The Banking System
The Kyrgyz economy is basically a cash based economy. There is a banking system … as you might expect in a country that is sometimes called “The Switzerland of Central Asia” and although it is still fairly basic and nearly all transactions in the country are cash based, it is developing rapidly, and this situation is changing as the banking system develops.
When I first came to Kyrgyzstan in the mid 1990′s there were over twenty banks operating in the country … indeed there are still over twenty banks, but only a few of them are survivors of those days. More than twenty banks to serve a population of just over five million may seem overkill … but most of them are quite small with just one or two offices and only two or three of them have extensive branch networks around the country.
When it declared independence from the former Soviet Union, Kyrgyzstan inherited a Republican bank which was transformed into the National Bank and a number of specialist banks which provided limited services – mainly transaction services and foreign exchange, rather than credit facilities, risk assessment and project appraisal, financial guarantees and other services.
A liberal licensing system encouraged the growth of the banking system. When an acquaintance of mine first came to the country back in the early days following Independence, he was drawn up short when he realized that the cash in order to pay his traveling expenses was enough to open a bank. As a result, about fifteen new banks were opened in 1993/4, often owned by individuals or private enterprises. Many of these new banks were underfinanced and, on one estimate, over 60% of the loans they granted turned bad – and so a financial crisis developed accompanied by a series of financial scandals. More than half the banks collapsed in 1998/9, either went into bankruptcy, reorganization or reconstruction … and so the public lost confidence in the banking system and withdrew their funds.
In the new millennium, however, the banking system entered into a period of growth and development … The regulatory system has become more rigorous, requiring greater Minimal Capital Reserves and meeting international requirements and standards, (so that many of the problems experienced in precious years are less likely to reoccur); new banks were opened, often with foreign ownership; new services were introduced such as credit facilities; credit and debit cards (both servicing and issuing); travelers’ cheques; operating ATM machines; guarantee facilities and so on.
As well as an increase in foreign ownership, international partnership is also developing with most banks belonging to international networks, such as SWIFT, Western Union, Visa and Mastercard and offering appropriate services.
Credit is still difficult, or expensive, to obtain in Kyrgyzstan, but there are signs that situation is improving. The mortgage market has appeared in Kyrgyzstan – but because the loans are heavily secured, the sums are smaller, the interest rate higher and the terms shorter than is common in the West, the country hasn’t experienced the same “sub-prime” crisis … although the number of cases of people holding “negative-equity” and auctions of repossessed largely escaped the
As a country where most of the population are nominally Muslim, it is not surprising that the government has made provision for banking services based on Islamic banking principles according to Sharia law. One of the basic principles of Islam is the prohibition against any form of participation in interest-bearing transactions. Banks that follow Islamic principles overcome this prohibition by issuing interest-free loans and obtaining a share in the financed, or newly established, company – sharing the risks and participating in both the gains and the losses of the project.
One area where Banks are more constrained than their counterparts in other parts of the world concerns their relationship with banks in “Offshore” zones … they are forbidden under Kyrgyz law to have direct correspondent bank relationships with such banks, and these banks may not be shareholders of a Kyrgyz Bank.
Bishkek