Uzbekistan’s financial regulator relaxed the rules for Kazakh banks to gain access to the local market, paving the way for Halyk Bank, Kazakhstan’s largest lender, which had expressed interest in entering its neighbor’s banking sector, the Diplomat reported.

Until July 10, only A-rated foreign banks could apply for a licence in Uzbekistan. Once the Uzbek and Kazakh Central Bank chiefs signed an agreement allowing B-rated Kazakh banks to do business in Uzbekistan, observers turned their eyes toward Halyk.

B-rated Halyk has small subsidiaries in Georgia and Kyrgyzstan. Kazkommertsbank, the country’s second-largest lender, which Halyk will incorporate at the end of the month, owns subsidiaries in Russia and Tajikistan. In Kazakhstan, Halyk processes salary payments for most state employees, pensions, and other government-linked transactions. Forty percent of bank cards in use in Kazakhstan carry the Halyk Bank logo, according to the latest financial report.

Uzbekistan, with Central Asia’s largest population and a new president ready to open up to foreign investors, could be an appealing frontier for the Kazakh giant, which now controls 35 percent of the domestic market. This was confirmed by Central Bank Chairman Daniyar Akishev, who said Kazakh banks will eagerly consider Uzbekistan for its “large market capacity and large population.” In May, Halyk Bank chair Umut Shayakhmetova said that her bank cultivated “an interest in entering the market of Uzbekistan.”

Foreign entities own small stakes in a handful of Uzbek banks, a testimony of the country’s closure to investments from abroad in the financial environment. The government owns the largest share of the banking sector.

Last month, Uzbekistan and the World Bank’s IFC launched the first two soum-denominated, $80 million-equivalent bonds in the London Stock Exchange, in a continued effort to give publicity to the newly liberalized currency. In February, it pledged to launch its first Eurobond, worth up to $300 million, but the government has not approved it yet.

Uzbekistan’s jump into the high-risk bond market and its open door to a financially stronger neighbor could prove tricky. Should Halyk enter with a serious investment – and it has proved it can do so, through the buyout of Kazkommertsbank – it could change the equilibrium in Uzbekistan’s banking sector, upsetting the local elites who control the most powerful banks. Halyk is majority-owned by Dinara and Timur Kulibayev, the daughter and son-in-law of President Nursultan Nazarbayev.

Kazakhstan’s presence in its neighbor’s banking sector could also be beneficial, as it might bring a fresh batch of best practices and, crucially, cash. The week before the Kazakh-Uzbek agreement, however, Nazarbayev signed a bill that would restrict and increase control on the outflow of capital from local banks. While recognizing the need to invest abroad, Kazakhstan’s government is growing wary of these instruments being used to siphon off capital from the local economy.

Small and medium lenders have faced trouble in recent months in Kazakhstan, partly because of long-standing liquidity problems and partly because of the effects of the liberalization of the local currency’s exchange rate. Arguably, easy access to channels to offshore capitals accumulated in these banks could have worsened the situation.

On July 16, during a meeting with Akishev, Nazarbayev said that sly, toxic practices at some banks caused a crisis in Kazakhstan’s banking sector that could only be ring-fenced by new legislation.

“We don’t need a large number of banks in our country,” Nazarbayev said, echoing other speeches he had made in the past.

The potential reduction in the number of banks in Kazakhstan could create larger banks via mergers and acquisitions, although so far only the Halyk-Kazkom deal has gone through. Larger banks could mean more competitive lenders, ready to play their role beyond the borders of Kazakhstan. Should Uzbekistan pave the way to its market, Kazakh banks could start settling in and play the role of the financial big brother to the rather inexperienced Uzbek institutions. For this to work, however, the economies, and the currencies, of both countries should remain stable or become stronger. As commodity prices find their new plateau, both government hope to avoid facing new crises.