Uzbekistan: State banks keep a tight grip

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By:
Matthew Thomas
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Uzbekistan’s state-owned banks dominate the local financial system; a mix of local, privately owned banks and eager foreign players are helping the country to open up, but it will not be easy.

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Uzbekistan’s banks and companies, emblems of the state, give a taste of the country’s recent past – and of its potential, provided the government continues to pursue reforms.

Islam Karimov, Uzbekistan’s long-serving president who died in September 2016, ruled the country even before its independence in 1991, having risen through Uzbekistan’s Soviet institutions. His 27-year rule created an economy that reflected his Soviet training: state ownership of the biggest banks and corporations, stringent laws on press freedom and little access for foreign corporations.

Shavkat Mirziyoyev, Karimov’s successor, at first appeared unlikely to be a great reformer. He had been deputy prime minister for 13 years, so he looked like the perfect candidate for continuity. But Mirziyoyev has confounded all expectations.

In September 2017, the government abandoned its fixed exchange-rate system, causing the Uzbek som to fall 48% against the dollar. A devaluation of that scale might be expected to wreak havoc on the local financial system, but bankers took it in their stride. So few people had access to the official exchange rate that it was, as one banker says, “a fiction”.

The government has followed the currency reform with a series of other important changes. It has cut corporate and individual tax rates, slashed import tariffs, created state agencies dedicated to privatization and capital markets, rewritten the central bank law, loosened visa restrictions for foreign travellers and started negotiations with the World Trade Organization, which it hopes to join.

Uzbekistan’s government has made a clear statement to the world – ‘we’re open for business’ – and the world appears to have listened.

Foreign investors

The European Bank for Reconstruction and Development, which retreated from the country in 2010 when there were concerns about the government’s willingness to liberalize the economy, returned in 2018.

Carrefour, the French retailer, announced plans to open seven stores by 2021. Kazakhstan’s Halyk Bank became the first foreign lender to start operations in Uzbekistan last year.

Global bond investors flocked to dollar bond debuts from the sovereign and from Sanoat Qurilish Bank, one of the country’s largest lenders.

These foreign investors have more than just government reforms to get excited about. Uzbekistan’s 33 million-strong population makes it by far the biggest in Central Asia. It is also enjoying impressive growth: its economy grew 5.5% in 2019, according to reports citing government officials.


Because the government owns these banks, and they own the SOEs, they just see it as taking money from one pocket and putting it in the other pocket 
 - Senior banker

The Asian Development Bank, which forecast 5.8% growth last year, has projected the economy will expand 6% in 2020.

It is worth noting that these predictions were made before the spread of the coronavirus Covid-19, which hit Uzbekistan in March and is likely to reduce economic growth in the near term. The pandemic has already had some impact on business, forcing the postponement of an investment conference scheduled for early March.

The government has since announced plans to set up a $1 billion fund to fight the pandemic.

But bankers in Uzbekistan are pinning their hopes on the long term. They may be able to endure the pandemic in a way their peers in more developed markets cannot.

Bankers in the country are certainly quick to praise the government for the breadth and scale of the changes it has made, but there is plenty more work to be done; for the defining feature of Uzbekistan’s financial system has not changed since Mirziyoyev came to power. State-owned banks still dominate the sector – and their relationships with the country’s big state-owned corporations are still very hard to untangle.

Big players

Uzbekistan’s state-owned banks are a big weight in the local financial system, representing 84% of total assets, 72% of deposits and 88% of loans, according to figures released by the Central Bank of Uzbekistan for March 1.

The five largest banks in the country, all of them state-owned – National Bank of Uzbekistan (NBU), Asaka Bank, Sanoat Qurilish Bank, Ipoteka Bank and Agrobank – hold 67% of banking assets between them.

The country’s state-owned corporations are also big players, but the data here is fuzzier, partly because the dividing line between a state-controlled company and a private company is not always clear.

The term ‘state-owned enterprise’ has no legal meaning in Uzbekistan, and although the government releases data on the different types of company operating in the corporate sector, the numbers add more confusion than clarity.

There were 90,126 private enterprises on January 1, according to Uzbekistan’s statistics bureau. But the bureau also counted 230,175 limited liability companies, 28,695 family enterprises and 675 joint stock companies, among other types of business. A large chunk of these businesses are also likely to be privately owned.

The government recognizes some companies as being state-controlled: these are ‘unitary enterprises’, which operate assets explicitly owned by the government. But Uzbekistan turned many of these corporations into joint stock companies long before the latest round of reforms.

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Giorgi Shagidze, TBC

The banking system provides the clearest example of the difficulty of using official statistics to separate state-owned and privately owned businesses. National Bank of Uzbekistan, the biggest state-owned bank in the country, is categorized as a joint stock company – but so are all of the country’s 15 privately owned domestic banks.

In a recent working paper for the Asian Development Bank Institute, Umidjon Abdullaev acknowledges the lack of data around state-owned companies, but suggests the number of state-owned companies is less relevant than their power: SOEs tend to dominate their respective industries.

He also points to an eye-catching estimate: about 73% of Uzbekistan’s joint stock companies – a good proxy for the best-organized, largest companies in the country – are either majority-owned or partly controlled by the government.

The prevalence of state-owned companies gives government-run banks a reliable source of business. Uzbek bankers interviewed by Asiamoney say that due diligence is minimal at some banks making loans to SOEs, and so these loans are often more like government subsidies.

“Because the government owns these banks, and they own the SOEs, they just see it as taking money from one pocket and putting it in the other pocket,” says a senior banker in the capital Tashkent.

Uzbekistan’s banks had an aggregate non-performing loan ratio of 1.28% at the end of 2018, according to data from the IMF. But several bankers in the country tell Asiamoney these figures are unreliable.

One says that international observers would be naïve to believe the official numbers, describing one particular large, state-owned bank as a black hole of bad loans.

This is not quite as alarming as it sounds. The government’s support of these banks means NPLs are probably not an existential problem. Much of the lending by these state-owned banks uses money they get from the Fund for Reconstruction and Development of Uzbekistan (FRDU), a state-owned policy fund.

In mid 2019, around 55% of bank funding in the country came from FRDU and multilateral lenders, according to Moody’s Investors Service.

The FRDU is also willing to take loans off the hands of state-owned banks. It recently moved $4 billion of loans from state-owned banks to its own balance sheet; the banks, in turn, merely had to pay back the loans they got from the FRDU to fund these deals. The FRDU has also let state-owned banks off the hook for other lending, injecting $1.5 billion of capital into these banks by converting outstanding loans into equity.

In other words, bank failure does not appear to be a risk. The bigger issue is that state-owned banks and corporations are so closely entwined that Uzbekistan may be unable to truly reform state-owned banks without also making big changes at SOEs.

This is a problem for bankers at privately owned institutions, who have little chance to compete on lending to SOEs without accepting rates they consider uneconomic.

“It’s a huge challenge for us,” says an executive at one such bank.

But it’s also a problem for state-owned banks themselves, as well as the government’s attempt to liberalize the banking system.

Uzbekistan’s government is keen to see its banking system operate almost entirely on commercial terms, but it may have to tolerate serious disruption first.

Ingrained relationships

There are a few ways to unravel the ingrained relationships between state-owned banks and state-owned lenders. The most extreme would be a full recognition of NPLs, including a write down of the value of many deals, followed by a cut-price sale to a private buyer – perhaps a foreign bank.

“It’s a massive, massive undertaking to try to privatize. We feel, at some point, the government may just say: ‘Why bother?’,” says one banker.

The easier option is a gradual attempt to steer state-owned banks away from their role as lenders to SOEs, relying on foreign competition and private-sector lenders to revitalize the banking system.

The government appears to have found a compromise between these two options.

Odilbek Isakov, deputy finance minister, previously told Euromoney that the government wanted to turn state-owned banks into “proper commercial lenders”, setting up potential sales to strategic buyers or even through IPOs. The $4 billion transfer of loans to the FRDU is a big step in that direction.

But that is only part of the solution. There is a place for nimble state-owned banks in a vibrant banking system, but privately owned banks, as well as foreign banks, are another important part of the government’s long-term plan.


There are a few things that make Uzbekistan attractive to us: economic growth is very strong; banking penetration is very low; and we are seeing good momentum in the implementation of the right reforms 
 - Giorgi Shagidze, TBC

Uzbekistan has already given the green light to Kazakhstan’s Halyk Bank, which opened last year. Georgia’s TBC Bank has won a preliminary licence, allowing it to set up a branch, test its infrastructure and get ready to accept clients, but not yet allowing it to take deposits.

Giorgi Shagidze, TBC’s deputy chief executive and chief financial officer, says the bank should be open for business by the summer.

“There are a few things that make Uzbekistan attractive to us,” says Shagidze. “It’s the most populous country in Central Asia, with a fast-growing population. Economic growth is very strong. Banking penetration is very low in some segments, including retail and SME lending. And we are seeing good momentum in the implementation of the right reforms.”

TBC will focus mainly on retail and SME lending. That will put it in direct competition with privately owned domestic players. These banks are partly making their retail and SME push through an investment in digital banking, attempting to overcome creaky technology that bankers tell Asiamoney still needs an upgrade.

There is plenty of business to go around, says Shagidze.

“There are very good, privately owned banks in Uzbekistan that are trying to restructure and aim more at individuals and small business,” he says. “The market is not penetrated in this area at all. We welcome competition because this market really needs more players to create an efficient infrastructure.”

There is also cause for optimism when looking at the changing strategies of state-owned lenders. Some bankers in Uzbekistan privately dismiss all such banks as mere arms of the state. That may be true in some cases, but it is an unfair criticism of the entire sector.

State-owned banks are changing their strategies as quickly as many of their privately owned rivals. The most vivid example perhaps comes from Sanoat Qurilish Bank (SQB), a state-owned lender that is sometimes still referred to as Uzpromstroybank, despite a domestic rebranding.

The bank has made admirable efforts to pursue more SME lending.

SQB lent about Som3.17 trillion ($332 million) to SMEs in the first nine months of 2018, according to the bank. That was an increase of 180% on its lending during the same period in 2017, far outstripping the 70% growth of the wider banking sector.

SME lending is now a crucial part of the bank’s strategy, allowing it to diversify its loan book not by rejecting old clients but by finding new ones.

This is also the case with other state-owned banks. Ipoteka Bank made loans worth just over Som4 trillion to small businesses last year. Asaka Bank financed three times more SME projects in 2019 than it did in 2018. These moves by state-owned banks are going to be crucial as Uzbekistan continues its reform efforts.

Asiamoney asked several local bankers to predict how dominant state-owned banks would be in five years’ time. The most pessimistic was an executive at a local privately owned retail bank, who said he wouldn’t be surprised if state-owned banks represented an even larger part of the banking system than their 84% asset holding at the moment. But even the most optimistic bankers say state-owned lenders will still hold more than 50% of banking assets.

Privately owned banks, whether domestic or foreign, will be crucial as the country opens up its financial system, but state-owned banks are not going to lose their dominant position any time soon.