Microsoft Word econ 2004 16. doc

Year
Refinancing rate
Deposit rate
Consumer prices
Weighted exchange rate depreciation
 
Figure 1. Inflation, currency depreciation and interest rates 
Table 2. Monetary sector 
 
1991 
1992 
1993 
1994 
1995 1996 1997 1998 1999 2000 2001 2002 
Broad money 
mln.soums 
61.1 347.2 2726 22513 54997 117294 170800 218752 288971 396180 611305 794697 
Broad money (M3) % change 
468 
785.1 
725.9 
144.3 113.3 45.6 28.1 32.1 37.1 54.3 30 
Currency outside 
banks mln. 
Soum 
587 
7318 
20769 
53262 
71639 
102659 
127545 
Velocity
2.5 
4.2 
6.8 
8.5 7 
7.3 
8.2 
Domestic credit 
824 6216 26438 47578 137423 208116 363534 488953 923144 1761358 2485276 
Domestic credit 
% change 
854.4 
525.3 80 188.8 51.2 79.5 34.5 88.8 90.8 41.1 
Broad money (M3) 
to GDP ratio 
% 
68.9 
53.5 
34.7 18.2 21 17.5 15.4 13.6 12.2 12.6 10.6 
Source: EBRD (1995-2003), IMF (1998, 2000) , CER (1997) and own estimates

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The interbank money market was established by the authorities in early 1996 as 
part of the Central Bank’s development of the instruments of monetary policy. The 
interbank money market quickly became an important source for a number of 
banks to solve their short-term liquidity problems. This made commercial banks 
more interdependent, which had a risk of contagion effect in case of failure of 
some individual bank. 
The interbank market has not fully regulated the funds surpluses and deficits 
among commercial banks of Uzbekistan. The Narodny (savings) bank has been the 
only bank consistently generating cheap funds to offer to the market, reflecting its 
dominant position in attracting savings from the public. Almost half of funds on 
offer in interbank market have originated from the Narodny bank. The Central 
Bank effectively controls all transactions and the terms of interbank loans. 
Payments system 
In July 1996, a complete electronic payment clearing system was introduced by 
the Central Bank, covering whole Uzbekistan. Before this, very slow and 
unreliable payment clearances occurred, particular in provincial areas.
All national currency transactions are made using the clearing accounts of the 
CBU. The network of branches of the Central Bank cover all regions. Until 2003, 

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regional branches of all banks had to have separate accounts with the CBU. Since 
2003, one clearing account (with the CBU) has been introduced.
Accounting standards 
In November 1996, the Board of the CBU adopted a new charter of accounts for 
the CBU and the commercial banks. The new accounting system was introduced in 
March 1997 and has improved the quality of monetary statistics. However, 
commercial banks have experienced difficulties in using the new system. In 
addition, risk assessment, and the corresponding classification of loans in 
commercial banks’ balance sheets, remain impaired by the fact that enterprises 
typically do not perform bookkeeping in accordance with internationally accepted 
accounting standards, and banks are inexperienced in risk assessment and risk 
management (IMF, 1998). Moreover, off-balance sheet reports require further 
enhancement, as they do not provide a comprehensive coverage of trade finance 
operations, operations with derivatives, and other contingent liabilities.
To encourage commercial banks to undertake an audit under international 
accounting standards and involving internationally recognised auditors, the CBU 
decided to pay for international audits of all Uzbek banks for the financial year 
1996. Since then, an increasing number of commercial banks have started to use 
the services of international auditors. The Central Bank itself has not undertaken 

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external audits up to the financial year 2002, when the Deloitte and Touche won a 
tender to do its first audit. 
Regulation and supervision 
Regulation and supervision are important functions of central banks. The Central 
Bank of Uzbekistan made an first important step in this direction in 1992, by 
issuing the instruction “Rules to regulate the activity of commercial banks”. These 
rules determined the order of formation, planning and use of credit resources, 
trying to reflect the lack of sufficient skills in commercial banks to manage 
liquidity and regulate risks. Since that time, however, the rules have bee revised 
several times.
In 1997, a regulatory framework was adopted by the Central Bank of Uzbekistan, 
including procedures for the reorganisation of commercial banks; requirements for 
the reporting to the Central Bank; procedures for registration, licensing, the 
liquidation of the banks; and penalties for violating banking regulations. 
All commercial banks are required to submit on the monthly basis
1
twenty-one 
financial reports, including a balance sheet, income statement, cash-flow statement 
and other documents. The final report covers thirteen prudential ratios (3 capital 
adequacy, 1 liquidity, 3 lending, 3 securities investments and 3 insider operations 
ratios) that all commercial banks are required to comply with. 

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Capital adequacy ratios generally comply with current Basel requirements. 
However, the usual practice of Uzbek banks is to over-report the value of the 
capital. This is due to the fact than in many cases the shareholders contribution 
made in kind (as buildings, inventory, etc.). As there is no liquid market for such 
goods in Uzbekistan, valuation is somewhat difficult. In most cases, the value of 
such assets is made at the book value, which is often far different (higher) from 
marketable value. Latest proposals made by the Basel committee to change the 
approaches of calculation capital adequacy have not been reflected yet in the 
Central Bank’s supervision regulations.
In general, requirements for the risk assessment of the portfolio are very weak. 
Banks are not encouraged to make objective risk assessments of the portfolio and, 
make provision and recognise loan losses on that basis. They prefer to rollover 
overdue loans instead of reporting them as non-performing, i.e. overstating the 
quality of banks assets.
In spite of a number of drawbacks, accounting standards and comprehensiveness 
of documents submitted to the CBU’s supervision reports are among the most 
sophisticated in the former USSR.

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3.1.2
 
 Commercial banking sector 
Uzbekistan’s banking sector
 
has played an important role in the implementation of 
the country’s import substitution policies. A large proportion of the government’s 
foreign borrowings for the state-led investment programme has been channelled 
though the six largest state-owned banks.