Non-cash payments
There is a basic accounting problem that we encounter trying to run a business here in Kyrgyzstan: sometimes it can be very difficult to obtain a receipt for payments. If, for example, we have to travel from one part of town to another and have to catch a bus or take a taxi, then it is virtually impossible to get a receipt.
Also, when you do get a receipt, then it is often important to have supplementary documents to show that it really was a company expense and not something bought by an individual for themselves. For example, if we have to buy products in a supermarket in order to provide a picnic for a tour, then a till receipt on it’s own won’t be sufficient.
One of the reasons for this might well be because a lot of people work in what is euphemistically called “the shadow economy” … there are different estimates about the size of this “unofficial economy” ranging from about 20% of that which official statistics record to a level that is equal, or even more, than this. They don’t want to give receipts because that would mean a piece of paper existing which would be an official record of a transaction … something the tax authorities could use.
A couple of weeks ago I received a notice about a proposed new law … an amendment to the Civil Code which would have the effect of making it compulsory to conduct all business transactions, of whatever size, through bank accounts. By business transactions I mean those between companies, and also between companies and private entrepreneurs. Payments between individuals could still be made by straight forward, old-fashioned, cash. So, individuals can still buy goods and services using cash, but businesses would have to settle their accounts some other other way, (such as by bank transfer, using credit cards or internet banking).
This notice, and the proposal it contains, has caused uproar. That is mainly down to the way in which the draft amendment to the law was drawn up. There are rules about drafting legislation and regulations that provide for public consultation which, apparently, weren’t followed this time. There is a special working group which is examining the question of developing the banking system especially through developing tools for non-cash payments. The proposal came during one of the sessions of this working group and the National Bank were commissioned to draw up the necessary legislation which, they did, and then circulated it for comment. The Business Associations were up in arms because it came as a complete surprise to them, and most business think it is unreasonable and unworkable.
When I saw the documentation, I was also concerned about the practicalities. It immediately set off “alarm bells” and I sent copies to the business associations to which we belong, asking that we discuss the proposal and prepare suitable responses and comments. As a result I have been invited to a number of meetings to observe the discussions.
Emotions were running high and there was an awful lot of “chaff” spoken … on both sides of the argument.
“Chaff” was the name given to anti-radar countermeasures in the second world war. Small strips of aluminum, metallised glass fibre or plastic, were spread by planes to create clusters or swarms of multiple secondary images on radar screens and confuse radar operators. It is still used to distract incoming missiles from their targets.
A certain amount of suspicion arises from the fact that the working group which promulgated the idea contained representatives from the Union of Banks – the business association representing all the commercial banks working in the republic. Maybe they were simply lobbying their own interests. This is not the first time I have seen proposals to force businesses to use bank accounts. Some time ago, for example, there was a proposal to revert to the requirement that I am told existed in the Soviet period, that cash received into the “kassa” (cash desk) should be deposited into a bank account within three days. For some reason, that particular proposal was not pursued, and now this new one has emerged.
In the “justification” for the proposed law, much was made about the need to develop the banking system and there is no doubt that such a move would be good for the banks … not only would it increase the amount they held on deposit, (which they could, presumably, then lend and receive interest on the credits), but there would be a large increase in the number of bank accounts being opened, (not everyone has a bank account – it could even be said that many people distrust the banks because of their chequered history), with the associated fees and also be transaction fees, (even though the banks have said that they could provide these services at minimum or perhaps even at “zero cost”). These fees, of course, represents additional costs for businesses.
The Union of Banks, however, assure us that the idea did not originate from them and that their contribution to the discussion was simply about how it could be implemented.
Personally, I have some doubts about how well the banking system could cope with the additional work. There would be an enormous increase in the amount of transactions.
According to official statistics, there are currently 22 banks in the republic, all with their head offices in the capital, Bishkek, and something like 239 branches throughout the country. In addition there are almost 1300 non-bank Financial Institutions such as Credit Unions and Microfinance organizations. Although this sounds reasonable, I wonder if there are sufficient branches in the more remote rural regions.
These banks offer a range of services … although they are mostly used for holding deposits of cash and making transfers. The services on offer do include Credit and Debit cards and networks of ATM machines. There are something like 170,000 cards issued – which represents a relatively small level of market penetration when compared with a population of over 5,000,000. Although the banks claim that these are becoming more popular, there is a certain amount of of resistance to them, for example when it comes to having salaries paid by bank transfer into personal accounts and using ATM’s to withdraw the money. (As everywhere in the world, ATM’s here do seem to have a habit of being out of order or rejecting a card).
Some banks do offer internet banking services, and this would certainly offer one way of making non-cash payments, however, not all do.
There is no real system of processing cheques – no clearing house system, and banks only accept cheques which are drawn on their own accounts.
Also, there is no system of “telephone banking”.
This means that the main method available for “non-cash” transactions is the time honoured system of making “bank transfers”. One of the practical problems with making bank transfers is that all the documentation has to be presented to the user’s bank before eleven o’clock, in order for the payments clearing system to work. If you are late by just a few moments, or there is a simple problem with the payment order, then the transaction will have to wait for the following day. (Although, to be fair, this is more of an annoyance, or inconvenience, rather than a major problem.)
I am also worried about the size of such payments. At the moment, for example, if we run out of paper in the office then I can simply go to a shop and buy a ream of paper … but under these proposals, I would not be able to pay for it by cash. I would either have to use a company credit or debit card, have an account with the shop, or they would have to be willing to provide the paper on credit whilst waiting for a bank transfer.
(Perhaps the use of a company credit card would be the most convenient method, but that in turn would require a vast increase in the number of places willing and able to accept them. At the moment there is a growing number of outlets accepting payment by credit card, but there are many times more that do not.)
At the moment I am not sure how it would work for us in terms of providing tour services. Every time we wanted to buy some goods or services, a meal in a cafe, bottles of mineral water for tourists en route, an hour’s horse riding, entrance fees to a museum or a National Park … and so on … we would have to have in place measures for making “non-cash” payments.
It seems to me that it would be sensible to have some sort of limit for cash payments, say, for example, 1000 som, but the justification for the amendment argues explicitly against this, saying that firms would “fix” or split their transactions to fall under this limit and I have to admit that would be a risk.
The biggest problem, however, it seems to me, (and it represents a big difference between the situation in the West and that which is prevalent in contemporary Kyrgyzstan), is the lack of trust in the banking system amongst the local population.
In the West we have long talked about the “cashless society” and moved towards methods of “non-cash” payments. As an individual, I paid my utility bills by Standing Order or Direct Debit and was happy to do so. It was convenient and I trusted the banks to operate the system fairly and accurately. It might seem strange to say this nowadays in view of recent history, but there were very few cases of banks getting into difficulty and going out of business. Here, unfortunately, that is not the case.
It seems to me that it would be far better for such a move towards the use of non-cash payments to be initiated by customer demand, reflecting the convenience and efficacy of using such a system rather than “coercion” by introducing such measures which don’t seem to be very common elsewhere in the world.
One way of trying to produce the confidence in the system is the recent introduction of networks of terminals which have appeared, especially here in Bishkek, that allow people to pay their household bills. The user selects the service provider they want to pay, and the systems offer a fairly comprehensive list of utilities that can be paid this way, type in their account number and then deposit their payment, and finally obtaining a written receipt. The service is not free, of course, but the ease, flexibility and convenience it offers is probably worth the five som (about USD0.12) per transaction and as a result, it seems to be growing in popularity and people are becoming more and more familiar with the use of technology for making transactions.
Let’s be clear about one thing: No-one disputes that there are indeed real problems that need to be addressed: the operation of the “shadow economy” and the development of the banking system in the country. In the meetings I have attended on the proposed amendments, however, people were asking if this was the right way to tackle the problems.
At least operating such a system would help to solve one problem for us, that of getting receipts … simply because every transaction would be recorded. But … is Kyrgyzstan ready for this?, is the banking system ready?, would it really help to eliminate the “shadow economy”, or drive more people further into the “shade”?
Bishkek