At university, Elizabeth Wallace studied the Soviet industrial system. So much for best-laid plans. By the time she earned her doctorate from the London School of Economics, Soviet industry was collapsing, and she quickly realized that small businesses were instead the key to the Russian economy. "It seemed clear that if this economy was ever going to succeed," says Wallace, "and not just have a handful of wealthy people, there needed to be small-business lending."
Wallace, the head of the London-based European Bank for Reconstruction & Development's small-business department, is turning that insight into one of the few real banking successes in Russia. This year, the Moscow bank that she pushed the EBRD to start in 1998--the Small Business Credit Bank, or KMB--expects to post its first profit, $2.2 million. KMB makes 2,700 loans a month, averaging $5,000 to $10,000 apiece, and expects to be issuing more than 8,000 a month next year. Now the EBRD is seeking to double its capital with a share issue and raise another $100 million from commercial institutions. That would mean more cash to spread among small-business owners such as Olga Yungo, the founder of Gelios, a florist outside Moscow, who borrowed $6,000 from KMB to help expand her chain of outlets. "KMB has been a great help," says Yungo. "Other Russian banks haven't been lending to small businesses like us."
KMB is certainly setting an example: It manages to get 99.7% of its loans repaid. Put that down to good training, tough credit analysis, and an early warning system that helps detect payment problems before debts get too large. Says Richard Hainsworth, chief executive of RusRating, a Moscow bank-rating agency: "Eventually, there will be people who leave the bank and bring those standards to other institutions. Gradually, KMB is going to affect the entire banking market."
Wallace, a 46-year-old American from South Carolina, arrived in Russia 11 years ago for the EBRD, the Group of Seven-backed body that taps public funds for development efforts in Eastern Europe and the old Soviet Union. Wallace's brief was to work on restructuring the large military enterprises that then dominated Russia's forlorn industrial landscape. But she was quickly struck by the vast inefficiencies and under-employment created by the command economy and figured that one solution would be new businesses to create competition. She lobbied the EBRD's shareholders, and in 1994, the bank set up a $300-million fund to lend to small businesses.
A great idea--in theory. But when the 1998 financial crisis hit, Russia turned into a sinkhole. Until then, the EBRD had channeled its loans through local banks. But two of the fund's main partner banks, with $150 million of EBRD money lent out, skidded into insolvency. After the EBRD sued one partner bank to get $58 million back, hoodlums beat up a former executive at that bank who had testified for Wallace. Wallace herself was threatened with a smear campaign. "We all grew up," she says. "This wasn't banking, it was restructuring in reverse, where depositors lost first and shareholders gained."
Wallace chose that moment to raise the stakes. She concluded that the EBRD needed to start its own bank in Russia and so avoid the risks of lending through murky and default-prone Russian banks. The result was KMB, which later attracted backing from George Soros' development fund, German consulting firm DEG, and Netherlands bank Triodos. Along the way, she also learned to accept a weird assortment of collateral, including dogs, geese, and even a pair of stockings that she recently wore on a trip to Moscow.
Today, Russia is still far from the hive of entrepreneurial activity that Wallace envisions. The country's small businesses must overcome endless government red tape--if they can even get a bank to lend to them in the first place. For other banks to follow KMB's lead and, as Wallace puts it, stop merely acting "as the murky treasury wings" for major industrial groups, there would have to be far-reaching reform to improve transparency and step up Central Bank supervision. At least one bank, however, is lending to the businesses that need it.
By Catherine Belton in Moscow
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