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Technical Assistance Consultant’s Report
Project Number: TA – 4565 (UZB)
Financial Sector Infrastructure Development
Draft Final Report
May 31, 2007
Uzbekistan:
Financial Sector Development Strategy
This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and
the Government cannot be held liable for its contents.
FINAL REPORT MAY 31, 2007
CURRENCY EQUIVALENTS
(as of December 31, 2005)
$1.00 = 1180 Uzbek sums
ABBREVIATIONS
ADB – Asian Development Bank
CIS – Commonwealth of Independent States
CBU – Central Bank of Uzbekistan
CCCSM Centre for Coordination and Control of the Securities Market
NBU – National Bank of Uzbekistan
SISB – State Insurance Supervisory Board
TRSE – Tashkent Republican Stock Exchange
USAID – United States Agency for International Development
VAT – Value Added Tax
WOCCU – World Council of Credit Unions
NOTE
In this report, "$" refers to US dollars.
CONTENTS
Page
Financial Sector Development Strategy............................................................................ 1
A. Financial Sector Structure and Development ............................................ 2
The Banking System ................................................................................. 3
Insurance................................................................................................... 5
Pensions.................................................................................................... 6
Leasing ...................................................................................................... 6
Capital Markets.......................................................................................... 7
Credit Unions............................................................................................. 8
Microfinance Organizations ....................................................................... 9
B. Regulation and Supervision....................................................................... 9
The Banking System ............................................................................... 10
Insurance................................................................................................. 10
Leasing .................................................................................................... 11
Capital Markets........................................................................................ 11
Microfinance and Credit Unions .............................................................. 12
C. Policy Issues............................................................................................ 12
Demand for Credit ................................................................................... 12
Financial Sector Issues for Private Sector Development ........................ 14
Banking.................................................................................................... 14
Insurance................................................................................................. 15
Pensions.................................................................................................. 16
Leasing .................................................................................................... 16
Capital Markets........................................................................................ 16
Microfinance and Credit Unions .............................................................. 17
D. Key Elements of a Financial Sector Strategy .......................................... 18
Reduce Direct Government Interventions ............................................... 18
Establish a Foundation of Sound Regulation and Supervision................ 18
Banking Sector Reform ........................................................................... 18
Non-Bank Reform.................................................................................... 19
Appendix 1. Banks in Uzbekistan.................................................................................... 20
Appendix 2. Large Banks ................................................................................................ 21
Appendix 3. Funding Sources and Interest Rates........................................................... 22
Appendix 4. Credit Unions .............................................................................................. 23
Appendix 5. NGO- Sponsored Microfinance Organizations............................................ 24
FINAL REPORT MAY 31, 2007
Preface
This report has been prepared by A. Michael Andrews (International Banking Sector and
Microfinance Specialist) for the Asian Development Bank (ADB). It draws on the work
completed by all the consultants engaged under ADB’s technical assistance project TA
4565-UZB, Financial Sector Infrastructure Development, including Alfred C. Dostie
(Team Leader and International Banking System Specialist), Mario Lamberte
(International Financial Market Specialist), John Wetherhold (International Insurance
Sector Specialist), Fozil Dodiev (Microfinance Sector Specialist), Vladlen Kim (Banking
Sector Specialist), Hondamir Mamatkulov (Banking Sector Specialist), Orifjan Namozov
(Financial Market Specialist), and Zafar Vokhidov (Insurance Sector Specialist). The
author gratefully acknowledges their contribution, and is especially indebted to Fozil
Dodiev, Ravshan Rashidov, and Irina Tchen of the Centre for Social and Economic
Research. Mr. Jurgen Conrad, Senior Financial Economist in the Governance, Finance
and Trade Division, Central and West Asia Department of the Asian Development Bank,
supervised the implementation of the technical assistance, provided helpful guidance
and comments throughout, and participated in some of the field research. The
conclusions, and any errors and omissions, are solely the responsibility of the author.
.
FINAL REPORT MAY 31, 2007
FINANCIAL SECTOR DEVELOPMENT STRATEGY
• A strategy for financial sector development in Uzbekistan needs to be integrated with
measures to support private sector development more broadly. With over 80 percent
of the shares of all joint-stock companies owned directly or indirectly by Government,
over the short- and medium-term the bulk of demand for private sector credit will
come from 2.8 million individual entrepreneurs, 253,300 micro enterprises and
15,300 small enterprises.
• Mobilization of savings has been constrained by many of the same issues that have
restricted private sector development. In the same way that diverse decrees and
privatization measures have not been part of an overall strategy or vision for private
sector development,1 Government policy with respect to the financial sector contains
a number of conflicting elements.
• Significant progress has been made with establishing a legal framework for many
aspects of a modern financial system. However the full effectiveness of policy
measures is frequently lost because of inconsistent or incomplete implementation,
and frequent changes in policy direction.
• Without consistent application and interpretation of laws and regulations, other
measures to increase savings intermediation and the use of financial products will
have only limited success as public confidence and the willingness of the private
sector and development partners to invest in the financial sector will remain low.
• While the nature and quality of supervision varies from sector to sector, there is an
overarching need for further evolution towards a risk-based prudential approach.
• The banking sector is by far the largest component of the financial system.
Therefore, banking reforms offer the potential for the largest and most immediate
benefits. Increasing banking sector intermediation would directly support private
sector development, which in turn would reinforce further financial sector
development.
• Direct government interventions through specialized institutions, subsidized financing
programs, and tax incentives have tended to perpetuate the role of the banking
sector as a conduit for planned financing rather than performing true intermediation
between savers and borrowers.
• The policy lending function of the state-owned banks still dominates the structure
and performance of the banking system. As a first step, policy lending should be
separated from commercial banking, freeing the commercial banks to focus
exclusively on savings intermediation on market terms and conditions.
• A concurrent package of policy measures should focus on removing the obstacles to
growth in private sector intermediation posed by the many non-banking functions
currently performed by commercial banks.
1
For a comprehensive analysis of private sector development see: Asian Development Bank,
2005. Private Sector Assessment for Uzbekistan. Manila.
2
• The focus on banking reform should be complemented by continuing efforts to
establish conditions conducive to the development of non-bank providers of financial
services.
• For the insurance sector measures are required to address deficiencies in the legal
framework, including civil code provisions on contracting, and the lack of capacity
both in companies and the supervisory authority.
• Capital market development requires an appropriately independent supervisory
authority supported by capacity building within this authority and the industry (stock
exchanges and professional market participants). Development of institutional
investors such as insurance companies and pension funds will over time foster
capital market development.
• Progress with privatization is required to increase the size of the private sector and
thus the supply of corporate securities—equities (shares) and debt (bonds).
Enhancements in corporate accounting, disclosure, and governance are required to
reduce the risk associated with and increase the attractiveness of investing in Uzbek
companies.
• For credit unions and leasing companies, which already have a generally appropriate
legal and regulatory framework in place, the key will be continued progress with
Government’s efforts to reduce the regulatory burden on business more generally,
which will benefit both the providers of financial services and their customers.
• The legal framework for specialized microfinance organizations currently being
introduced could provide a sound basis for development if the implementing
regulations and supervisory regime are suitably supportive.
A. Financial Sector Structure and Development
1. The gradual pace of financial sector reform in Uzbekistan has resulted in a
significantly different course of development than in many other countries in the
Commonwealth of Independent States (CIS). During the 1990s, reforms in Uzbekistan
focused on establishing the core legal and regulatory framework for banking and building
supervisory capacity in the Central Bank of Uzbekistan (CBU) rather than liberalization
and privatization. This helped to avoid the boom and bust in the banking sector
experienced in other CIS countries. However, another consequence of the gradual
approach to financial sector reform is that the Uzbek financial sector continues to have
very high levels of government ownership.
2. The basic elements of a market-based financial sector are now in place in
Uzbekistan, but private sector intermediation has yet to assume an important role.
Institutions owned directly or indirectly by government account for the majority of the
financial system. Banks dominate the financial system. Banks wholly or majority owned
by the state account for two-thirds of financial sector assets. Leasing and insurance,
which are the only other segments with sizeable assets, are also dominated by state-
owned companies (Table 1). Other financial services providers remain small in both
number and size. Shares (equity) of 117 companies were listed on the Tashkent
Republican Stock Exchange (TRSE) at end-December 2005. Most listed companies are
privatized state-owned enterprises. Secondary market trading is thin. Corporate debt
(bonds) has also been issued, but volumes are small and maturity periods are usually
less than one year. There were about 50 corporate bond issues between 1999 and
3
2005. Bonds outstanding amounted to approximately 36 billion sums ($32 million) at
end-2005.
Table 1. Uzbekistan financial sector, end-2005.
Number Assets Assets
(sum billion) (percent of GDP)
Commercial banks 28 5,657 37.2
Wholly or majority state-owneda 5 3,764 24.7
Joint stock with minority state ownershipb 7 1,436 9.4
Private joint-stock 12 268 1.8
Banks with foreign capital 4 189 1.2
Credit unions 22 7 0.0
Microfinance organizations 14 6 0.0
Insurance companies 25 214c 1.4
Of which, Uzbekinvest (state-owned) 1 148c 1.0
Leasing companies 12 77d 0.5
Of which, Uzquishloqmash (state-owned) 1 70d 0.5
Collective investment funds 18 4 0.0
Private pension plans 1 n.a. n.a.
a. NBU, Asaka, Khalk Bank, Microcredit Bank, Aloqabank.
b. Pahkta, Uzpromstroy, Ipoteka, Gallabank, Ipak Yuli, Savodar, Turon.
c. Estimate.
d. Estimate for end-2004.
Memo: GDP 15,210 billion sums at end-2005.
Sources: Central Bank of Uzbekistan, Credit Unions Association of Uzbekistan, Microfinance Association of
Uzbekistan, Centre for Social and Economic Research, bank financial statements.
The Banking Sector
3. The banking sector in Uzbekistan is highly concentrated and segmented. It has
evolved away from the Soviet system of specialized banks. The joint-stock banks with
minority state ownership that emerged through initial rounds of privatization and the
remaining state-owned banks have a legacy of serving particular sectors or functions
(Appendices I and 2). However, all Uzbek banks have universal licenses and thus
officially serve all economic sectors.
4. The investment activities of the banking system have not kept pace with growth
in the economy. Assets and loans have declined sharply as a percent of GDP (Figure 1).
This indicates that the strong economic growth recently experienced in Uzbekistan is
occurring in spite of rather than because of the contribution of the financial sector. This
prompts a crucial question: Why is the Uzbek banking system not growing and not
providing more financial intermediation to foster even faster economic development?
5. A major reason for the current under-development of the financial sector is the
effect of policy measures that conflict with the objectives of encouraging use of the
financial sector, coupled with frequent changes in and inconsistent application of various
regulatory requirements. The Uzbek banking system performs very significant tax
collection functions and also serves as a fiscal agent of government. The role as fiscal
agent is in some ways a carry-over from the Soviet banking system, with Uzbek banks
being responsible for not only the allocation of resources under various Government
programs, but also being required to directly intervene in the financial management of
enterprises to ensure funds are used as intended. The resulting tendency to view the
banking system as agent of Government rather than an intermediary is compounded by
4
lingering distrust of banks originating in the loss of monetary value of deposits through
high inflation in the 1990s and from restrictions on cash transactions.
6. Most of the government Figure 1. Size of the banking system.
controlled banks are rather $US billions
anomalous for banking institutions 6.0
as their total loans exceed total Assets
5.0
deposits, reflecting that they
4.0
mobilize far fewer savings than Loans
their size would suggest. State- 3.0
owned National Bank of Uzbekistan 2.0
Deposits
(NBU) accounts for almost 60 1.0
percent of total bank loans, but only 0.0
about one-third of total bank 2001 2002 2003 2004 2005
deposits. Two other banks are
Percent of GDP
wholly owned by government and
70
two joint stock banks are majority Assets
60
state-owned. The government- 50
owned banks collectively account 40
Loans
for two-thirds of banking sector 30
assets, but function more as 20
Deposits
conduits for various government 10
financing programs than as true 0
2001 2002 2003 2004 2005
intermediaries. Seven banks with
Source: Central Bank of Uzbekistan.
government minority shareholdings
collectively account for a further 26 percent of banking system assets.
7. The 12 banks with wholly private domestic ownership and four banks with foreign
shareholders have only a small share of the market. However, unlike the state-owned
banks, the private and foreign banks have deposits that exceed their volume of loans,
indicating that these institutions function more like conventional banks, mobilizing
savings to finance their investments. Thus, the private and foreign banks collectively
have only about 4 percent of total loan volume, but almost 14 percent of total bank
deposits.
8. Uzbekistan remains in the lower range of CIS countries by most measures of
financial deepening. Numerous policy initiatives to support the development of the
financial system, including implementation of an efficient electronic payment system to
promote use of the banks for the majority of transactions, and introduction of deposit
insurance in an effort to build confidence in the banking system, have had only a minimal
effect on financial sector development. As a result, most banks continue to serve more
as direct implementing agencies for government policies than as true intermediaries.
This is evidenced by the low levels of deposit mobilization in Uzbekistan (Figure 2).
9. Efforts to directly control the supply of financial services are another distinct
feature of the banking sector in Uzbekistan. There is a wide range of lending programs
at preferential interest rates (Appendix 3), and the establishment in 2006 of Microcredit
Bank continues the legacy of establishing specialized banks focusing on government
priority sectors. Although successful in some respects, the provision of subsidized
lending programs to meet policy objectives has significant downsides, primarily in
reducing incentives for provision of products and services on commercial terms,
discouraging deposit mobilization and in embedding otherwise avoidable risks in the
5
banking system.
10. A further downside is the
creation of opportunities for rent- Figure 2. Bank deposits in selected CIS countries.
seeking. Those not among the (percent of GDP)
eligible borrowers attempt to obtain 25
subsidized credit, and those Russia
20
obtaining it may opt to use it for Kazakhstan
other than the intended purpose. 15
Uzbekistan
This leads to further restrictions 10
and policing efforts on the part of 5
Azerbaijan
government and the banks, with Kyrgyz Republic
0
effectiveness always open to
2000 2001 2002 2003 2004 2005
question because of people’s
Sources: Centre for Social and Economic Research, National Bank of Azerbaijan.
endless inventiveness. Regardless
of the effectiveness of efforts to ensure only qualified borrowers receive the funds, and
that they are used for their intended purposes, the policing efforts devoted to subsidized
lending programs are a substantial cost to both the banks and borrowers.
2
Insurance
11. There were 23 non-life and two life insurance companies in Uzbekistan at end-
2005. With total market size equivalent to $38 million in gross premiums in 2005, the
market penetration ratio is one of the lowest in the world: The premium to GDP ratio was
less than 0.3 percent. Knowledge of insurance products and their use remains at a low
level. The market consists almost exclusively of general (property and casualty)
insurance. Virtually no life insurance is sold by domestic companies. However, a
successful marketing agency, Safe-Invest, sells life insurance products of foreign
companies directly to Uzbek residents. More attractive interest rates provided by banks
on individual term deposits coupled with uncertainty over claims paying ability make life
insurance products offered by domestic carriers unattractive for individual customers.
Another constraint to insurance sector development (and contractual savings in general)
is a lack of long-term investment instruments.
12. Industry concentration is very high with the five largest insurance companies
accounting for over eighty percent of premiums. State companies no longer enjoy
special treatment or separate tax holidays. As a result, the share of premiums earned by
the three biggest state-owned companies has fallen from over 90 percent in 2001 to
about 40 percent in 2005. However, state-owned Uzbekinvest is still by far the largest
insurance company. Together with other state-owned companies, Uzbekinvest
dominates the compulsory insurance market. Most other insurance companies are small,
with 15 having less than the equivalent of $500,000 capital.
13. The industry earns very large underwriting profits (the difference between
premiums earned and claims paid) with the loss ratio (claims paid to premiums earned)
never exceeding 25 percent, and in the remarkably low range of 10-15 percent over the
last three years. In large part this is attributable to ambiguity of wording in contracts,
lack of knowledge among the insured, limited ability to pursue legal disputes, and
lengthy claims procedures established by insurers.
2
This section and the following section draws on the work of the insurance sector specialists
under the TA.
6
14. This highly unbalanced relationship between the insured and the companies is
favorable for industry profitability, but undermines any potential for development of a
functional and efficient insurance market. The experience with compulsory third party
liability auto insurance illustrates the problems. Only 500 claims were filed in 2002 with
respect to 10,000 recorded road accidents. The insured tend to avoid making accident
reports and make settlements themselves. When claims are filed, contracts are
frequently dishonored for technical reasons, leading the public to view premiums for
compulsory coverages as more of a tax than a purchase of insurance.
15. Tax incentives have been used extensively to promote the insurance industry.
Companies enjoyed a three-year profit tax holiday for the period that ended May 2005
provided the tax savings were directed to specific purposes including training, expansion
of agent networks, purchases of equipment and increasing capital. A new three-year tax
holiday for the service industry, including the insurance sector, was introduced effective
1 April 2006. Such incentives often result only in companies “gaming” the system, in
effect undertaking the same activities they would have in the absence of tax incentives,
while enjoying the tax holiday. Enforcement efforts add to the administrative burden
borne by both the tax authorities and the companies, and can ultimately defeat the
intended purpose of the incentives. A sound regulatory and supervisory system is likely
to be more effective in the long run in fostering development of the industry.
Pensions
16. There are two pillars to the Uzbek pension system, the pay-as-you-go social
security fund, and a mandatory private pension fund managed indirectly by the social
security administration through state-owned Khalk Bank. Individual private retirement
savings plans have not been introduced in Uzbekistan, but there is an element of “pillar
three” retirement savings in the mandatory private pension fund, as entrepreneurs can
make voluntary contributions. The state social security fund, which despite the name is
not a fund but rather financed on a current (or pay-as-you-go) basis from general
government revenues, encompasses a range of programs including disability payments,
and the state old-age pension.
17. The Accumulation Pension Fund was introduced in 2004, with contributions
beginning in 2005. One percent of all wages is directed to the Fund, with 4.1 million
individuals contributing in 2005. In addition, 18,000 individual entrepreneurs made
voluntary contributions. The Fund balance is projected to be 82 billion sums by end-
2008. Government paid the start-up costs for the Fund, and has provided a tax holiday
to Khalk Bank as an indirect subsidy for the Fund’s operating expenses. Each individual
member of the plan is entitled to receive interest on contributions equal to at least the
rate of inflation. Government debt and bank deposits are currently the only investments
of the Fund. As the Fund grows there is likely to be a shortage of suitable investment
instruments in which Khalk Bank will be able to invest contributions, raising questions of
how the investment returns mandated by the plan can be met.
3
Leasing
18. The leasing industry in Uzbekistan is still at an early stage of development, but
has been growing rapidly. At end-2005 there were 31 active lessors, comprising 12
specialized leasing companies and 19 commercial banks, up from only 13 lessors in
3
This section draws on the work of the financial markets consultants under the TA.
7
2002. The 4,078 lease agreements executed in 2005 had a total value equivalent to $96
million, comprising 3.2 percent of total fixed investments in Uzbekistan.
19. Leasing provides a viable substitute for loans to finance equipment. However as
with lending, the volume of leases outstanding overstates the level of financial
intermediation. NBU accounts for 95 percent of the banking sector’s lease portfolio, and
Uzquishloqmash Leasing (UQML), which is also state-owned and largely funded by
government programs, is by far the largest specialized leasing company. Aside from
NBU and UQML, the specialized leasing companies and commercial banks typically
have lease portfolios equivalent to a few million dollars or less.
4
Capital Markets
20. There is limited capital market activity in Uzbekistan notwithstanding the
establishment of key elements of the supporting infrastructure including a stock
exchange with an automated trading system, a central securities depository, and a real
time gross settlement system. Government remains a major player both in the issuance
and ownership of securities.
21. Excluding time and savings deposits of banks, fixed income instruments
outstanding at end-2005 amounted to the equivalent of $72 million, about 60 percent of
which was government debt, with the balance comprised of short term corporate
securities (Table 2). Treasury bills and bonds are sold by auction. Banks are the main
participants in the government debt markets with 20 banks and one non-bank financial
institution acting as primary dealers. Corporate securities generally have an original
maturity of less than one year and are collateralized or bank guaranteed, with banks
purchasing about 80 percent of the issues. Virtually all of the secondary trading in
corporate securities takes place in over-the-counter market (OTC) transactions, with less
than two percent of the value traded on the TRSE. About three percent of trading in
2005 took place in the Inter-Bank Trading System, which will increase significantly in
future since the system was only introduced by the Banking Association in the last
quarter of 2005.
Table 2. Fixed Income Instruments Outstanding, end-2005.
Assets (sum billion) Assets(percent of GDP)
Treasury bills (under one year) 15.8 0.1
Treasury notes/bonds (over one year) 33.7 0.2
Corporate securities (under one year) 36.1 0.2
Sources: Central Bank of Uzbekistan and Centre for Coordination and Control of the Securities Market.
22. Share issues and trading have been growing steadily, although given the very
small base, the equity market is still dwarfed by the banking system. There were 2,114
joint stock companies registered at end-2005, up about 8 percent from the previous
year. The vast majority of joint stock company shares are owned directly or indirectly by
the state (Table 3), reflecting that the major role of capital markets to date has been to
participate in partial privatizations of state-owned entities. Reflecting this, the TRSE,
established in 1994, still has branches in all twelve regions of the country and 84 broker
offices. Four shares are listed on the highest trading board of TRSE (A List) and 113 on
4
This section draws on the work of the financial markets expert under the TA.
8
its third board (C List). Most primary issues are made through the OTC market, with
secondary trading spilt more evenly between the OTC market and the TRSE.
23. Institutional investors do not yet play a role in Uzbekistan. The Pension
Accumulation Fund so far has invested almost exclusively in bank deposits, and the life
insurance sector is virtually inactive. There are no unit trusts (mutual funds) in the
conventional sense, although there are 18 privatization investment funds remaining from
the more than 80 established in 1996-2000 to involve individuals in the securities market
through participation in privatization of state property. Theses funds are very small, with
net asset value of about sum 4 billion at end-2005. The funds are also very liquid, in part
because they are prohibited from declaring dividends and there are few options for the
required reinvestment of their profits.
Table 3. Number of Stock Companies and Book Value of Equities
end-2004 end-2005
Total joint stock companies 1,957 2,114
Open joint stock companies n.a. 1,754
Closed joint stock companies n.a. 360
Equities, total book value registered equities* (sum billion) 2,171 2,787
Of which, owned by the state 2,090 2,325
owned by the private sector 127 462
* Issues of equities are registered at the State Securities Register and Central Depository.
Sources: “Chastnaya sobstvennost’”, N10, 2-7 March, 2006; “Biznes Vestnik Vostoka”, 19 January, 2006.
Credit Unions
24. In contrast to the experience in many other countries, the legal foundation for
credit unions in Uzbekistan was established before major efforts were devoted to credit
union development. The credit union law was enacted in 2002, with the first credit union
licensed in September of that year. From the outset, the focus on development support
for credit unions was on training of credit union staff and members, the establishment of
systems and some limited grant support for equipment.
25. At end-September 2006, there were 32 credit unions with almost 48,000
members and 8,900 loans outstanding (Appendix 4). The large excess of number of
members over number of loans is an indication that credit unions are successfully
attracting savings. At end-September 2006 credit unions served about half as many
small and micro borrowers as the banking system did at end-2004, although with a
smaller average loan size.
26. Although still among the lower ranks of the CIS countries in terms of outreach
(Table 4), Uzbekistan credit unions appear at this point to be among the most successful
in achieving sustainability. In many other countries external finance has been provided to
try to “kick-start” credit unions, but this has frequently served to undermine the principle
of cooperative ownership. In Uzbekistan, the exclusive reliance on member funds5 has
given depositors a reason to take a keen interest in credit union performance as they
wish to safeguard their personal investment by ensuring the election of well-qualified
directors and retention of competent staff. The USAID funded support for Uzbekistan
credit unions is no longer being provided directly by the World Council of Credit Unions
5
Although ADB’s Small and Microfinance Development Project includes a component to provide
subordinated debt to credit unions, this has, perhaps fortunately, not been advanced.
9
(WOCCU), as the Credit Union Association of Uzbekistan has evolved into a second-tier
organization, or apex, to provide support and services to individual credit unions.
Table 4. Credit Unions in Selected CIS Countries, end-2005.
Penetration Assets
Number Members
(members, percent of population) ($US millions)
Georgia 56 5,710 0.06 1.3
Kazakhstan 136 n.a. n.a. 256.4
Kyrgyz Republic 320 28,972 0.56 15.8
Moldova 504 96,299 2.84 18.6
Russia 213 277,776 0.19 141.1
Ukraine 746 1,297,000 2.76 409.3
Uzbekistana 32 47,876 0.18 10.4
a. end-September 2006.
Sources: World Council of Credit Unions, Credit Union Association of Uzbekistan, National Bank of the
Kyrgyz Republic, Kazakhstan Agency for Financial Supervision, International Monetary Fund.
Microfinance Organizations
27. The first specialized microfinance organizations were established in Uzbekistan
in 1998 with United Nations Development Program assistance. Subsequent support from
other external funding agencies led to additional NGO-sponsored microfinance
organizations, peaking at 14 in 2005, with nine of these still operational at end-October
2006. Some microfinance organizations closed down for a variety of reasons, including
an uncertain legal environment and generally challenging business conditions,
operations not sustainable without ongoing sponsorship, and employee fraud and loan
losses.
28. Collectively, the microfinance organizations have a much smaller average loan
size (about $160 equivalent) than either banks or credit unions, and total loans of just
over $3 million equivalent at end–September 2006 (Appendix 5). The small loan size is
in part due to funding constraints, and in part due to targeting very small and start-up
businesses. Banks and credit unions cater to more established micro and small
enterprises. Until November 2006, microfinance organizations operated under a legal
framework that limited funding to donor grants and their own resources. Some existing
microfinance organizations have achieved sustainability, with income sufficient to
finance ongoing activities, while others are still dependent on donor support. The
outreach is greater than for either banks or credit unions with microfinance organizations
serving over 20,000 active borrowers.
B. Regulation and Supervision
29. While the nature and quality of regulation and supervision varies from sector to
sector, there is an overarching need for further evolution towards a risk-based prudential
approach. The legacy of blurred lines between the supervisory authority and the
industry, a focus on regulatory compliance and a history of direct oversight and
intervention in management decisions remains evident in the activities of the CBU, State
Insurance Supervision Board (SISB) and the Centre for Coordination and Control of
Securities Markets (CCCSM). Effective risk-based supervision will also require
enhancing the risk-management capacity of financial institutions.
10
The Banking System
30. The legal regime for bank supervision is based on the law on Banks and
Banking, 1996, with a number of subsequent amendments, and over 200 instructions,
regulations, resolutions of the President and Cabinet of Ministries and normative
documents of the CBU. In common with the banking laws of many CIS countries, the
Uzbek law has virtually no reference to risk management standards or risk-focused
supervision, which has become a cornerstone of international best practices. Some
areas of risk management are addressed by prudential norms, but the basic legal
framework is more oriented to regulatory compliance than towards risk management.
31. Frequent amendments to laws and issuance of new resolutions makes regulatory
compliance a continually moving target for Uzbek banks. In part, this is due to the policy
formation and legal drafting process, which does not necessarily include consultation
with the banking industry. Prudential requirements for Uzbek banks are based on
international standards, and in many instances are more stringent than the minimums
required by international best practices. While the prudential norms are sound, and bank
reporting in most cases indicates comfortable margins above the required minimums,
the evidence suggests that the banking system has much less resilience than the
numbers indicate. For instance, the prevailing standard for loan classification and
provisioning makes it likely that earnings and capital are overstated.
32. The CBU devotes about 70 staff to supervision, divided into departments for on-
site (Inspection) and off-site supervision (the Licensing Department undertakes ongoing
off-site supervision in addition to its responsibilities for licensing). The CBU has received
extensive technical assistance to support the development of prudential standards and
supervision methodology. Bank reporting requirements are extensive, with the CBU
using an automated system to process daily balance sheet and transaction reports for
every branch of every bank. The detail of daily reporting by banks and analysis by the
CBU is evidence of the extensive focus on regulatory compliance, as a risk-based
approach to supervision relies on verification of the adequacy and implementation of
banks’ own policies and procedures rather than extensive review of individual
transactions.
Insurance
33. The legal framework for insurance has significant deficiencies with respect to
prudential standards and the independence, resources and powers of the supervisory
agency. The Law on Insurance Activity, 2002, which replaced the Insurance Law of
1993, establishes the broad legal framework for general insurance, with rule-making and
enforcement powers delegated to the Cabinet of Ministries. Technical assistance had
been provided by the ADB for drafting the insurance law,6 but the version of the law
ultimately enacted does not include a number of key elements from earlier drafts,
especially with respect to establishment of a regime for prudential regulation and
supervision.
34. The new law divided the insurance market into life and non-life segments but
there are no further legislative acts regulating life insurance. Definitions of classes of
insurance were taken from European regulations with the aim of bringing the insurance
legislation in line with European standards in the longer run. In addition to the Law on
Insurance Activity, Chapter 52 of the Civil Code deals with insurance contracts. This
6
TA 3488-UZB Development of the Insurance Industry.
11
chapter has proven problematic for the insured public since it has provided a legal basis
for insurance companies to dishonor claims on technical grounds.
35. The Insurance Law provides that the supervision function is to be assigned to a
government body determined by the Cabinet of Ministers. Gosstrakhnadzor, which is the
State Insurance Supervisory Board (SISB) established under the Ministry of Finance,
was responsible for supervision pursuant to the 1993 insurance law and continues to
exercise this function. The authorized staff complement is 15 organized into two
departments: Licensing and Inspections; and Methodology. Currently seven positions,
including that of the agency head, are vacant. Its functions are very wide and include the
representation of all parties involved in insurance activity including the companies and
policyholders, the development of insurance related legislation, and policyholder
protection. Some of these activities, such as representing industry interests, go much
beyond the conventional role of the regulator and potentially conflict with other activities
such as policyholder protection.
36. The head of the SISB is appointed by the Cabinet of Ministers and is subject to
removal at any time, thus not having the fixed term appointment advocated by
international standards to provide operational independence. Due to limited staff and
budget, the SISB frequently draws on staff from the Ministry of Finance to fulfill its
functions. The only remedial action currently available to the SISB is the ability to
suspend a company’s license for up to ten days. Further supervisory action can only be
pursued through the courts. These arrangements fall well short of international best
practices requiring an independent supervisory agency with adequate resources to
pursue a clear mandate to ensure prudential soundness of the industry and policyholder
protection.
Leasing
37. A legal foundation is provided by the 1999 Law on Leasing. This law was
amended in 2002, together with amendments to the Civil Code to address uncertainties
and conflicts between the two laws. The Tax Code was similarly amended to harmonize
with the criteria and classifications situated in the Law on Leasing. The Code of
Economic Litigation Procedures, amended in 2003, provides for the repossession of
leased assets. This framework, which appropriately does not include prudential oversight
of specialized leasing companies, provides an overall favorable environment for the
development of the leasing market, evidenced by the entry of three new specialized
leasing companies and nine banks into the leasing market since the reforms of 2002-
2003.
Capital Markets
38. The 1993 Law on Securities and the Stock Exchange and the 1994 Law on The
Mechanism of the Securities Market provide a basic legal framework for capital markets
in Uzbekistan. The CCCSM is the regulatory authority for the securities markets. It is a
state body attached to the State Property Committee, which is by far the largest
shareholder and seller of stocks. This arrangements harbors the potential for conflicts
between capital markets development objectives and the regulatory objective of investor
protection on one hand, and privatization objectives of maximizing the returns to
government on the other hand. There are no self-regulatory organizations in the
generally accepted sense, although there is a national organization of investment
institutions which functions as an industry association. Accounting and disclosure
12
standards do not conform with international practices, making it difficult for potential
investors to asses the risks of corporate bonds or equities.
Microfinance and Credit Unions
39. The legal regime for microfinance is still very much a work in progress. The law
on microfinancing introduced in September 2006 is very general, with the detail to be
contained in regulations yet to be implemented. It is noteworthy that the law mandates
the CBU to establish a licensing mechanism without providing detail on this mechanism.
The revocation of the interim legal framework for microfinance organizations before the
new licensing regime was developed and established, and absence of transitional
provisions means that the current small base of microfinance activity is continuing to
shrink. The microfinance organizations existing prior to the introduction of the new law
are now in a state of legal limbo. The interim legal arrangement provided by Resolution
309 of the Cabinet of Ministries was repealed by Resolution 225 on 31 October 2006,
but the procedures for licensing under the new law are not yet in place. The net result
may be that all pre-existing microfinance organizations effectively wind-down, with some
subsequently re-establishing under the new legal regime.
40. The credit union law and prudential standards introduced in 2002 are generally
appropriate, reflecting accepted international standards and best practices. Prudential
reports are required on a monthly basis, and the CBU undertakes a program of off-site
analysis, with annual on-site examinations of all credit unions. The Credit Union
Association has proved a useful vehicle for dialogue between credit unions and the CBU
on regulatory issues.
41. Many of the legal concerns for microfinance organizations and credit unions
originate with the legal framework more broadly applicable to commercial activities. Like
their micro and small business clients, credit unions and microfinance organizations are
subject to regulations establishing daily cash limits for businesses, with the requirement
that all cash receipts be deposited daily in a bank account. The inability to hold cash to
meet requirements for loans disbursements or, in the case of credit unions, cash
withdrawals, is an administrative impediment to their development. Similarly, the
requirement to disburse loans exclusively by bank transfer is an obstacle to the very
small loans issued by microfinance organizations given high transactions costs.
C. Policy Issues
42. The current approach to financial sector development in Uzbekistan provides
mixed messages to the users and providers of financial services. These have resulted in
limited deepening of the financial sector despite the recent strong overall economic
growth. Greater financial intermediation is required to further accelerate growth, and
perhaps more importantly, position the economy through greater diversification to deal
with down-cycles in commodity prices, to which Uzbekistan remains vulnerable given its
economic structure.
Demand for Credit
43. Estimates of demand for credit vary, but it clearly far outstrips supply. Since
government directly or indirectly owns more than 80 percent of the equity of all joint-
stock companies, the bulk of the private sector demand for credit comes from the 2.8
13
million individual entrepreneurs in Uzbekistan,7 253,300 micro enterprises and 15,300
small enterprises. While a significant number of these individual entrepreneurs and
businesses are wholly self-financed, if even 25 percent require credit8 there are almost
770,000 potential small and micro-business borrowers.
44. There is additional demand in the agricultural sector, notwithstanding
government’s targeted financing programs, illustrated by the fact that about 10 percent
of credit union loans are advanced for agricultural purposes. About 80 percent of the
agricultural sector’s contribution to GDP is accounted for by small-scale
entrepreneurship, suggesting that a significant portion of the 160,000 collective and
dekhan farms (a family small-scale business involved in production and sale of
agricultural products) are potential small and micro-finance borrowers.
45. Considering individual, small and micro-enterprises and small-scale agriculture,
the total number of potential private sector borrowers is conservatively in the range of
800,000, concentrated in the micro and SME segments. With fewer than 50,000 micro
and SME borrowers currently served (Table 5), there is clearly an enormous unmet
demand for small and micro-credit. If the average loan size were $1,000,9 unmet
demand exceeds $800 million, or about one quarter of the total loan portfolio of the
banking system.
Table 5. Serving the small end of the market, end-September 2006
Number of borrowers Sums (million) US$ (million)b
Banks’ micro-credit portfolio 16,200 a 46,600 37.3
Credit unions 8,901 13,059 10.4
Microfinance organizations 20,482 4,107 3.3
Total 45,583 63,766 51.0
a
end-2004.
b
1$US = 1250 sums
Sources: Central Bank of Uzbekistan, Credit Unions Association, Microfinance Association.
46. Survey results indicate that access to credit is a much larger obstacle to business
than high borrowing rates.10 This is confirmed by the rapid growth in credit union lending
7
Survey data for 2004 estimates a much higher number, 4.7 million. The Asian Development
Bank (ADB) Private Sector Assessment, relying on data from the State Committee on Statistics,
cites 2.8 million at end 2003. Clearly, the demand for credit could be much higher than the
conservative estimate provided above. Centre for Economic Research, 2005, “Microfinance
Development in Uzbekistan” (Tashkent).
8
Surveys provide varying results, but generally indicate that between one-third and two-thirds of
businesses and entrepreneurs in Uzbekistan desire external financing. See Mario B. Lamberte
and Mariano Cordero “Rural Finance in Uzbekistan” in Mario B. Lamberte, Robert C. Vogel, Tom
Moyes and Nimal A. Fernando, eds. 2006, Beyond Microfinance: Building Inclusive Rural
Financial Markets in Central Asia, (Manila: Asian Development Bank), and Centre for Economic
Research, 2005.
9
Larger than microfinance organization loans, but still less than the average for credit union loans
and banks’ small and microfinance loans.
10
The survey was undertaken by the Center for Social and Economic Research. Difficulties in
getting a loan and lack of working capital were cited as main issues by over half of survey
respondents, while the cost of credit was cited by only six percent. Almost 30 percent of
respondents would have been prepared to pay interest rates of 3 or 4 percent per month, with
over 20 percent prepared to pay monthly rates of 5 percent or more. Source: Centre for Social
and Economic Research, 2005.
14
despite interest rates far in excess of those charged under various policy lending
programs, and the fact that banks, particularly the small private banks with less access
to government funding, charge significantly higher rates for lending their own resources
than lending under government programs (Appendix 3).
Financial Sector Issues for Private Sector Development
47. Some financial-sector specific issues need to be addressed on a priority basis as
part of the government’s ongoing efforts to reduce the bureaucratic burden on
businesses. Key policy changes that would help the financial sector better support
private sector development include:
(i) Removal of the system of daily cash limits for businesses; Formatted: Bullets and Numbering
(ii) replacement of the requirement for all business-to-business transactions
to be conducted electronically with a limit on the maximum size of cash
transactions;
(iii) placing the onus for tax payment on the tax payer, and cease the practice
of requiring banks to provide customer information to third parties such as
the revenue authority; and
(iv) timely processing of foreign exchange purchases.
48. In addition to these reform measures, the government will need to continue with
efforts to reduce the bureaucratic burden on businesses. The 2001 introduction of a “one
window” system for new businesses to obtain registration, certifications and permits was
a step in the right direction. However it still takes on average 19 days to register a
business and a further 17 days to obtain necessary permits and approvals.11 There is
clear scope to further streamline these processes.
Banking
49. The non-bank functions performed by commercial banks and channeling of funds
to so called priority sectors and borrowers through preferential financing programs has
limited the growth of savings intermediation. The small private banks and credit unions,
which are less involved in these directed activities, are growing rapidly, in contrast to the
banking system as a whole. This suggests that separation of policy functions from
intermediation would spur development of the financial sector and contribute to stronger
growth.
50. Government policy lending needs to be separated from commercial banking so
that the commercial banks, whether government owned or private, have a clear focus on
savings mobilization and investment on commercial terms. This could be accomplished
in two ways. One is to re-designate an existing bank as a development bank,
transferring its commercial business to another bank, and transferring policy lending
from other state banks to the development bank. The other option is to create a new
development bank to assume state-banks’ policy functions. Under either option, the
process could be phased, starting first with one bank. Starting with NBU offers the
opportunity to remove the majority of policy lending from the commercial banking
system, but it would also be possible to begin with one of the smaller banks, treating it
as a pilot project. Given the dominant role of NBU, ultimately NBU has to be transformed
to ensure that the reforms have a significant impact on the banking system.
11
International Finance Corporation, 2005, Business Environment in Uzbekistan as Seen by
Small and Medium-Sized Enterprises (Washington: IFC).
15
51. Bringing more savings into the formal banking sector requires policy measures to
encourage rather than mandate the use of the banking system. The requirement to use
the banking system for financial transactions has been primarily motivated by concerns
over revenue collection and the administration of financing programs. The resulting
intervention by commercial banks in entities’ financial management, debiting of banks’
customer accounts without the knowledge and consent of the account holders, and
sharing of bank client information with various authorities all provide incentives for
business and individuals to avoid the formal banking sector.
52. Funding provided under Government programs and the potential availability of
large deposits from government-related entities is a disincentive for banks to
intermediate household and small enterprise deposits. It is less costly for banks to target
large deposits from government organizations and state-owned enterprises rather than
developing capacity for large-scale mobilization of small deposits. State-owned banks
faced with capacity constraints are likely to focus on delivery of Government policy loans
and externally funded programs, and devote fewer resources to commercial lending.
53. There is a need over the medium term to review the existing legal framework for
banking to identify and remove inconsistencies, and to introduce the elements of best
practices that have developed since the original introduction of the banking law in 1996.
While the oversight of banks comes closer to international best practices than the
current approaches to insurance and capital markets, there is still room for improvement.
Reduction in the frequency of legal changes and improvement in the consultation and
drafting process would facilitate regulatory compliance. Introduction of a greater
emphasis on risk management and risk-focused supervision would enhance the
environment for private sector intermediation. Greater transparency and disclosure
would help foster market discipline as a necessary complement to prudential oversight.
Insurance
54. A sound system of regulation and supervision is required to establish a base for
development of the insurance industry. The existing law needs significant amendment to
address deficiencies in prudential standards for insurance companies, and to establish a
supervisory authority with the independence and resources required to meet
international best practices codified in the International Association of Insurance
Supervisors Core Principles. Amending the legal framework can take place over a year
or two, but building supervisory capacity will be a medium- to long-term project. It is
important that this work be initiated at an early date so that supervisory capacity is in
place before the insurance industry begins to grow rapidly.
55. Chapter 52 of the Civil Code requires amendment as part of a larger effort to
address the significant imbalance in the current relationship between the insured and
insurance companies. Reducing the scope for denial of claims over narrow contractual
issues would be an important first step in changing the public perception of compulsory
coverages from a tax to an actual purchase of insurance. Concomitant measures should
include the building of capacity within the insurance industry, including the training of
brokers, agents and claims adjusters. Specific issues to be addressed with compulsory
coverages include:
Formatted: Indent: Left: 0.5",
(i) Complete reform of third party liability automobile policies; Space After: 0 pt, Numbered +
(ii) development of a workers compensation scheme managed by the private Level: 1 + Numbering Style: i, ii, iii,
sector; and … + Start at: 1 + Alignment: Left +
Aligned at: 0" + Tab after: 0" +
(iii) establishment of an earthquake facility. Indent at: 0.5"
16
56. A regulatory framework for life insurance needs to be introduced as part of the
review of the legal framework. The currently unregulated purchase by Uzbek residents of
products from foreign companies indicates at least some emerging demand for life
insurance. An appropriate legal basis can help to ensure that life insurance companies
are ultimately able to play a significant role in mobilizing domestic resources and making
them available for productive investment through purchase of debt and equity securities.
Emergence of such institutional investors is a key element of developing domestic
capital markets.
57. Establishing an independent supervisory authority and building capacity will
take time, but this work needs to be initiated now to avoid a “boom and bust” cycle.
Privatization of the state-owned insurance companies without an effective supervisory
regime in place presents a greater risk of failures, which would further undermine the
limited confidence of the public in insurance companies’ claims paying ability. There has
been little interest expressed by foreign insurers in investing in Uzbek insurance
companies. This may change with improvements in the legal and policy framework.
However, in the near to medium term Uzbek companies will be faced with the difficult
challenge of building expertise in risk management without the benefit of significant
knowledge transfer from foreign companies operating in Uzbekistan.
Pension Funds
58. Introduction of the Pension Accumulation Fund was a positive step that should
be followed by additional measures. First, the arrangements for oversight and
investment policies of the Fund need to be reviewed to ensure that they are appropriate
for a second pillar pension fund. It will be important that the Fund not become a
“dumping ground” for otherwise unattractive shares of state-owned enterprises, or a tool
for implementing industrial or regional development policies at the expense of prudent
investment decisions. A second step is to expand the range of the “third pillar” options by
introducing a policy framework conducive to private retirement savings in addition to the
current provision for voluntary contributions by entrepreneurs to the Accumulation Fund.
Over time, this could lead to the emergence of institutional investors managing
considerable amounts of long term savings, which would foster capital market
development.
Leasing
59. The existing framework for leasing is broadly appropriate, with the outstanding
issues relating more to problems with general commercial activities than with the legal or
tax provisions for leasing. There is considerable ambiguity over what qualifies as
imported “technological equipment” and is thus exempt from customs duties and VAT.
There is also a lacuna in the leasing law as it does not provide for secondary leasing,
thus not permitted a lessor to re-lease equipment in the event the original lessee
defaults.
Capital Markets
60. Development of the capital markets has been limited by the pace of privatization.
Government still controls over 80 percent of all joint-stock company equity, indicating
that the private capital markets currently serve only a very small portion of the economy.
Thus, while the measures noted below are important, without additional privatizations to
increase the size of the private sector and the supply of equities and corporate debt,
17
capital market growth will continue to be slow. Key capital market development
measures are:
(i) Establish an appropriately independent supervisory authority meeting the Formatted: Bullets and Numbering
standards established by the International Organization of Securities
Commissions;
(ii) build capacity in the authority and the industry, including stock
exchanges, brokers, and other professional market participants;
(iii) enhance the application of governance, accounting, and disclosure
standards to reduce the risk of investing in Uzbek companies; and
(iv) continue with the development of the pension and insurance sectors so
that over time institutional investors will emerge.
61. Enhancing the quality of capital market supervision will provide a sound
framework for the market development over the longer term, helping to establish and
maintain investor confidence. There is also a need to educate the general public about
securities markets in order to attract private savings. In addition to these policy
measures, there are also specific technical requirements to enhance the trading systems
for government debt and the systems of the TRSE to reduce operational, clearing and
settlement risk.
Microfinance and Credit Unions
62. The uncertainty over the transitional provisions for NGO-sponsored microfinance
organizations to obtain a license under the new law and regulations means that lending
will be sharply curtailed, at least for an interim period. However, with greater legal and
policy certainty there is potential to expand microfinance activities to levels more
commensurate with those elsewhere in the region. Government will need to match its
expressed commitment to microfinance with:
(i) Clear and comprehensive regulations and licensing procedures to Formatted: Indent: Left: 0.5",
complement the 2006 Law on Microfinance; Space After: 0 pt, Numbered +
Level: 1 + Numbering Style: i, ii, iii,
(ii) clarification of the transition provisions for microfinance organizations … + Start at: 1 + Alignment: Left +
previously operating under resolution 309; and Aligned at: 0" + Tab after: 0" +
(iii) a supervisory regime consisting only of licensing, reporting and consumer Indent at: 0.5"
protection such as “truth in lending” disclosure, reflecting that
microfinance organizations, by virtue of not accepting deposits, do not
require prudential regulation.
63. The short history of credit unions in Uzbekistan has been very positive, which is
in part attributable to the establishment of a broadly appropriate framework for regulation
and supervision at a very early stage of sector development. While there are some
issues under discussion between the Credit Union Association and the CBU, the
principal policy requirement for further development is to continue to permit credit unions
to operate without direct government intervention. Unlike banks which have been
directed to provide financing to selected sectors and qualifying businesses at subsidized
rates and rely extensively on Government or other external finance, credit unions have
been free to lend on the basis of their own credit assessments and charge market-
determined rates of interest. The requirement to mobilize their own member resources
for lending has helped to ensure close member oversight of the credit union, and initial
success has helped to attract additional deposits.
18
D. Key Elements of a Financial Sector Strategy
64. A strategy for financial sector development has to be integrated with an overall
approach to private sector development. There is a symbiotic relationship between the
financial sector and the real sector, with policies to support growth in one also benefiting
the other.
Reduce Direct Government Interventions
65. The focus of financial sector policy and private sector development more
generally needs to be on establishing conditions conducive for business. Coherent
policies, a legal framework that changes only after consultation with affected
stakeholders, and consistent interpretation and application of laws and regulations will
benefit both the financial sector and the private sector more broadly. Within the financial
sector specifically, there is limited scope for state-owned institutions and government
funding to meet the demand for credit, and coercing or co-opting banks to target specific
sectors or products has had limited success and imposes otherwise avoidable risks on
the banking system. Recognizing this, the Government should look to increased private
intermediation rather than new or expanded specialized programs and state-owned
institutions to meet the real sector’s financing needs. In addition, further progress with
privatization will reduce direct Government participation in the real sector.
Establish a Foundation of Sound Regulation and Supervision
66. One benefit of the gradual pace of financial sector reform in Uzbekistan has been
success in implementing some elements of international best practices in regulation and
supervision prior to the establishment of large privately owned banks. However, there is
significant scope and need to enhance the legal framework and practice of supervision.
While banking supervision is more advanced than insurance or capital markets
oversight, the much larger size and systemic importance of the banking sector means
that the need for continued enhancement of banking supervision is just as imperative.
There is a need for a comprehensive review of the legislation for banking, insurance and
the capital markets, significant upgrades in the independence and capabilities of the
non-bank supervisory authorities, and an overall enhancement of the focus on risk-
management and risk-based supervision rather than compliance oriented supervision.12
Banking Sector Reform
67. Since the banking sector is by far the largest component of the financial system,
bank reforms offer the potential for the most immediate and largest benefit for the real
sector. Two key structural reform measures are needed:
(i) Eliminate the intrusive non-bank functions performed by the banking Formatted: Bullets and Numbering
sector, including acting as agents for tax collection and the execution of
government policies, and direct intervention into the financial
management of enterprises; and
12
The older compliance-based approach relies on highly prescriptive regulations, with the
activities of the supervisory authority focusing on ensuring compliance through regular review of
individual transactions and activities. In contrast, a risk-focused approach places the onus on the
board of directors and management of a financial institution to establish policies and procedures
that enable the financial institution to comply with standards of sound business practice. The
more modern risk-focused approach to supervision relies extensively on verifying the existence
and adequacy of an institution’s own policies and procedures rather than individual transaction
review.
19
(ii) separate policy lending from commercial banking.
68. The first measure would remove one of the major incentives for individuals and
businesses to avoid using the formal banking sector. The second would enable
commercial banks to focus on lending on market terms and conditions unfettered by the
need to deliver policy loans. Establishment of a specialized development bank funded by
government could provide a vehicle to continue to deliver policy loans if the authorities
wish to continue this practice, while also transparently accounting for the fiscal cost of
government programs.
69. The separation of policy lending from commercial lending would be a step
towards the previously announced divestiture of significant shares of Asaka Bank and
NBU. A further measure to reinforce the separation of policy lending from commercial
lending would be the divestiture of the government’s remaining share in banks
previously partially privatized.
Non-Bank Financial Sector Reform
70. While the non-bank financial sector is small relative to the banking sector and in
absolute terms, it would be a mistake to neglect it for at least two main reasons: First,
growth and development of well-functioning non-bank financial institutions, including not
only capital markets and institutional investors, but also microfinance institutions and
credit unions, generates significant economic and social benefits. Second, the
development of a balanced financial system makes the corporate and financial sectors
more resilient to shocks by reducing systemic vulnerabilities in a bank-dominated
financial system.
71. For insurance and capital markets, the establishment of a solid framework for
regulation and supervision should be the first priority. Sequencing of reforms—focusing
first on the legal framework and practice of supervision—will help to avoid costly
institutional failures. Privatization of state-owned insurance companies can be
addressed over the medium term. Significant growth in capital markets activities cannot
be expected until there has been expansion of the private sector through further
privatization and organic growth of existing private enterprises.
72. For credit unions and leasing, the key is to permit these sectors to continue to
develop without being subject to direct policy interventions. The approach to licensing
and oversight of microfinance organizations now being introduced should result in a
regime emphasizing only registration and reporting, reflecting that institution not taking
deposits do not require prudential regulation.
APPENDIX 1. BANKS IN UZBEKISTAN
Bank State-ownership Deposits Assets
Headquarters Legal structure Staff Branches Minibanks
(end-2005 data) (includes indirect) (sum billions)
National Bank of Uzbekistan Tashkent State joint-stock 100 percent 6201 93 56 743 2,886
Asaka Bank Tashkent State joint-stock 100 percent 2365 27 71 231 599
UzPromstry Bank Tashkent Joint-stock 33 percent 3981 46 72 309 522
Pakhta Bank Tashkent Joint-stock 28 percent 8108 183 618 186 357
Ipoteka Bank Tashkent Joint-stock 43 percent 4338 39 130 212 272
Khalk (Peoples) Bank Tashkent State joint-stock 100 percent 10845 199 183 89 191
ABN AMRO Bank Uzbekistan Tashkent Foreign subsidiary 18 percent 52 1 0 88 104
Ipak Yuli Bank Tashkent Joint-stock 24 percent 459 4 14 50 72
Gallabank Tashkent Joint-stock 48 percent 1615 32 72 23 72
Hamkorbank Andijon Joint-stock 838 22 42 35 61
UzKDB (formerly UzDaewoo) Tashkent Foreign subsidiary 5.5 percent 81 0 2 43 58
Microcredit Bank Tashkent Joint-stock 90 percent 2911 75 161 25 55
Kapital Bank Tashkent Joint-stock 476 2 19 32 53
Savdogar Bank Tashkent Joint-stock 0.5 percent 1408 35 50 30 49
Turon Bank Tashkent Joint-stock 10 percent 996 18 40 35 47
Credit Standard Bank Tashkent Joint-stock 88 1 0 35 46
Aloqabank Tashkent Joint-stock 52 percent 722 12 17 28 34
Exchange Trust Bank Tashkent Joint-stock 301 2 5 27 30
ALP Jamol Bank Tashkent Region Joint-stock 298 3 7 17 22
RavNAQ Bank Tashkent Joint-stock 127 0 2 13 21
Parvina Bank Samarkand Closed joint-stock 279 4 27 12 20
Uzbekistan-Turkish Bank Tashkent Foreign subsidiary 92 0 0 10 17
Bank Saderat Iran Tashkent Foreign branch 28 0 0 1 11
Universal Bank Kokand Joint-stock 148 2 6 2 5
Uktambank Qarshi Joint-stock 81 0 7 1 4
Davr Bank Tashkent Closed joint-stock 56 0 0 2 3
Turkison Bank Tashkent Joint-stock 105 0 2 1 2
Samarkand Bank Samarkand Joint-stock 19 0 1 0 1
Sources: Central Bank of Uzbekistan and commercial banks.
APPENDIX 2. LARGE BANKS
The six largest banks, of which three are wholly or majority owned by government and three
have significant government minority holdings, account for about three-quarters of bank
deposits and over 90 percent of loans.
National Bank of Uzbekistan, 100 percent owned by the Ministry of Finance, finances large
investment projects in priority sectors and administers the majority of credit lines provided by
International Financial Institutions (IFIs). It has a network of 100 branches and 56 mini-
banks (sub-branches usually staffed by up to three employees providing deposit and
payments services, and accepting loan applications which are adjudicated at a branch)
covering all regions of the country. It accounts for almost two-thirds of banking sector loans,
90 percent of which are government guaranteed under various financing programs.
Asaka Bank, 98 percent held by the Ministry of Finance and indirectly 100 percent owned by
government, is the second largest bank accounting for just over 10 percent of banking
sector assets. Like all the state-owned banks it has a universal banking licence and thus
serves all sectors of the economy, however, its core business continues to be serving the
automotive sector, including providing low interest rate loans to finance UzDaewoo car
purchases. It has 27 branches and 71 mini-banks.
UzPromstroy Bank, with a 33 percent government shareholding, mobilizes a larger share of
deposits than the large wholly government-owned banks, accounting for about 13 percent of
total bank deposits, but only about 9 percent of assets. UzPromstroy Bank historically has
focused on large industrial and construction enterprises with a network of 46 branches and
72 mini-banks.
Pakhta Bank historically served the cotton sector and related agricultural enterprises.
Although only 28 percent government-owned, it continues to play a central role in
channelling agricultural credit, evidenced by the fact that it’s deposits comprise only about
half of it’s funding base and are less than total loans extended. Pakhta Bank has also
spearheaded government efforts to extend banking services in rural areas, with over 600
mini-banks, accounting for more than a third of all mini-banks in the country, although it has
only about 6 percent of total banking assets.
Ipoteka Bank, with a 43 percent state-shareholding was formed in 2005 through the merger
of two other banks to provide mortgage financing at preferential rates. It has about a five
percent market share, and in contrast to the other large government-controlled banks has a
loan to deposit ratio of only 62 percent, likely because mortgage lending has not yet
developed into a major activity.
Khalk (Peoples’) Bank, 50 percent owned by the Ministry of Finance and 50 percent by the
CBU, provides basic banking services including deposits and transfers, utilities payments,
foreign exchange transactions and payment of state-pensions and through a network of 199
branches, 183 mini-banks and 2350 retail service points. Despite the breadth of coverage,
its focus on small deposits and transactions services is evident in its relatively small market
share—3.4 percent of total assets.
22
APPENDIX 3. FUNDING SOURCES AND INTEREST RATES
Suppliers Interest Rates
Commercial Banks
Commercial lending 18 – 24 percent, or more
Policy lending
Fund for the support of employment 16 to 45 percent of CBU refinance rate*
depending on the purpose
Fund for preferential lending 50 percent of CBU refinance rate
Fund for the purchase of agricultural products 3 percent per annum
Fund for the promotion of dekhkan and farming entities 16 to 40 percent of CBU refinance rate,
depending on the purpose
Centralized financing for construction 2 percent
Mortgage lending fund 5 percent
Purchase of terminal for acceptance of plastic card 50 percent of CBU refinance rate
payments by retailers and service providers
Asaka Bank
Loans for purchase of Uzdaewoo cars 4 to 7 percent per annum, depending on
the term
Microcredit Bank
Business start-up 5 percent
Micro-leasing 50 percent of CBU refinance rate
Expansion and working capital Not higher than CBU refinance rate
Credit unions 24 to 60 percent per annum
Microfinance organizations 24 to 72 percent per annum
*CBU refinance rate at end-2005, 16 percent.
Sources: Decrees, resolutions, regulations, Central Bank of Uzbekistan, banks, credit unions, microfinance
organizations.
23
APPENDIX 4. CREDIT UNIONS
(end-September 2006)
Assets Loans Deposits Capital
№ Credit Union Region Sum Sum Sum Sum Members
Number Number
(000s) (000s) (000s) (000s)
1 Sherdor Samarkand 1,292,538 211 1,067,377 580 1,035,338 222,907 5,736
2 Umid Buhara 817,461 397 645,367 598 610,792 185,374 3,488
3 Marvel Namangan 45,411 26 38,076 4 6,180 38,230 132
4 Lastochka Navoiy 1,540,532 635 1,075,974 723 693,717 758,816 2,414
5 Ishonch Djizzak 742,726 369 680,775 323 571,704 120,255 3,022
6 Tayanch Namangan 354,226 375 349,769 237 307,801 34,448 1,795
7 Hazina Samarkand 339,920 131 284,156 144 266,039 62,678 3,820
8 Madadkor Andijan 967,711 482 896,029 668 757,568 178,747 3,586
9 Baraka Tashkent city 485,901 518 493,314 96 417,348 45,594 1,093
10 Buhoro tadbirkori Buhara 486,140 210 410,876 330 385,440 92,724 1,888
11 Kapital Union Tashkent city 290,155 137 272,172 17 30,895 53,437 301
12 Oltin vodiy Fergana 923,765 848 856,977 677 758,846 141,733 2,922
13 Omad Sirdarya 118,786 118 104,357 37 90,765 25,590 1,618
14 Asr Andijan 840,468 815 785,725 448 559,243 192,110 5,096
15 Finans plus Tashkent city 171,708 61 152,519 60 137,685 30,954 284
16 Avitsenna Buhara 230,795 149 198,082 130 167,658 57,766 1,592
17 Nurafshon Fergana 439,637 395 387,689 164 321,776 102,590 1,742
18 Aziya Trast Tashkent city 1,196,269 260 1,078,476 277 983,105 193,267 588
19 Imkon Tashkent city 1,475,382 1,544 1,374,101 159 1,045,191 256,639 2,087
20 Universitet Tashkent city 139,235 88 113,280 50 98,562 33,648 554
21 Inom Djizzak 187,538 140 172,421 55 143,292 38,216 398
22 Kesh Kashkadarya 55,532 51 46,772 15 35,685 16,945 216
23 Farovon Surhandarya 121,402 55 98,235 22 92,419 25,198 379
24 Kredo Buhara 83,051 75 80,085 57 62,820 18,177 238
25 Jahon Andijan 754,482 368 707,693 305 613,987 110,051 741
26 Poytaht Invest Tashkent city 229,380 68 173,150 40 110,226 96,849 140
27 Mehribon Namangan 34,381 38 29,175 0 0 32,744 1,207
28 Mador Fergana 322,710 250 307,384 131 262,830 51,926 456
29 Tashabbus Fergana 59,247 39 53,125 27 39,800 18,057 116
30 Tezkor-kredit Tashkent city 163,685 34 100,031 38 137,631 24,029 98
31 Agrosanoatfinans Andijan 14,713 8 14,350 1 700 13,995 62
32 Tashrif Fergana 21,181 6 11,800 3 8,700 11,851 67
Total 14,946,068 8,901 13,059,313 6,416 10,753,743 3,285,547 47,876
Sources: Central Bank of Uzbekistan, Credit Unions Association of Uzbekistan.
24
APPENDIX 5. NGO- SPONSORED MICROFINANCE ORGANIZATIONS
(includes only Microfinance Association member, end-September, 2006)
Loans
Average
Service Assets Loan
Name Region(s) Staff Active Outstanding
Locations (sum) Size
Borrowers (sum 000)
(sum
000)
Samarkand
Centre for city and
Social- 4 sub-offices
Samarkand
Economic rural areas 38 178,727,618 122 15,298 125
region
Development of
"SABR" Samarkand
region
Karakalpak
Branch of the
Business
Women's Republic of
Nukus city 40 n.a. 5,182 486,676 93
Assosiation of Karakalpak
Uzbekistan
"Tadbirkor
Ayol"
Republic of
Nukus city,
Karakalpak,
Muynak city,
JDA Surhandarya
Termiz city, 12 73,358,158 380 61,358 217
International and
village
Samarakand
Karnab
regions
Kungrad,
Kanlikul,
Shumanay,
Republic of
NGO "Daulet" Hodjeliy, 45 794,215,443 6,388 640,464 100,
Karakalpak
Kegeliy,
Chimbay
Districts
FVRM-
Fergana Valley Andijon 53 1,618,147,144 3,703 1,422,595 520
Uzbekistan
Tashkent
Tashkent,
city
Fergana,
Fergana city
PAD Surhandarya,
Termez city 30 n.a. 759 471,020 620
Microfinance Samarkand,
Samarkand
Kashradarya
city
regions
Karshi city
FINCA Tashkent
Tashkent city 43 1,051,959,670 3,948 1,010,360 255
International city
Total 261 3,716,408,033 20,482 4,107,774 1,933
Source: Microfinance Association of Uzbekistan.
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