Last week, the World Bank’s Board of Executive Directors approved a $15 million concessional credit for Uzbekistan. It will finance a five-year projectto support the Government’s efforts in restructuring and privatizing state-owned commercial banks, strengthening financial preparedness for natural disasters, establishing a development bank, and improving export and trade financing instruments for local enterprises.
The International Development Association (IDA), a part of the World Bank Group, will provide the concessional financing to the Government of Uzbekistan at a low-interest rate, with a repayment period of 30 years, including a five-year grace period.
As Uzbekistan is transitioning to a market economy, its banking and insurance sectors face a range of interconnected acute issues, including the following:
Uzbekistan’s banking sector consists of 33 banks and is dominated by 12 state-owned commercial banks (SOCBs) that accounted for 86 percent of total credit to the economy by the end of 2021. Traditionally, SOCBs intermediated funds from the Government to priority sectors and state-owned enterprises at below-market rates, lacking strong governance and risk management, with heavy dependence on state funding and capital support. The transformation and privatization of most state-owned banks are ongoing and one of the key priorities of the Government supported by the World Bank and other IFIs.
Uzbekistan is prone to climate-induced disasters, such as more frequent and extreme droughts, lower precipitation levels and changes in weather patterns. Climate change is expected to increase their frequency and severity. The current capacity of the authorities, businesses and people to cope with the costs of disasters is limited because of the low penetration of disaster risk insurance. Low financial preparedness to meet post-disaster costs can amplify the negative impacts of disasters on the economy, the Government's fiscal position, and people’s well-being.
After 2018, the private sector benefited from improved access to finance thanks to the rapid credit growth. However, small and medium enterprises still lack an appropriate range and quality of financial products due to limited product innovation by banks. The authorities have decided to establish a development bank which, among other priorities, will be providing financing, guarantees, and insurance support to local exporting firms and companies.
The new World Bank-funded project will respond to the above-mentioned challenges. It will be implemented by the Ministry of Finance (MOF) of Uzbekistan, which is tasked to lead SOCBs’ restructuring and privatization, and will include the following components:
Component 1 will finance activities supporting SOCBs’ modernization, commercialization, and privatization through: the capacity building for the MOF to effectively restructure and privatize SOCBs; the modernization of SOCBs’ core ICT infrastructure and digitalization of bank processes; the support to the Banking and Finance Academy to train a new cadre of banking and financial sector specialists.
Component 2 will invest in strengthening financial preparedness for disasters and boosting the efficiency of the insurance sector through: the development and implementation of a national disaster risk financing strategy; the capacity building for the Insurance Market Development Agency to effectively supervise and regulate the insurance market, including the disaster risk insurance market.
Component 3 will support the improvement of export and trade financing instruments, through providing technical assistance to the Ministry of Investment and Foreign Trade to support the creation of a new development bank in Uzbekistan, and to the Export Promotion Agency and its Export Support Fund to improve and enhance export, import, and trade finance products for local firms and companies.
“The reforms of banking, insurance, and export and disaster risk financing create synergies that will improve the efficiency of financial services, contribute to productivity, and boost sustainable growth driven by the private sector”, noted Marco Mantovanelli, World Bank Country Manager for Uzbekistan. “The new project will contribute to the implementation of the Banking Sector Reform Strategy for 2020-2025 prepared with the World Bank’s assistance. It will help reduce the state’s direct participation in SOCBs and build a more effective, inclusive, and competitive banking system led by private sector banks”.