Microsoft Word econ 2004 16. doc

Table 3. Banking sector and stock market indicators 
 
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 
Number of banks (with 
foreign participation) 
30 30 
21 
(1) 29 (1) 31 (1) 29 (2) 30 (4) 33 (4) 35 (5) 34 (6) 
Asset share of state-
owned banks 
% 
21.7 15.9 46.7 38.4 75.5 70.6 67.3 65.8 77.5
Non-performing loans
% to total 
loans 
0 0 0 0 0.4 0.1 0.1 0 
Stock market capitalisation % of GDP 
0.4 
0.5 
2.1 
1.9 
1 0.6 
0.4 
Source: EBRD (1995-2003) 
As illustrated in Table 3, as at October 2003, there were 34 commercial banks in 
Uzbekistan: two state banks (fully and directly owned by the government), 2 state-
owned joint–stock banks, 10 indirectly state-owned (via state-owned companies 
and organizations) joint-stock commercial banks, 15 private banks, 4 joint-stock 
banks with foreign participation and 1 subsidiary of foreign bank. 28 banks were 
licensed to carry out foreign currency transactions, but the bulk of foreign 
exchange transactions were conducted by the NBU. In addition, there are 8 
representative offices of foreign banks registered in Uzbekistan. 

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The NBU, a state owned bank, is the largest commercial institution in Uzbekistan. 
At the end of 2001, it accounted for 75 percent of total assets, and 60 percent of 
total capital of banking system. Moreover, it accounted for nearly 70 percent of 
total commercial bank loans and about 85 percent of all transactions (including 
trade finance) in foreign currency. Foreign investment in the banking area not 
related to the NBU is limited.
The development of commercial banking has been affected in Uzbekistan by direct 
government intervention in foreign exchange and financial markets. Initially the 
rule limiting enterprises to hold accounts with one bank was introduced, which 
seriously undermined competition among banks. Moreover, enterprise deposits 
were allowed to be withdrawn only for the payment of wages and travel expenses, 
in accordance with quarterly cash plans. Both rules were abolished at a later stage 
(in 1998 and 2002 correspondingly) that should improve the competition among 
banks and increase the trustworthiness of the banking sector. However, cash plans 
were de-facto not completely abolished as secret “oral” orders of the Central bank 
officials forced the banks to limit withdrawals by enterprises. The system of cash 
planning seriously undermines confidence in the commercial banking system and 
should be dismantled. Banks should be fully delegated the responsibility for their 
own liquidity management. Two further reasons that induce people to stay away 
from the banks, and firms to reduce bank account activity to the minimum are the 

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tax-enforcing role of the banks for tax authorities and negative real return on 
savings (see Figure 1). Banks should only be required to breach customer 
confidentiality where there is evidence of misconduct (such as required in 
documenting possible tax evasion or money-laundering activity). Freezing up 
customer funds (which often happens) should only be a last resort and any frozen 
funds should be released only in connection with settlement of claims of other 
creditors.
Without action to bolster confidence in the banking system, there is a risk that 
dismantling the cash/non-cash restrictions will lead to a significant drain in the 
liquidity of the banking system, as enterprise managers seek to withdraw non-cash 
balances from their enterprise bank accounts. 
The most important commercial banks are controlled by the government and 
follow the credit policies set by the Republic’s Monetary Policy Commission, 
which gives priority to sectors in line with agricultural and industrial policies of 
the government. 
Privatisation of state-owned banks 
The issue of the privatisation of state-owned banks has been discussed since the 
early years of independence. However, little progress has been achieved to-date. In 
1998, the government developed a strategy which encompassed the privatisation 

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of five banks initially. For the largest bank targeted for privatisation (NBU), it was 
initially envisaged to offer for sale only a stake of 40 percent (revised up to 49 
percent in 2003), without management control being transferred to the strategic 
investor. In a second bank (Asaka), the government does not plan for the 
privatisation of more than 50 percent of equity. It is a precondition for the banks to 
be attractive candidates for strategic investment that the government make a clear 
policy statement that investors will be offered both management and board-level 
control in the banks; that up to 100 percent of each bank’s shares will be offered 
for sale; that the government’s post-privatisation approach to any minority stake 
will be that of a passive financial investor; and, set out in advance any specific 
veto rights that the government would like to retain so long as it remains an 
investor (World Bank, 2003). 
The government has already prepared the legal basis for the institutional 
framework to govern the bank privatisation process by creating the Bank 
Privatisation Agency and preparing for the creation of an Asset Restructuring 
Agency to handle the management of the assets carved out of the bank during the 
course of privatisation. The government needs to establish the mandate of the 
Asset Restructuring Agency. It can either be a “parking lot” for the (mostly non-
performing) debts of state enterprises or it can be a catalyst for the restructuring 

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and privatisation state-owned enterprises by actively enforcing creditor rights 
(World Bank, 2003). 
Problems 
The banking system of Uzbekistan is characterized by a small number of relatively 
sophisticated banks (the NBU and some joint venture and private banks), along 
with the successors of the formal sectoral (i.e. predicated on the financing of a