Tajikistan’s Banking Sector: Regulatory Compliance Challenges Ahead

Payment Methods and Trade Finance

As Tajikistan’s economy continues to recover from a troubled past, regulatory compliance has become a major concern for financial institutions in the country. One of the key challenges faced by banks is managing trade finance, which involves complex rules governing foreign exchange controls, non-performing loans (NPLs), and other aspects.

Preferred Payment Methods

While large-scale Tajik firms are familiar with international payment methods such as:

Letters of credit: Despite being a widely used method, letters of credit are often avoided due to high taxation costs.
Documentary collections: This method is also commonly used, but its complexity can be a challenge for some businesses.
Wire transfers: Wire transfers are widely accepted and used for international transactions.
Cash in advance: Some companies prefer to pay cash upfront, which can help reduce the risk of non-payment.

Informal Channels

However, most companies rely on personal contacts and informal channels for financing due to a lack of trust in formal banking systems. This can lead to a high degree of uncertainty and risk for businesses looking to expand their operations.

Banking System Overview

Tajikistan’s banking sector has struggled with a history of government-directed lending, resulting in a high percentage of NPLs “covered” by state interventions. In 2016, two major banks were ordered to be liquidated, and the process remains ongoing.

Key Statistics

Only about 5 million out of 9.7 million residents hold bank accounts.
Many lack confidence in the banking system due to past experiences with government-directed lending and NPLs.

Non-Performing Loans

NPLs have decreased overall since 2016, but credit remains tight due to a high number of banks and low depositors. Microfinance institutions provide some lending at the small and medium enterprise (SME) level, although capital costs are high regardless of the loan originator.

Challenges Ahead

Tajikistan’s banking sector faces significant regulatory compliance challenges, including managing foreign exchange controls, NPLs, and trade finance. While progress has been made in reducing NPLs, credit remains tight due to a high number of banks and low depositors. The country must continue to strengthen its banking system and improve financial literacy among residents to promote economic growth and development.

Foreign Exchange Controls

Tajikistan is subject to International Monetary Fund Article VIII on Foreign Exchange controls. The National Bank of Tajikistan (NBT) maintains a managed float exchange rate regime and intervenes in currency markets on an ad-hoc basis to control inflation and prevent strong local currency devaluation.

Recent Developments

In 2022, the somoni appreciated by over 10% against the dollar due to the strengthening of the ruble from April-October 2022 and inflows of remittances from Russia. This has significant implications for trade finance and foreign exchange controls in Tajikistan.

US Banks and Local Correspondent Banks

The NBT maintains a correspondent bank account with the Federal Reserve of New York, but no commercial banks have U.S. correspondent bank accounts. Sanctions compliance is a serious consideration due to Tajikistan’s trade relationships with sanctioned countries like Iran. The country has relied on correspondent accounts with Russian banks, which declined after the 2022 invasion of Ukraine.