Kyrgyzstan’s banks are trying to expand their customer base, but will this impact upon their performance?

In a country where much of the economy is cash based and the failure of the largest bank – Asia Universal Bank in 2010 – remains fresh in the memory, expanding a customer base might seem a challenge for Kyrgyzstan's banks.

But it might also provide an opportunity for growth. As can be seen in our chart, in 2013, for the first time in Kyrgyzstan, nearly half of the country's money supply entered the banking system, and in 2014 the amount outside of banks decreased to 42.73%. This happened as the deposit base of country’s commercial banks grew by 22.57% while their loan books expanded by 45.95%.

Indicators FW 2

Wider financial inclusion comes at a price, however. As the banks expanded their reach, their capital adequacy ratio began to slide – in 2013 the proportion of Tier 1 capital to risk-weighted assets saw a 2.4 percentage point decline on the previous year, to 19.9%, and this drop continued into 2014, to 16.4% at the end of the year. The liquidity ratio likewise decreased, by 10 percentage points to 70% in 2013 from the year before, and then again to 65.1% by December 2014.

While the bank’s safety cushion grew noticeably thinner, returns have not increased. Return on assets fell by 0.2 percentage points in 2013, and then by 0.2 percentage points more, to 2.6% in 2014. Asset quality, however, improved, as the non-performing loans ratio dropped between 2013 and 2012 by 1.7 percentage points, to 5.5% and then again, to 4.5% by the end of 2014.

Given the high dollarisation of Kyrgyz banks’ loan books, it is not certain whether high-asset quality is going to continue for the country's banks. Share of loans in foreign currency – primarily dollars – was about 54% at the end of 2012 and 2013, only to inch up four percentage points in January 2015 to 58.01%. Since in 2013 30.59% of Kyrgyzstan’s total gross domestic product came from remittances from Russia, a tumble in the Russian economy could pull the local currency, the som, down with it. Along with the rallying dollar, this could upset the repayment of foreign currency loans in the future.


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