Uzbekistan reforms banking sector

Odilbek Isakov outlined the strategy of the banking sector reforming

New plans to clean up Soviet-style banking sector will see underperforming legacy loans transferred to state fund. Uzbek policymakers have announced plans to clean up the balance sheets of the country’s largest banks as part of a drive to restructure and privatize the state-dominated sector. Nearly 30 years after the end of the Soviet Union, publicly owned lenders still account for more than 80% of total banking assets in Uzbekistan, Euromoney writes in the article Uzbekistan outlines path to banking sector reform. Under former leader Islam Karimov, most were used as policy banks, channelling subsidized funding from the country’s sovereign wealth fund to state-owned enterprises (SOEs) and government projects.Loans were routinely rescheduled, profitability was meagre and the banks required regular recapitalization from the state budget.   

The government of Shavkat Mirziyoyev, who took over as president after Karimov’s death in September 2016, is now looking to overhaul the sector as part of a wider drive to reform and revitalize the Uzbek economy. Speaking on the sidelines of the IMF/World Bank annual meeting in Washington DC, first deputy finance minister Odilbek Isakov outlined policymakers’ strategy for the sector. “Our intention is to transform the state-owned banks into proper commercial lenders that in due course we can either sell to strategic banks or IPO,” he said.  As a first step, the government has announced plans to transfer some of the largest underperforming legacy loans to the Uzbekistan Fund for Reconstruction and Development (UFRD). In addition, part of the banks’ debts to the fund will be turned into equity. This is expected to result in a boost to the capital of Uzbekistan’s four largest banks. Capital adequacy ratios are forecast to rise from current levels of around 13% to more than 20%.


The UFRD will continue to finance government projects, either directly or through National Bank of Uzbekistan, the country’s largest lender. The other three leading banks – Uzpromstroybank, Asaka Bank and Qishloq Qurilish Bank – will move towards normal commercial operations.  Uzbek policymakers are keen to involve international financial institutions in the process. The IFC is already helping Uzpromstroybank and number five player Ipoteka Bank undertake a radical overhaul of their strategies, structures and operations. The European Bank for Reconstruction and Development is reported to be looking at a similar tie-up with Asaka Bank. The IFC has also indicated an interest in becoming a shareholder in both Uzpromstroybank and Ipoteka Bank, either directly or by converting debt into equity, as a first step towards privatization.

Isakov said the government also wants to see the largest state-owned banks access the Eurobond market following Uzbekistan’s sovereign debut in February.  “Capital markets transactions will play an important role in the transformation of state-owned banks,” he said. “They will discipline the banks and keep them on the reform path. We want to see them come to market as soon as possible, hopefully within the next 12 months.” 

Isakov also stressed that changes in Uzbekistan’s banking sector would be matched by reform of other SOEs.  “The majority of banks are owned by the government and the majority of assets in the banking sector are loans to SOEs,” he said. “If you reform one area but not the other, it won’t work. You have to do both.” If the process is successful, he added, the relationships between banks and SOEs could become a strength rather than a weakness, and potentially help local lenders see off competition from new entrants to the market.


So far, the only foreign lender to enter Uzbekistan since the start of Mirziyoyev’s reform programme is Kazakhstan’s Halyk Bank, which began operating in the country in May as Tenge Bank. Georgia’s TBC Bank has also applied for an Uzbek banking licence. Isakov said other international groups were in “wait and see mode”. “They want to see how the reforms go,” he said. “Once the reforms are progressing well, and the banking system has recovered and become profitable, then larger banks will seriously consider stepping in.”  

At the same time, he warned against relying on strategic investors to finance Uzbekistan’s banking growth. “Capital has become more expensive and banks are having to think very hard about which markets they operate in,” he said. “So, while we welcome strategic buyers, for us it’s more important to reform the banking sector and get to the point where we can successfully IPO one or two banks. That’s probably a better direction of travel than waiting for a strategic buyer to come in.”

For investors looking for minority holdings in Uzbekistan’s banks, there are already opportunities. Policymakers have recently announced plans to sell 25% stakes in three smaller state-owned lenders: Aloqabank, Turonbank and Asia Alliance Bank. In August, the government relaxed restrictions on the purchase of equity in Uzbek banks. Foreigners can now buy stakes of up to 5% without requiring approval from the central bank.

ФОТО Odilbek Isakov outlined the strategy of the banking sector reforming