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Armenia’s Microfinance Sector Faces Challenges Amid Digital Transformation

The microfinance sector in Armenia is facing significant challenges as it navigates a period of digital transformation, according to a new report from the Asian Development Bank (ADB).

Financial Performance of Key Universal Credit Organizations

The report highlights the financial performance of key universal credit organizations (UCOs) in Armenia. According to the report, ACBA Leasing UCO CJSC stands out with assets amounting to AMD64.1 million. Aregak UCO CJSC has AMD29.5 million, Global Credit UCO CJSC has AMD24.9 million, Finca UCO CJSC has AMD23.0 million, Development and Investments Corporation of Armenia CJSC has AMD22.6 million, and Kamurj UCO CJSC has AMD15.5 million.

Digital Transformation Challenges for UCOs

The report also notes that the Central Bank of Armenia (CBA) is leading the digital transformation of the financial market, aiming to establish a national electronic identity system, broaden financial inclusion, and create a non-cash economy. However, this shift poses challenges for UCOs, which must invest in digitalization efforts to remain competitive.

Operational Challenges Facing UCOs

The report identifies several operational challenges facing UCOs, including:

  • Inflation and exchange rate volatility
  • Compliance with financial regulations
  • Funding of loan books through external resources
  • The need for technology advancements and improved service delivery

Increased Competition from Commercial Banks

Commercial banks are increasing their lending to the same market segment as UCOs, leading to increased competition. With limited ability to raise cheap funds, UCOs struggle to offer competitive rates, raise investment funds for digitalization efforts, and grow at a profitable rate.

The Future of Armenia’s Microfinance Sector

The report concludes that the trajectory of Armenia’s microfinance sector hinges on the extent to which the banking sector proactively engages in closing the existing finance accessibility gap for micro, small, and medium-sized enterprises (MSMEs). This presents a unique window of opportunity for investors to play a pivotal role in shaping the sector’s future.

UCOs in Armenia

Here are some of the key UCOs in Armenia:

  • ACBA Leasing UCO CJSC: Provides leasing and financing solutions to businesses and individuals in Armenia.
  • Aregak UCO: Offers microloans, savings accounts, and financial education to underserved communities.
  • Global Credit UCO CJSC: Provides offline and online loans to legal entities and individuals.
  • FINCA Armenia: Part of the FINCA Impact Finance network, providing loans for agriculture, small businesses, and consumer products.
  • Kamurj UCO CJSC: One of the leading microfinance service providers in Armenia, offering agricultural, housing, and personal loans.

ADB’s Work in Armenia

The Asian Development Bank has supported Armenia through various programs since 2005, including:

  • Transport
  • Public finance
  • School safety
  • Energy
  • Water supply
  • Urban development

As of September 2023, the ADB has committed $1.3 billion to Armenia through 59 public sector loans, grants, and technical assistance.

ADB’s Microfinance Program

The Asian Development Bank’s Microfinance Program is a credit enhancement and risk-allocation tool designed to promote local currency lending by commercial banks and financial institutions to microfinance institutions. Under the program, the ADB shares default risk on wholesale loans extended by its partner financial institutions to microfinance institutions.