Uzbekistan’s Banking Sector on the Brink of Radical Transformation
The government of Uzbekistan has unveiled its latest Banking System Reform Strategy, aimed at liberalizing the industry and introducing greater discipline and transparency over the next five years. This marks a significant turning point in Uzbekistan’s credit sector, which has been undergoing reforms since 2017.
Concentrated Sector Poised for Change
The banking sector is highly concentrated, with 13 of 31 banks currently in government hands, controlling over 87% of equity and holding 85% of all assets. The top three banks - National Bank of Uzbekistan, Asaka Bank, and Ipak Yuli Bank - dominate the market. However, a wave of privatizations is expected to shake things up.
Newcomers Flocking to the Country
New players are entering the market, including:
- Gazprombank from Russia
- KfW Development Bank from Germany
- Commerzbank and Deutsche Bank from Germany
- Ziraat Bank from Turkey
- Korean Development Bank
- Private equity firms like:
- Asia Frontier Capital
- Triodos Investment Management A.G.
- DEG
- ResponsAbility Investments
- Sawada Group
Challenges Ahead
Investing in Uzbekistan remains a risky business. Stress tests have revealed potential hazards in the quality of loans, with non-performing loans doubling since 2018. The government’s co-dependence with banks also means it plays a central role in directing and backstopping the industry.
Despite these challenges, the outlook is positive as the expanding economy can sustain higher levels of credit, while ongoing liberalizations and privatizations will sustain demand for loans and other financial services.
Privatization Agenda Trails
The bank privatization agenda trails on earlier plans to sell off more than 1,000 state-owned enterprises. Over time, cooperation with international financial institutions should help ease some governance problems, but they are unlikely to disappear as they are rooted in historical custom and informal power structures.
Expert Caution
Experts caution that the pace of reforms may be slowed down by issues such as:
- Nationwide 4G coverage
- Quality of governance and transparency
- Nepotism
- Corruption
- Political interference
However, the strong backing provided by key policymakers suggests that the reforms are likely to strengthen the system’s competitiveness and profitability over time.
Conclusion
Uzbekistan’s banking sector is poised for a significant transformation, one that will shape its future trajectory and impact on the country’s economic development. The government’s commitment to liberalizing the industry and introducing greater discipline and transparency bodes well for the sector’s long-term success.