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Banking Reform Reshapes Uzbekistan’s Economy

13 September 2021

Abdusattor Rasulov started his construction materials business in Uzbekistan in 2013. Five years later, when he decided to shift gears and start a hydroponic tomato farm, he discovered that the old ways of doing business had shifted, too. The government was two years into a plan to open the country to private investment—and it included a proposal to transform Uzbekistan’s banks from state-owned institutions into private enterprises.

For business owners like Rasulov, the seeds of change hold great potential for growing his business.

“Many regulations are being revised and simplified,” Rasulov said. “Now it is much easier to apply for and obtain loans. We are tackling problems that were latent for 20 or 25 years, and conditions for doing business are improving.”  The result, he said, is that the number of entrepreneurs is growing.

Though Uzbekistan gained independence after the 1991 dissolution of the Soviet Union, changes such as those that Rasulov has benefitted from were slow in coming. Even now, state-owned banks control roughly 85 percent of the country’s bank assets, and most small business owners face daunting obstacles because of limited options for financing. For entrepreneurs who need loans and lines of credit to launch or expand services and companies, the high interest rates, currency-conversion problems, and staggering amounts of paperwork often push them out of the formal economy, effectively eliminating any access to finance they might have had.

Those issues made it hard for any business to grow, said Gayrat Ibragimov, Deputy Director of Commerce for the pharmaceutical company UzGerMedPharm, which launched around that time. “Neither banks nor the financial sector in general were ready to provide loans or credits…and the number of required documents to be submitted to a bank was unimaginably numerous.”

Gayrat Ibragimov

That began to change in 2017, when Uzbekistan’s government launched a five-year National Development Strategy to open the country to foreign investment. Key to this was privatizing state-owned banks, a plan formalized in the Banking Sector Reform Strategy of 2020. “The government set a very clear goal for the transformation: People should feel the radical change in the quality of banking services,” said Jamshid Abdushukurov, Head of Banking Reforms Department in Uzbekistan’s Ministry of Finance.

That has included a transformation of banking culture—putting the experience of bank customers first and making loans and other services more affordable. Four years ago, the total volume of the country’s bank loans was 26 percent of gross domestic product. Today, that figure is nearly 48 percent.

Longtime economic analysts are optimistic about the way that bank privatization has the potential to transform Uzbekistan’s economy—as well as the business community. “There is a direct link between the health of the banking sector and the health of the overall economy of the country,” said Ismoil Turopov, a former banking executive and now the editor of the web-based news site Bankers.UZ.

Turopov, former head of economic analysis and strategic development for Ipoteka-bank, believes that Uzbekistan’s revived banking sector “sets a tone,” paving the way for new businesses, services, and innovations that will help make the nation more competitive.  

Ismoil Turopov

Attracting private investors

The pivotal changes to Uzbekistan’s financial sector could ultimately help reshape the economy and the country’s ability to attract private investors.

This is where IFC’s support has helped ease the way forward, said Zafar Khashimov, senior country officer for Uzbekistan. IFC backing began with four years of advisory work to help transform Ipoteka-bank, the country’s fourth-largest bank, into a sustainable commercial entity. In 2020, IFC made a $35 million-equivalent loan to support Ipoteka-bank’s transformation. That helped boost the bank’s lending to small and medium-size enterprises (SMEs).

Zafar Khashimov

For Ipoteka-bank, the long road to privatization includes deliberate, strategic steps taken at each stage of the process, said the World Bank’s senior economist Vinayak Nagaraj. World Bank Group efforts included IFC’s work with Ipoteka-bank to strengthen its commercial operations, corporate governance, and risk management. At the same time, World Bank collaboration on policy and regulatory reforms at the government level paved the way for large-scale institutional change, including the liberalization of currency exchange policies.

The changes have been appreciated abroad as well, Abdushukurov said. Growing interest from foreign investors over the past three years has led many Uzbek banks to issue and successfully place bonds valued at around $1 billion in foreign financial markets.