MICROCAPITAL STORY: Unmet Demand for Microfinance Inhibiting Economic Growth of Russia’s Urban and Rural Poor

A recent article from the Inter Press Service (IPS), an independent news agency focused on the developing world, reveals Russia’s micro-entrepreneurs and micro-businesses are not receiving the capital they need to grow. The article indicates microfinance institutions (MFIs) are only supplying 15 percent of an estimated USD 8 billion in micro-business demand. Furthermore, formal banking institutions are supplying just 20 percent of the USD 22 billion needed by small and medium-sized enterprises.

The article cites Vasily Solodkov, a member of the Russian National Committee on Microfinance, who points out that the shortage of microfinance is stifling economic growth, especially in rural areas where lack of business opportunities and a high rate of unemployment is widening the income gap between rural and urban areas and is causing migration to cities.

According to the article, administrative bureaucracies and an inadequate understanding of microfinance are the primary barriers to micro-lending in the country. Moreover, microfinance in Russia is not yet fully regulated and the monopolistic nature of capital markets in Russia is preventing distribution of capital resources to those most in need.

Anton Makharov, a senior lecturer in economics at the Moscow Institute of Law and Economics, claimed the lack of economic transparency and the country’s failure to observe standard regulations and business etiquettes hinder investment attractiveness in the industry. Without a proper system of resource access or risk control, the Russian economy may not be healthy enough for a productive, sustainable microfinance sector. Makharov noted that small and medium businesses contribute approximately 20 percent to Russia’s gross domestic product. With an effective capital distribution system in place, small businesses could grow faster and make a much larger contribution to the economy.

To read the article in its entirety, visit http://www.ipsnews.net/news.asp?idnews=39045.

According to a joint 2006 publication from the Russian Microfinance Center, a non-profit organization that promotes microfinance in Russia, and the Russian SME Resource Center, a Russian non-commercial small business research and analytical center, the overall growth of non-bank microfinance operations from 2003 to 2004 was around 130% to 180%. As of January 2005, the aggregated non-bank loan balance of 400 surveyed MFIs was approximately USD 144 million. An extrapolated aggregate figure for all Russian non-bank microfinance providers was estimated at USD 281 million to 332 million.

-Steven Craig

Additional Resources:

IPS: http://www.ipsnews.net/news.asp?idnews=39045

Russian Microfinance Center: http://www.rmcenter.ru/en/

Russian SME Resource Center: http://www.rcsme.ru/eng/

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