Uzbekistan’s Banking Sector Embarks on Radical Overhaul to Boost Transparency and Growth

In a significant move aimed at liberalizing its banking sector, Uzbekistan has adopted a new Banking System Reform Strategy that is expected to transform the industry over the next five years. The reform strategy, unveiled in December 2020, charts a course for greater discipline, transparency, modernized lending practices, and increased foreign investment.

Background

The overhaul of the banking sector began in 2017 when currency controls were removed, allowing the national currency to float freely. Since then, lawmakers have amended the 1996 Law “On Banks and Banking Activities” to redefine the Central Bank’s role and powers, with an emphasis on price stability and oversight. The new law also allows foreign investors to own up to 5 percent of domestic banks with minimal regulatory approval.

Current State

Despite these reforms, Uzbekistan’s banking sector remains highly concentrated, with a few state-owned banks dominating the market. However, the government has announced plans to privatize several major banks, which is expected to inject much-needed capital and expertise into the industry.

Foreign Investment and Private Equity

The entry of foreign investors is already underway, with Korean and Turkish banks having established a presence in the country since the late 1990s. More recently, Gazprombank from Russia and KfW Development Bank from Germany have been approved to set up local offices.

• Private equity firms are also eyeing opportunities in Uzbekistan’s liberalizing economy.
  • Asia Frontier Capital has launched an Uzbekistan Fund to capitalize on the country’s growth potential.
  • Triodos Investment Management and DEG have acquired minority stakes in Ipak Yuli Bank.

Challenges

Despite these positive developments, risks remain in the sector. Stress tests have revealed concerns over the quality of loans, with non-performing loans having doubled since 2018. The government’s role in supporting the banking system also remains significant, with credit lines issued with state backing standing at around $600 million.

• Other major challenges facing the sector include:
  • Lack of nationwide 4G coverage, which will slow down the diffusion of mobile banking.
  • Issues with governance and transparency, as well as nepotism, corruption, and political interference in the industry.

Outlook

Despite these challenges, the outlook for Uzbekistan’s banking sector remains positive. The expanding economy can sustain higher levels of credit, while ongoing liberalizations and privatizations across different sectors will drive demand for loans and other financial services.

• As the reforms gain momentum, they are expected to strengthen the system’s competitiveness and profitability.
• However, margins will eventually shrink as the industry becomes more competitive.

Implementation

The successful implementation of these reforms will depend on a range of factors, including:

• The ability of international financial institutions to provide support and guidance.
• Continued commitment from the government to transparency and good governance practices.

As Uzbekistan embarks on this radical overhaul of its banking sector, it is clear that the country’s leaders are determined to transform the industry into a more modern, efficient, and competitive force in the economy. With careful management and implementation, the reforms have the potential to deliver significant benefits for both domestic and foreign investors.