With global economic tribulations and rising fears about high inflation and incoming recessions, it has never been more important to take on board local knowledge and experience.
Here, Umid Khakimov, the chief executive officer of Asia Alliance Bank, talks about competition, challenges and opportunities for banks and clients in the Republic of Uzbekistan…
Can you talk about how the bank and its customers have been impacted by the high inflation and high-policy rate environment?
In recent years, we did not witness any impactful inflation or base rate fluctuations though the policy rate of the Central Bank of Uzbekistan (CBU) historically has been high comparing with neighbouring countries. The only case when CBU rose its benchmark-refinancing rate to 17% from 14% was last year after the Special Military Operation (SMO) started in Ukraine and it has since gradually brought the rate down to the initial level. And in March of this year, the CBU cut the base rate by 1% point to 14% to ensure that monetary conditions remain with a downward inflation forecast at 8.5%-9.5% in 2023.
We see that the annual inflation rate has already declined below 11%. Seasonal factors and the high base effect of the previous year played an important role in this decrease. Inflation expectations of the households and SMEs for this year also returned to the downward trend and formed at the same level.
I would like to mention that, over 2022, the economy adjusted to changes in external conditions. The impact of external economic conditions was relatively short-lived and less pronounced compared to initial projections. This resulted in increased foreign exchange inflows from exports and cross-border remittances.
Therefore, on the other hand the high level of remittances in the past year, an increase in budget expenditures this year, including wages and pensions, are the main factors supporting consumer demand. This, in turn, will serve to ensure high economic activity in 2023.
What role, if any, does the state or government still play in banking in Uzbekistan?
Uzbekistan’s banking sector is the second largest in the peer group of Belarus, Kazakhstan, Russia and Ukraine. Currently, our banking sector consists of 33 banks, of which 11 are state-owned banks (SOBs) which controlled 78% of the assets, 83% of the loan portfolio, and 62% of deposits by the end of 2022.
Traditionally, SOBs intermediate funds from the government to priority sectors at below-market rates with a heavy dependence on state funding and capital support.This is the same in our country. At the stage of ongoing reforms, SOBs are primarily involved in direct lending to the key sectors and state-owned enterprises at subsidised interest rates. In addition, the government implements essential programs, such as supporting youth and women's entrepreneurship through owned banks.
At the same time, I would like to mention the government’s large-scale reform programme of the banking sector, started in May 2020, that is aimed at privatising several state-owned banks by end of 2025 through IPOs or sale of banks’ shares to strategic investors.
Moreover, last year, the World Bank also approved $150 million concessional credit for Uzbekistan, which will finance a five-year project to support the Government’s efforts to reform the financial sector that, I hope, will help reduce the state’s direct participation in SOBs and build a more effective, inclusive, and competitive banking system led by private sector banks.
How do you perceive foreign banks entering the market? Are these international banks needed in the market to help grow competition and standards?
Entering of foreign players is itself a sign of the development of the banking market after almost two decades of state-led economic management. Foreign banks bring their own culture of working with clients and their approach to it. In my opinion, only the most successful banks can go beyond the borders of their countries and develop a global branch network. Respectively, their experience can be useful for domestic players in the banking market.
For clients, this means diversification in the choice of services and suppliers. The trend will favorably influence the development of the financial system as a whole. Entering of foreign banks will not only mark improvements in the country’s banking sector, but also shows that Uzbekistan itself is becoming an attractive market for foreign entities and the policy of the government affect positively.
How much competition is there from foreign banks and non-banks in the Uzbek market?
Currently, competition between foreign banks and non-banks cannot be called high, but we see a sustainable tendency to its boost. As an example, three years ago, TBC Bank started with a focus only on retail and gradually added new services into a product line. Offering microloans, attractive deposit tariffs, car loans etc. TBC represented them in new digital format. For now, there is not much pressure on local banks, but we see the trends in digitalisation, ways of simplifying processes and opened new opportunities, which foreign colleagues show us.
It’s worth mentioning that, in recent years, competition among commercial banks of Uzbekistan in terms of loans and deposits products has intensified. Based on the market economy principles, there is hard competition among offered tariffs and conditions, and it is strengthening each year.
What key reforms are needed to help the banking sector in Uzbekistan develop further?
The key direction is privatising several state-owned banks by the end of 2025 through IPOs or attraction strategic investors or international banks. This will not only increase competition significantly, but also ensure banks’ development towards lending to the private sector - the engine of economic growth and help with an access the support they need.
In addition, the improvement of the legal framework for banking supervision is also crucial.
Here it is necessary proper implementation the recommendations of Basel Committee of Banking Supervision, World Bank and IFC so that to improve a corporate governance, risk management and compliance requirements in the banking sector.
From the operational point of view, there should be constant expanding the quality of service, focusing on customer-oriented services, credit mechanisms and digitalisation of business processes.
Finally yet importantly, in order to further develop the banking sector, it is essential for banks to increase financial literacy of their customers, provide clients with self-service opportunities, crave the client feedback, as well as motivate its employees for constant development.