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Tajikistan’s Banking Sector Faces Challenges Amid Legacy of Directed Lending

Dushanbe - Tajikistan’s banking sector is struggling to overcome the legacy of directed lending, which has led to misallocated credit and economic costs. According to a recent report by the International Monetary Fund (IMF), the country’s largest bank, Agricultural Insurance Bank (AIB), has been forced to fully provision for its losses, bringing the specific provisions to non-performing loans ratio to 60.75%.

The Impact of Directed Lending

  • AIB’s loan book is heavily weighted towards non-performing loans, which could have reduced annual GDP growth by as much as 0.25 percentage points.
  • Restructuring AIB could require the injection of public funds equivalent to around 2.5 percent of GDP.

Banking Sector Dominance

Tajikistan’s banking sector is dominated by state-owned banks, with two out of the eight operating insurance companies owned by the government. The report recommends that the supervisory function be moved from the Ministry of Finance to the National Bank of Tajikistan (NBT).

Microfinance Institutions and SME Lending

In contrast, microfinance institutions (MFIs) have experienced sustained growth in recent years, with the largest MFIs competing directly with banks for small and medium-sized enterprise (SME) lending. The MFI sector is concentrated, with the five largest MFIs accounting for around 70 percent of total assets.

Leasing Sector Challenges

The report also highlights the challenges faced by Tajikistan’s leasing sector, which is small and unregulated, making analysis difficult. Banks and MFIs can provide leasing on their books, but the size of their financial leasing transactions is very small.

Insurance Sector Development

In addition to banking, the report looks at Tajikistan’s insurance sector, which is small and underdeveloped. The sector suffers from an absence of actuaries, underwriters, or loss adjustors, and life insurance accounts for less than 2 percent of total gross insurance premiums.

Capital Market Limitations

The capital market in Tajikistan is limited to an emerging government debt market and the NBT’s open market operations. The government securities market is comprised of 91-day treasury bills (T-bills), while the NBT’s open market operations include weekly auctions and instruments with maturities of 7, 14, 28, and 56 days.

Recommendations for Reform

Overall, the report emphasizes that Tajikistan’s banking sector faces significant challenges in overcoming the legacy of directed lending and improving financial stability. It recommends structural reforms to address these issues and promote a more stable and sustainable financial system.