“Uzbekistan, the big country with big opportunities,” reads an Uzbek government slogan. As central Asia’s most populous country strives to become a market-driven economy, the opportunities appear limitless.
Since Shavkat Mirziyoyev swept to power in 2016 following the death of Uzbekistan’s autocratic leader, president Islam Karimov (who attracted international criticism for the country’s poor human rights record), Uzbekistan has sought to remake itself in the eyes of the international investment community.
At the recent European Bank for Reconstruction and Development (EBRD) annual meeting in Samarkand, Uzbekistan – the first such meeting to be held in the country since the multilateral development bank’s disastrous 2003 event in Tashkent which ended in a cooling of relations between the bank and the country’s former president – Mr Mirziyoyev was at pains to point out that the country is entering a new era. “Today’s Uzbekistan is not yesterday’s Uzbekistan,” he told attendees at the meeting in May.
The laundry list of items on his reform agenda include abolishing forced and child labour, putting in place legal and regulatory reforms (including judicial independence and administrative courts to protect the interests of citizens), and creating an atmosphere where corruption in society is not tolerated. World Trade Organization accession is also on the cards.
There is still much to do if the reality on the ground is to match the ambitious rhetoric. However, encouraged by what has been achieved so far by Mr Mirziyoyev’s reformist government, the EBRD started investing in the country again in 2017 after a decade-long hiatus.
Last year, it invested €839m in 26 projects, making Uzbekistan the leading recipient of bank funding in central Asia for the third year running. EBRD investments include its largest renewable energy project to date: two wind power plants with a total installed capacity of 1 gigawatt in the Bukhara region. “Uzbekistan is a country where we move from megawatt to gigawatt,” said EBRD president Odile Renaud-Basso.
Foreign banks on the hunt
The EBRD has also provided financing to Uzbek banks, including a $210m trade finance facility to Asakabank, Ipoteka Bank, National Bank for Foreign Economic Activity of Uzbekistan and Uzbek Industrial and Commercial Bank to help private exporters and importers manage the impact on supply chains of the war in Ukraine. It also invested $7m in TBC Bank Uzbekistan.
Ms Renaud-Basso told the meeting the privatisation of state-owned banks through strategic sales and transparent initial public offerings (IPOs) is high on both Uzbekistan’s and the EBRD’s agenda. “This will help turn around companies and banks to ensure they are more efficient, competitive and transparent and make an enhanced contribution to Uzbekistan’s economic growth,” she said.
On June 13, Hungary’s OTP Bank became the first foreign bank to participate in the privatisation of Uzbekistan’s banking sector after it finalised the first stage of its acquisition of a majority stake in the country’s fifth largest lender, Ipoteka Bank. OTP Bank acquired 75% of the bank’s shares from the Uzbek ministry of economy and finance. The remaining 25% stake will be purchased three years from now.
We were amazed by [Uzbekistan’s] highly educated workforce and by the commitment to develop a market economy
“We are constantly looking for new business opportunities and markets that are developing fast,” László Wolf, director and deputy CEO, commercial banking at OTP Bank, said during a panel discussion at the EBRD’s annual meeting. “Therefore, three years ago we studied the opportunity to invest in Uzbekistan. We met several experts and were amazed by [the] highly educated [workforce] and by the commitment to develop a market economy.”
Then the Covid-19 pandemic hit, swiftly followed by the war in Ukraine, and Mr Wolf said the bank’s management began to wonder whether it should venture so far from its home market. “Banking is generally a risky business. After some consideration we said, yes, we are committed, and I am sure we took the right decision to come here. We’ve only had positive treatment by the government.”
Mr Wolf said he is encouraged by how much the country’s gross domestic product (GDP) has grown (in 2022, Uzbekistan’s total GDP was $77.2bn, an increase of almost 6% in real terms compared on 2021, according to Uzbekistan’s statistics agency) and the development of the banking sector.
“Competition is much stronger from new digital service providers,” he said. “There are no hidden risks we have found. We have full confidence in the bank and the economy.” OTP Bank’s plans for Uzbekistan, according to Mr Wolf, are to combine branch banking with a digital service offering to improve wait times in branches. It will also provide banking services – cash management, trade finance – to corporate customers.
International entries
Umut Shayakhmetova, CEO of Halyk Bank, Kazakhstan’s largest bank, which operates a subsidiary in Uzbekistan, says she views the entry of international banks, such as OTP, as quite positive. “Sure, they will be competitors,” she says, ”but they will also bring new standards, their expertise, and competence. They will train staff, and change the regulator’s strategy. Obviously, it’s important.”
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She says the level of banking penetration in Uzbekistan remains rather low, and the regulatory framework is still in the early stages of transformation. “It’s important that the authorities and the regulator promptly adopt reforms, and that they keep their word,” she adds. “They should also be open for international investors.”
Rather than taking the privatisation route in Uzbekistan, Halyk Bank opted to open a local subsidiary, Tenge Bank, in 2018. Today, it has nine branches across the country. “Initially, we were aiming at privatisation and looking for an merger and acquisition transaction,” says Ms Shayakhmetova. “But today, three years later, we have already made good progress on the growth of our local bank. We are always up for any deal that adds value, and we would definitely be interested in working with any smaller e-commerce businesses or payment integrators and aggregators in other markets in addition to Uzbekistan.”
Where cash is king
Speaking at the annual meeting, Sardor Umarov, deputy chairman of the board of Asakabank, one of Uzbekistan’s state-owned banks, said it is developing new business areas, such as investment banking and custodial services, because it wants to have the capacity to service institutional and global investors starting with liquidity and cash management, through to payment and foreign exchange services.
He added that the central bank will be important in unleashing the potential of commercial banks. “If you don’t have liquidity it is not going to work. Banks [need to be] able to use local and international securities to manage short- and long-term liquidity,” he said.
A more universal method of assessing counterparty risk is also needed, Mr Umarov said, because most banks are using different methods which limits the ability to participate in the market. There is still much to do, but he seems encouraged by the country’s future prospects. “I don’t think it will sound overly optimistic when I say we are literally at the threshold of underwriting the great future of the new Uzbekistan,” he said.
Uzbekistan’s banking sector is the second largest among its peer group of Belarus, Kazakhstan, Russia and Ukraine. It consists of 33 banks and is dominated by 11 state-owned banks, which control 78% of assets and 83% of loan portfolios, as well as 62% of deposits as at the end of 2022, says Umidjon Khakimov, Asia Alliance Bank’s acting CEO. Established in 2009, the bank serves the retail, smaller business and corporate customer segments in Uzbekistan.
Traditionally, Uzbek banks have heavily relied on external sources of financing rather than customer deposits because Uzbeks have a tendency to ‘keep money under their pillow’. Cash transactions are also quite large. “You buy your car, you pay cash,” said Mr Umarov. “Cash is king in Uzbekistan, and is used for everyday consumption and large purchases. But we should not assume this cash will come to banks.”
Banks have started a deposit war, he said, so deposit rates are high, but he estimates it could be a decade before those stockpiles of cash find their way into the banking system. “[It is about] increasing the trust of customers in banks,” he said. “Banks should start offering loans.”
Encouraging figures
Mr Khakimov says the growth of loans to the economy has accelerated, mainly due to loans allocated in the local currency. “The main factors of a 1.3-times increase in the volume of loans issued by local banks was the rapid increase in car loans, micro-loans and consumer loans to households,” he explains. Asia Alliance Bank’s loan portfolio in national currency amounted to UZS1.35tn ($118.6m) and UZS1.60tn in 2022 and 2023, respectively.
Mr Khakimov says these trends were reflected in a decrease of dollarisation in the economy, and the level of dollarisation of deposits and loans declined to 30% and 44%, respectively. Stronger consumer demand, stimulated by high levels of remittances, and an increase in budget expenditures, including wages and pensions, has also seen the average growth of local banks’ deposit base accelerate.
People who understand the benefits of using banks are typically more likely to prefer banking services
At the end of April, term deposits in the national currency increased by 1.3 to 1.5 times compared with the same period last year, says Mr Khakimov. Asia Alliance Bank’s deposit book increased from $148.6m in 2022 to $186m in 2023. But compared with the growth of external financing, the increase in the level of customer deposits in the banking system remains moderate.
Promoting financial education could be one way of increasing deposits, he says. “People who understand the benefits of using banks are typically more likely to prefer banking services. Therefore, the government and financial institution-led programmes and initiatives that focus on financial education could help increase banking penetration.”
Moreover, in terms of marketing, the development of convenient channels and attractive presentation of product conditions matter. “We have to show that deposits are reliable in terms of custody and more secure in mitigation of inflation risk,” says Mr Khakimov.
Young Uzbeks prefer digital
Competition among Uzbek commercial banks in terms of loans and deposit products has intensified in recent years, Mr Khakimov adds. While competition from foreign banks or non-banks is still relatively low, he said the entrance three years ago of TBC Bank of Georgia, which started adding new services to its product line such as micro-loans, attractive deposit rates and car loans, via digital channels, showed local banks what is achievable. “We see the trends in digitalisation, ways of simplifying processes and the opening of new opportunities, which foreign colleagues have shown us,” he says.
Cash may be king in Uzbekistan – one only has to visit one of Samarkand’s infamous bazaars to see traders and money changers with wads of Uzbek som in their hands – but Mr Khakimov points to the latest data published by the Central Bank of Uzbekistan which shows the number of users of digital and mobile banking services increased to 34.4 million individuals and 1.2 million small and medium-sized businesses as of May 2023. “This means a sharp increase of 62% compared with the same period of 2022, when total users were 22 million,” he explained.
One more piece of data that is interesting, he says, is the number of bank cards, which now exceed 36.5 million, compared with 28.3 million last year. “Given these numbers, the digital payments segment currently faces dramatic growth, driven by the increasing adoption of ecommerce and mobile payments. The convenience and efficiency of digital payments have made them a preferred method of payment for consumers, especially among younger generations.”
But the growth and development of Uzbekistan’s banking sector hinges on more than just digitalisation. Increasing the financial literacy of customers to further develop the banking sector, is essential, says Mr Khakimov, as is the need for improving the legal framework and banking supervision.
Last year the World Bank approved $15m in concessional credit for Uzbekistan to help reform the financial sector. Mr Khakimov says he hopes this will help reduce the state’s direct participation in state-owned banks and build a more effective, inclusive and competitive banking system led by private-sector banks.
“If privatisation plans are successful, they will drastically reduce the share of state ownership in the banking sector, potentially in favour of foreign investors, who currently play a limited role, controlling just 7% of assets,” he says.
“This will not only significantly increase competition but also ensure banks’ development towards lending to the private sector, as compared with the previous longstanding practice of directed lending to state companies.”
Shareholder value
But the big question, says George Paresishvili, CEO of the Tashkent Stock Exchange, is whether the IPOs of state-owned companies will attract enough interest from investors. “We need to always keep investors in mind and think the way investors think,” he told the EBRD’s annual meeting.
If state-owned banks are to be attractive assets for international investors to hold, Mr Paresishvili said they need to be ring-fenced from government intervention. “If you are a bank, the last thing you want is the government directing which loan to give to whom, at which terms,” he said. “You may end up lending to companies or individuals that are not bankable, this loan will not be paid then you will need to provision it. It will not end well.”
Now is the time to diversify the investor base and let foreign investors come in
“I’m not criticising the government,” continued Mr Paresishvili. “These are real challenges you have to take into account when privatising state-owned companies. They need to be run as private companies. The government should look at them as a shareholder and do whatever is necessary to maximise value to shareholders. We don’t have to reinvent the wheel. We need to follow the [right] path, and it will make them successful IPOs.”
However, given that Uzbekistan’s capital markets are still at a relatively early stage of development, Mr Paresishvili said it is still much easier to buy a foreign security in Uzbekistan than to hold it there. Central securities depositories and custodian banks are not really present in the market. The Tashkent Stock Exchange is working with the ministry of economy and finance to engage with international securities depositories such as Germany’s Clearstream and international custodian banks.
“Hopefully, within a year we will see dramatic change,” he said. “Demand will go up when we have these big names in the market.”
Odilbek Isakov, CEO and founder of Infrasia Capital and former deputy finance minister, says the market will be even more professional when foreign investors come. “Now is the time to diversify the investor base and let foreign investors come in,” he says. “Without them it is going to be hard to develop capital markets on the buy side.”
