Kyrgyzstans banks are small, almost exclusively foreign-owned and invariably cautious to the point of paranoia. The local authorities are eager for newcomers to dip their toes into this pond, arguing that the post-Soviet economy will boom. But most newcomers that take up the invitation find a market that is deeply hostile to financial institutions, with potential clients much more inclined to invest in gold or put their money under the bed rather than use a bank deposit.
"The country is under-banked. There are financial assets worth some $5 billion waiting to be absorbed by banks that decide that they can take the political risk"
Almas Chukin, Kazyna Capital Management
Banks should not be deterred by perceived hostility, says Almas Chukin, the Kyrgyz-born chairman of Kazyna Capital Management, a Kazakh investment company. He believes there are opportunities for financial institutions. "The country is under-banked," he says. "There are financial assets worth some $5 billion waiting to be absorbed by banks that decide that they can take the political risk." Kyrgyzstan has a GDP of $6 billion, he says, but banking assets are scarcely $1 billion. Most economic activity takes place in the cash economy at the moment, he says, "but as the economy develops, there will be an appetite for more developed banking products like mortgages and longer-term loans".
A 22-strong array of banks already occupies strategic positions on the streets of the capital, Bishkek. These include one important local bank and Kazakh, Latvian and Turkish institutions, including Demir, Halyk, BTA and Kazkommertzbank.
The key local bank is Kyrgyz Investment and Credit Bank (KICB), which is part-owned by the European Bank for Reconstruction and Development, the local government and Habib Bank of Pakistan. The bank recently increased its paid-up capital from $10 million to $17.5 million. A bank official says: "About 120 loans worth about $30 million have been approved and about 64% of the credit portfolio is medium-term and long-term loans. Loans to the manufacturing sector comprise more than 55% of total loans and the remaining portion of the credit portfolio is spread among tourism, agriculture and trade. KICB is expecting further growth in its loan book by increasing its credit portfolio by $15 million annually." The bank has a range of consumer products and is the largest provider of consumer loans. The bank has a "strong customer base", says Chukin.
The Turkish contingent of Kyrgyz banks is headed by Demir Kyrgyz International Bank, which is said to be preferred by expatriates. The bank claims on its website to be "among the top five commercial banks in the Kyrgyz banking sector in terms of asset size, capital and profit. The bank contributes noteworthy [sic] to the development of the economy and the banking sector of the Kyrgyz Republic." At the end of 2009, the bank made profits of $1.43 million on assets of $85 million and deposits of $73 million.
A more familiar name in Kyrgyzstan is UniCredit, which bought Kazakh ATF Bank in 2008. The original Kyrgyz state enterprise bank has 13 branches in Bishkek and a number of others in the main business centres. It employs some 500 people and sells a range of commercial and retail products.
Political instability has challenged Kyrgyz banks in the past year, says National Bank of Kyrgyzstans Chokoev. He points to events that followed the overthrow of president Kurmanbek Bakiyev in April. These included an uprising in the southern town of Osh, where there were fatalities and many businesses were destroyed. There was a disproportionate amount of lending to companies from the south. After the turmoil, people couldnt repay debt. Credit portfolios deteriorated by 30%. These were direct losses. The banks had to restructure their portfolios.
On the positive side, KCMs Chukin says that Kyrgyz banks were unaffected by the global financial crisis, as they had minimal exposure to international capital markets.
The fate of what was once the largest Kyrgyz bank explains local hostility to the banking system. Asia Universal Bank was a big player until Maksim Bakiyev, president Kurmanbeks powerful son, quit the country when his father lost power.
The bank had been built up by Mikhail Nadel, a Russian immigrant, during the late 1990s. He worked with former president Akayev and then with Maksim Bakiyev. It was said that the bank handled more than 50% of the states entire financial activity.
Uchun Karimov, the head of the department for serious crime in the general prosecutors office, says that the government started an investigation into AUB in June 2010. It is investigating whether AUB laundered money. In particular it is looking into the banks handling of about Som3 billion ($63.6 million). AUB was buying stocks from Russian companies and the prosecutor suspects that it might have been laundering money through central Asian financial markets. Many of its activities were undertaken in offshore centres. Karimov says that the Kyrgyz government had asked for help from the Russian central bank.
NBKs Chokoev says that the Russian central bank gave an early warning to the Kyrgyz authorities of concerns about AUB. "The National Bank of Kyrgyzstan started to question the operations of Asia Universal Bank in 2004 and 2005," he says. "The National Bank of Kyrgyzstan and the Russian Central Bank started to exchange information about the operations of AUB. Following an investigation by the Central Bank of Russia, it instructed Russian banks not to deal with AUB in 2005. We started to pay attention to AUB. The Bakiyev regime had protected AUB. There was a sudden increase in the size of the banks balance sheet at the end of 2009 and beginning of 2010."
He continues: "The bank is now closed." He is focused on Maksims role in the banks activities. "Maksim was not signing financial documents himself, but all the people signing the documents had direct contact with Maksim they were Maksims people. Even though he was not on the board of AUB and even though he didnt sign the documents, he had direct contact with the managers. He set up some companies which had contracts with AUB." Maksim Bakiyev was unavailable for comment despite repeated requests. Nadel has vigorously contested the allegations made against him and AUBs former management. "When someone has worked hard for 10 years to create a successful business, it is simply wrong to take it away from them using false allegations. Not only did I lose my main business, my name has been smeared by unfounded allegations." (see Banking: To have and to have not in central Asia, Euromoney, October 2010)
Chokoev says the National Bank, alongside UK auditors BDO, started to investigate AUB in April 2010. "We have come to the same conclusions as BDO in respect of the AUB investigation. There were large schemes and mechanisms, including made-up companies and offshore zones, and made-up persons." An audit by the National Bank of Kyrgyzstan examining the banks activity shows large movements of money out of the country in the days before Bakiyev was overthrown.
Nazisa Samarhavazovitch, a senior official in the general prosecutors office, says: "AUB controlled the government pension fund." He says that the general prosecutor has seized $19 million from accounts belonging to Bakiyev and is looking into whether or not Maksim Bakiyev used the banks money to fund his own operations.