Uzbekistan’s Senate Approves Landmark Banking Law, Marking New Chapter for Financial Sector
Tashkent - In a significant milestone for Uzbekistan’s financial sector, the country’s Senate has approved a package of laws, including a new banking law that represents a major overhaul of the sector. The approval follows a year-long technical cooperation between the World Bank Group and the Central Bank of Uzbekistan (CBU) to strengthen banking regulations and supervision.
A New Era for Banking in Uzbekistan
The new banking law marks a significant shift away from the previous regulatory framework, which prioritized compliance with government policy priorities over financial stability and depositor protection. Under the old system, state banks played a dominant role in channeling funds to priority sectors and firms, often at preferential terms.
Key Features of the New Banking Law
- Prioritizes financial stability and depositor protection
- Establishes a robust “gatekeeper function” for supervising private investors seeking to enter the banking sector
- Emphasizes supervisory judgment in fulfilling the CBU’s mandate, allowing it to exercise discretion in making complex decisions
- Shields the CBU from political and industry pressures
World Bank Group’s Role in Drafting the Law
The World Bank Group (WBG) played a key role in drafting the new law, providing technical assistance to the CBU’s banking supervision department. The WBG team identified several weaknesses in an initial draft of the law and offered support in redrafting it to ensure its alignment with international best practices for banking supervision.
Challenges Overcome
- Establishing a robust “gatekeeper function” to supervise private investors
- Ensuring that these investors meet common fit and proper standards, de facto ownership structures are well-understood and monitored continuously, and related party lending is contained
Impact on Financial Sector Reform
The new banking law is expected to have a galvanizing effect on financial sector reform in the country, marking a significant milestone in Uzbekistan’s journey towards a more market-oriented financial system. The WBG has reaffirmed its commitment to supporting financial sector policy reforms in the country and looks forward to building on the interest shown by Uzbek policymakers.
Looking Ahead
The government’s decision to treat banks differently, rather than viewing them as commercial enterprises, was a major paradigm shift for Uzbekistan. The WBG project team worked extensively with stakeholders, including bankers, lawmakers, ministries, and the media to explain the importance of this approach. With the new law in place, Uzbekistan is poised to take a significant step towards a more stable and sustainable financial system.