Chairman of the Board email: feshimbekova@ifc.org
Energo Bank
493 Jibek Jolu Ave. Ernest Otorbaev
720070 Bishkek Manager, Coordination Office
tel: 996-312-670-158 GTZ
105 Isanov Str.
Anvar K. Abdraev 720001 Bishkek
Chairman of the Management Board tel: 996-312-662-639
KyrgyzKredit Bank email: ernest.otorbaev@gtz.kg
194 Moskovskaya Str.
7220010 Bishkek Daniel Berg
tel: 996-312-216-676 Head of Office, EBRD
email:a_abdraev@kcredit.kg 26 Geologicheskiy pereulok
Bishkek
Tel: 996-312-530-016
Email: bergd@bsk.ebrd.com
Kyrgyz Republic 47
Others
M. Asraf Malik
Country Director, Kyrgyz Resident Charlie Undeland, Head
Mission Urban Institute Bishkek Office
52-54 Orozbekov Str. 195 Tynystanov St.
720040 Bishkek Bishkek, Kyrgyzstan
tel: 966-312-627-343 Telephone: 996-312-224-848
amalik@adb.org cundeland@ui.kg
Lorenzo Costantino Tatyana Semenchenko

Finance and Private Sector Development Prsident
The World Bank Association of Realtors and Professional
214/4 Moskovskaya Str. Members of Real Estate Market
720010 Bishkek 165-B Moskovskaya Str.
tel: 996-312-610-650 720017 Bishkek
email: lcostantino@worldbank.org tel: 996-502-291-661
bnedy@infotel.kg
Suerkul tegin Adbybaly
Consultant, Finance and Private Sector
Development
The World Bank
214/4 Moskovskaya Str.
720010 Bishkek Hiyaebek Bogubaev
tel: 996-312-610-650 Chairman of the Board
email: sadbybalysuerkul@worldbank.org Association of Kyrgyz Appraisers
41 Martrosova Str.
Michael Mered 720031 Bishkek
Resident Representative tel: 996-312-510-743
International Monetary Fund email: bogubaev@infotel.kg
101 Umetaliev Str,
720040 Bishkek Nuria Bogubayeva
tel: 996-312-611-815 Independent Appraiser, First Category
email: mmered@imf.org 9 Baityk Baatyra
Bishkek
Tel: 996-312-412-038
Email: bogubaev@infotel.kg
Kyrgyz Republic 48
Annex 2
Overview of Program Approach
KfW Housing Finance Investment Program
As conceived in this report, the KfW lending program would consist of lending to
commercial banks or micro credit companies for on-lending for the two purposes
listed below. Because the envisioned KfW program would be fairly large in
relation to the volume of mortgage lending in the country, more than one of the
options listed could be funded.
Accelerate the rate of improvement in housing and infrastructure in

marginal housing rings, also called novostroika. These are areas on the
outskirts of Bishkek and Osh where households have invaded and seized the land
in well-organized operations. The government has responded by granting
ownership rights to the land after some years and occupying households have
often registered their rights. Over 200,000 persons are thought to live in the
areas around Bishkek.
The initial housing constructed is generally primitive and is improved over time.
KfW could provide finance to micro finance companies and banks that would
make loans in these areas for home improvements and upgrading. The program
would have a major impact on the welfare of a significant number of households.
Accelerate the development of mortgage lending. Three non exclusive options

are present.
a. KfW could provide finance to partner banks to fund mortgage loans that
meet standards agreed with KfW. Similar to what KfW is doing in Armenia,
a maximum loan amount could be set to channel KfWs funds to moderate
and lower income borrowers. As part of this package, it could work with
the same banks to improve risk management systems and with the
industry overall to improve professionalism in loan underwriting and
servicing, including the introduction of Minimum Quality Standards; a
variable interest rate mortgage product might also be introduced to manage
interest rate risk.
b. KfW could provide support for the establishment of the contract savings
scheme being launched by the Government.
c. KfW could supplement the funds available for the Governments social
housing construction program by providing funds to finance mortgage
loans to dwelling purchasers.
The team recommends the first alternativeKfW finances mortgage loans made by
partner commercial banks and micro finance companies. The program includes a
robust technical assistance component aimed at increasing professionalism and
standardization in residential mortgage lending.
Kyrgyz Republic 49
Annex 3
List of Participants for the Workshop on

Contract Savings Schemes for Housing 63
No. Organization Full Name of a Paticipant

1. Kyrgyzpromstroybank Sasykulova ..
Ishenaliev ..
2. AKB Kyrgyzstan Omuraliev Talant Deputy
Chiarmen of the Board
3. Akbaraliev Zakhiddin
OAO IB Issyk-Kul
Nadbagin R.R.
4. Settlement and Saving Company Kachkeev M.R.
Deputy Director General
5. ZAO INECSIMBANK Bulatov E.K.
Head of Corporate Lending
Unit
6. DosCredoBank Toibayev K. B.
7. AsiaUneversalBank Kochkorbayev U
8. Ecobank Sagynbekov N.
9. KyrgyzCreditBank Abdrayev A.K
Chairmen
Tynayev U.
10. Khalyk Bank Kyrgyzstan Cholponkulov A. A.

11. Bishkek Branch of the National Uzagalieva N. Z.
Pakistan Bank
12. Kyrgyz Investment and Credit Bank Kalmatova N.
13. FinanceCreditBankKAB Sherbalievs Dz, A,
14. Presidents Administration Kasymov Dz. T. .

15. Prime Minister Office Mikhienkova E.B.
Financial Department
Shambetov Dz. A.
Construction Department
16. KR Ministry of Finance Usenov S.D.
Kyldjyev
Dzeenbekova N.B .
Turdumambetova T. K.
17. NBKR Allybayeva S.
Sadyrkulova A.N.
Djaparova Ch.A.
18. Micro-finance organization Bai-Tushum Ashyralieva T.
19. State Agency of Architecture and Construction Satybaldieva
Ibragimov
63The Workshop was organized by the team on the afternoon of February 27. Friedemann
Roy made the main presentation after an introductory presentation on KfW by Olga
Gorowenko.
Kyrgyz Republic 50
20. Association Kyrgyz Appraisers Bugubayev N.

..
21. Kyrgyzzjylcommunsoyuz Zalyalov U. F
22. Bishkek Kurulush Moldobayev
23. IFC Eshimbekova F.
Steven Orletsky
Kenshetayev .
24. USAID Ilebayev D.

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Pre-Feasibility Study

Prepared for Prepared by

THE URBAN INSTITUTE

This projects objective is to define alternatives for a KfW investment program in

Mortgage lending. Mortgage lending has increased sharply since 2002. At

Under these conditions, a small share of Kyrgyz households is able to take a

National housing problems. Based on statements of officials and experts

Marginal housing rings or novostroika. The shuttering of plants and the

Insufficient affordable newly constructed dwellings. Government officials see the

Affordability of basic housing services. The combination of Kyrgyzstans temperate

Shortage of mortgage finance. Several officials spoke of the need to develop

Government Housing Sector Initiatives

Under the program, a savings account is opened in a commercial bank in the

Creation of a contract savings scheme for housing. This features the

Social housing construction program. This program supports the

Possible Objectives of a KfW Investment Program

1. Help control the deterioration of the multifamily housing stock. There is no

1 The exchange in early March 2006 was about Som 49 = 1 EUR.

2. Accelerate the rate of improvement in housing and infrastructure in marginal

3. Accelerate the development of mortgage lending. Three nonexclusive options

Programs to implement both initiatives 1 and 2 would use a contract savings

I. SETTING THE STAGE 9

II. IINVESTMENT PROJECT ALTERNATIVES 26

I. SETTING THE STAGE

A. Overview of the Current Situation

A.1 Macro-economic and political conditions

These two topics are best considered together, particularly in light of

Table 1. Macro-economic Indicators, 2000-2005

Indicator 2000 2001 2002 2003 2004

A.2 National housing problems

A.2.1 Tenure, housing conditions, housing construction

Table 2. Total dwelling square and percent of households with access to

Flushing toilet N/A 26.7 56.3 4.1

A.2.2 Major housing problems

A.2.2.2 Marginal housing rings or novostroika areas. The shuttering of plants

These settlements were created by occupancy of completely unserviced land. The

A.2.2.3 Insufficient affordable newly constructed dwellings. Government officials

A.2.2.4 Affordability of basic housing services. The combination of Kyrgyzstans

A.2.2.5 Shortage of mortgage finance. Several officials spoke of the need to

A.3 The banking system

After independence in 1991, a two-tier banking system was implemented in

The 19 commercial banks operating in the country report assets of

10 The current USD/KGS exchange rate is about 41.

Chart 1: structure of Kyrgyz banking system

National Bank of Kyrgyzstan

Micro finance Currency exchange

Business Environment, summer 2005.

Table 3: Key indicators of Kyrgyz banking system

31 Dec. 2003 31 Dec. 2004 31 Dec. 2005

varying interest rates. Average costs of funds vary around 8 to 9 percent. 20 As a

Chart 2: development of interest rates in the Kyrgyz

Interest rate on loans Interest rate on deposits

Source: IMF; NBKR 24

Deposit rates reflect rates in KGS for about 6 months.

A.4 Mortgage lending

A.4.1 Mortgage products

25 Data provided by the National Bank of the Kyrgyz Republic.

Under these conditions, a small share of Kyrgyz households is able to take a

Table 4. Home Purchase Mortgage Product Examples at the End of 2005

Minimum Annual Annual Term Prepayment

A.4.2 Risks in mortgage lending

At least at some lenders, underwriting practices and elements of loan

The foreclosure process contains a good deal of uncertainty in principle.