 Financial Development,
Privatisation through stability |
After the disintegration of the Soviet Union, most of the newly independent states were left with the memories of the Moscow commanded banking and finance sector and very little experience of their own. Since strong economic changes were required, some states adopted the so-called shock therapy reforms, while others decided to conduct the reforms more gradually, as became the case with Uzbekistan.
The reforms started with a primary concern for financial stability, which was preceded by structural reform -chiefly taking the form of privatisation. Only after financial stability had deemed satisfactory, economic liberalisation was gradually implemented. The basic goal of these economic reforms may be defined as the creation of reliable organisations that are able to provide a complete range of financial services. According to Mr. Kudaibergen Djumabekov, the General Director of the Banking Association,"There is a tendency for faster rates of expansion of financial infrastructure. The system of new commercial and private banks is being established. These banks are serving enterprises of all types of ownership; they render financial services to private sector enterprises emerging in fast pace. The government of the republic realised that the liberalisation of the economy is impossible without a strong and sound financial and banking system based on an effective legislative and regulatory framework."
In 1995, the Uzbek government passed legislation that would ultimately result in the development of Uzbekistan's banking infrastructure from a centralised banking to a more diverse, service oriented banking system. The creation of a dual banking system was to be the key element in this restructuring process, where the functions of the Central Bank and other commercial banks, thirty-four to date, became clearly separated. Thus, the Central Bank has the exclusive right to perform a number of operations such as issuing money and regulating the use of foreign currency. Moreover, it also provides deposit and transfer services and grants loans to government financial institutions.
The state owned banks namely the National Bank for Foreign Economic Activity and the People's Bank, as well as the specialised state commercial banks like Asaka Bank and Pakhta Bank, make up to 80% of all credit investments of the country. Moreover, the increase of commercial and private banks such as Galla Bank, ABN Amro Aloka Bank, Ipaq Yuli Bank and Uzpromstroy Bank provide financial services to private enterprises, and eventually results in an increase to the aggregate capital of the country. The establishment of specialised banks was the very first step towards reforming the whole sector. Today, however, banks are moving away from working in highly specialised areas to concentrating on attracting a more general client base by providing a variety of services that meet all the banking needs of the general public.
In lieu of this, the National Banking Reformation Program, implemented in 1995, planned to privatise and restructure these banks by equipping and encouraging them to provide services on a more general basis, thus entering the competitive world of banking. Mr. Mullajonov, Chairman of the Board of the Central Bank says, "Development of the financial sector of Uzbekistan during the last few years is characterised by further modernisation of the legislative and normative base, the enhancement of the level of capitalisation intermediaries and the implementation of international standards in the system of regulation and supervision of activities."
Overall, banks in Uzbekistan are among the most
capitalised and stable banks of all CIS countries
with the National Bank of Uzbekistan and Asaka Bank
rating within the top 1000 in the world. The Implementation
of the National Program for the Development of the
Banking System of Uzbekistan in 1995, and the co-creation
of The Uzbekistan Banking Association have positively
effected the economy in various ways. |
The program has provided a more developed financial
environment for enterprises from various sectors
of the economy, and created favourable conditions
for increased business activities for small, medium
and private enterprises. This positive growth
of the banking infrastructure has resulted in
healthy competition, such as savings and investments
brought into the national economy have increased
considerably, and the macro-economic stability
of the country has increased; which finally lead
to overall economic growth. The Banking Association
exists primarily to protect the legal interests
of the banks, and the most important task of the
Association is to consolidate all efforts of all
commercial banks in the country to implement the
Program for the Development of the Banking System
of Uzbekistan. It is also committed to the development
of the banking infrastructure by providing training
and creating a legislative framework in which
commercial banks can aspire to international standards
and integrate themselves into the international
banking community.
Although the absence of full convertibility of
the local currency Soum has resulted in keeping
some potential foreign investors cautious, the
government has created a reliable and favourable
investment climate by consciously trying to implement
measures that will rebuild the economy, provide
constant growth and stability of currency and
develop the internal monetary market. The government
is preparing to sign an agreement with the IMF
on implementing free currency conversion. Until
then, other incentives and actions are taken to
make the sector more attractive, such as including
a tax break for all banks for the first two years
of operation. The purpose is to direct these funds
towards the development of each individual bank
by implementing progressive banking technologies,
automating and computerising procedures, training
personnel and developing a network of branches.
Decrees and resolutions made by President Karimov
and his cabinet are aimed at improving the activities
of commercial banks from their foundations. According
to the General Director of the Banking Association,
Mr. Kudaibergen Djumabekov, "Our government
provides guaranteed political and social stability
as well as financial stability of banks."
In 1999 the next step in the reform process
was taken by privatising state banks. The Agency
for the Restructuring of Assets of State Banks
was established in early 2000 followed by a decree
to further liberalise and reform the banking system
and reduce state shares to 50%. This reformation
program for the period of 2000-2003 covers all
spheres of the banking system. The most important
steps towards reforms and development are seen
as being the privatisation of the two largest
banks in Uzbekistan, namely the National Bank
for Foreign Economic Activity and the Asaka Bank
with 22% of the shares of the latter and 40% of
the shares of the former will be sold to strategic
foreign investors through the EBRD,
International
Finance Corporation (IFC) and other international
financial institutions. In addition, the World
Bank has provided technical assistance worth
of $25 million to help speed up the privatisation
process. This was given in the form of loans for
the institutional development of the financial
sector. The EBRD
has signed an agreement with the Ministry of Finance
of Uzbekistan on assisting to further attract
foreign investment to the privatisation program.
In addition, other banks, where the state's share
exceeded 25%, would also be privatised. It is
attractive for financial institutions to participate
in the privatisation process because foreign capital
needs to be brought into the banking system. The
advantages of privatisation, according to Mr.
Z. Mirhodjaev, Chairman of the Board of the National
Bank for Foreign Economic Activity of
the Republic of Uzbekistan, are ".the modernisation
of the bank investment policy, fortification of
the bank's role as the main channel of inflow
of foreign investment into the economy of Uzbekistan,
further assistance to the small and medium sized
business and active attraction of customers."
With the development of external trade in Uzbekistan,
the development of a state insurance support system
became vital in order to lower the risk and to
provide export and import financing. Uzbekinvest,
the only state insurance company that used to
operate during Soviet time, was given this responsibility.
Soon after, with the further development of private
entrepreneurship, the need for insurance services
grew until 1995, when President Karimov issued
a decree stating that insurance services need
to be provided to the emerging businesses sector.
Today Uzbekistan has 27 insurance companies including
UzAig, Uzbekinvest, Madad and Kafolat
whose services include long and short term insurance,
collateral for loans, personal liability, export
risk insurance, property and assets insurance,
insurance on letters of credit, automobile insurance,
life insurance, health insurance and more. This
is a new concept for independent Uzbekistan and
rapidly growing as it is presently expanding 1.6
times faster than any other industry in the country.
Mr.
Mumin Ashurov, the General Director of Madad
is positive about future prospects, "I should
note that there is a favourable investment climate
in Uzbekistan and the insurance companies play
a key role in this field. As I mentioned the experience
of the development of the banking sector of Uzbekistan
I can surely say that the insurance system will
also be developing rapidly."
The banking sector is one of the most progressive
and dynamic sectors of the country, having undergone
significant and dramatic changes since independence.
As a result, today's bankers are committed to
moving Uzbekistan from post-soviet banking to
a free market economy using modern banking technologies
and methods of operation. What has been achieved
in the banking sector since independence has brought
about optimism and anticipation for further success
in this area.
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