History of Banking System

The commercial banks of Uzbekistan began to act as a specific credit institution, which, on one hand, attracted interim spare funds of sector, on the other hand, satisfied financial  requirements of enterprises, private entrepreneurship and population owing to attracted funds.

During recent years in the republic, as in the world banking practice in whole, international and domestic experts noted the existence of general tendency - deviation from specialization and intensification of banking activity universalism. It predetermines substance of banking operations and essence of credit relations.

The important direction of banking activity was to develop the retail banking production for the population as well as for entrepreneurs.

The banks projected their work in that direction, on the basis of “gold” principle of the world experience: attractiveness of the service to population is proportional to the growth of accessibility to entrepreneurs’ credits. Realizing reforms livened up the banking activity in the direction of adopted before laws “About consumer credit” and “About mortgage”, which had important social significance and favoured to improve living standard of population of the country.

Responding to a challenge of new realities both in the republic and world banking community, the commercial banks of Uzbekistan expanded the set of offered services, performed new banking products in the market, and, in the same time, actively generated international standards of the activity of financial institutions.

It was the time when mortgage credits sprang up. Priority of such form of banking service were estimated by the citizens of Uzbekistan quickly. The new source of resource and the forms of their social protection, particularly the youth, were supported by two laws – “About consumer credit” and “About mortgage”.

Dispositions of the law of the Republic Uzbekistan “About consumer credit” targeted at consumer protection and efficiency widened the opportunity of population to improve their conditions of life that sufficiency increased the amount of consumer credit in banks.

In October, 2006, the law of the Republic Uzbekistan “About mortgage” entered into force. Its adoption marked the new stage in the development of banking consumer credit and defined legal mechanism to give credit to buy real property. The main goal of the documents was the regulation of relations arisen at use of collateral for real property. The appearance of new kind of the service in the consumer market, exactly mortgage, favoured to improve housing conditions of people. Within the range of acting decree of the President of Republic Uzbekistan from February 16, 2005, “About further development  of housing construction and dwelling market”, a number of new mechanisms in system of granting of long-term mortgage for housing construction was introduced, it was established Joint-stock commercial mortgage bank “Mortgage bank” and Fund of maintenance of granting of mortgage. The strategy of the banks was directed to maintain monetary circulation, to form funds reserves in banking brunches, upgrade the effectiveness of the activity. The realization of arrangements of “Program on reform and development of banking sector for 2005-2007 y.y.” favoured further reform and liberalization of banking system, provided its steady growth and efficiency, increased the level of capitalization. There were priority directions to maintain the monetary circulation, to upgrade the national currency stability and  its rate of exchange, stimulate the increasing of deposit accounts at the banks. Timely facility given by the government to commercial banks of the republic, permanent incentives of their endeavor to development predetermined the formation of banking-financial market, where the credit institutions became to work out and offer their new instruments.

The period of upgrade of level of bank capitalization in the country and involving them in participation in investment process and structural reform of the economy. Exemption the banks from profit taxes, gained from granting investment credits to domestic enterprises for term of over 3 years and directed to increase own capital, was regarded by the government as one more reserve to raise banking activity. In addition to it, the expenses of the commercial banks to set mini-banks according to approved state programs were excepted from taxable funds.

In that period an emphasis made on realization of the concrete measures to maintain monetary circulation and upgrade the national currency stability, its rate of exchange. That efficiency livened up the population who began to open deposit accounts at the banks showing their confidence in them. The amount of deposit base of banks grew up. It was formed the market of banking service, banking products were replenished by new kinds of service, for an example, leasing.

The development of retail service furthered to form joint banks, attracting international banking and financial capital broadly. Banking market of the republic sufficiency was changed at the result of formation of banks with 100% of private capital. Private banks intensified competition in service market, what was one of the important stages of the development of home banking system. The government and CB stimulated their development in every possible way, maintaining by tax exemption and technical support in training of personnel. Currently the number of private banks increased almost half of the total number of the commercial banks of the republic.

Intensification of the private bank development in the republic furthered to raise competition, to improve the quality of the performed banking service, effective market distribution of financial resources. In its turn, that affected the process of private entrepreneurship development in the country.

It was the period of the regulation system development of the banking activity targeted at further liberalization and intensification of the reform in the country. In that period the goal  was to strengthen confidence  of people in whole banking sphere, to make banks as financial  support for realized reforms in the republic, from the achievements of which the directions of further development of the banks depended on. It livened up the process of turning into a joint-stock company of the enterprises and change of the form of their ownership. The banks following the conception of their development improved strategy according to the requirements of new type of economic development of the country. Widening of base of their resource  and lifting of the level of capitalization was realized owing to obtained funds of new shareholders, diversification of own activity, new banking product development and tools on the base of IT-technology.

The factors associated with liberalization of exchange market and  arrangement of necessary conditions to provide convertibility of so’m on current international operations influenced directly in bank activity. In October, 2003, the Republic Uzbekistan assumed liability of  Article 8 of Agreement of International Monetary Fund at the result of which the enterprises had got opportunity to convert on current operation. In that issue Uzbekistan reached the goal basing on own resource, not  attracting external borrowing.  Taken steps promoted to expanse home enterprise activity which had got access to convert national currency. The number of currency exchange offices grew up, procedure of foreign currency purchase was simplified. It was the stage of productive work. The policy of the CBRU was targeted at export incentive and effective use of currency resources, together with containing of inflation and averting of sharp fluctuation in exchange.  Favorable price conjuncture of general export goods of Uzbekistan in world markets as well as conduction of export-oriented monetary policy  furthered to increase the amount of export and growth of currency reserves. 

The process of the reform of banking system  was gone on. Its main directions were: strengthening of the corporate management system by upgrading the role of shareholders in bank management; raise of financial stability of the banks owing to improvement of  assets quality including currency; further banking development and expansion of banking service performance; raise the role of commercial banks in investment process  and development of mechanism of access of entrepreneurial structures in all forms of ownership to credit resources including  international financial institutions.

It was set sure and effective mechanism to protect the deposits of the people in the banks. Within the bounds of the law of the Republic Uzbekistan “About guarantee of security of funds of citizens in the banks” it was founded the Fund of guarantee of security of funds of citizens in the banks, the members of which became, except “Halq bank”, all commercial banks carrying out its activity on the territory of Uzbekistan. Reliability, high quality service performance,  partnership with clients became the main principles of banking activity of Uzbekistan. The institutional background of functioning of banking system was developed. The adoption of program documents targeted at liberalization and reform of banking sector predetermined improvement of efficiency of its activity. On the base of them the system concepts and  progressive advance of banking activity liberalization were. Adherence to such principles allowed to strengthen confidence of people in home banks. Such approach was outstanding achievements in the process of the formation of steady and reliable banking system.

Since July 1, the small business enterprises had an opportunity to export the goods  (work, service) of own production for foreign currency in cash through the savings bank offices of the banks, entering export proceeds in their accounts in established order.  For such unprecedented step the government of the republic went for the purpose to encourage the development of small-scale business and private enterprise still more, extend its foreign economic activity. It was set Consolidated stabilization fund in freely convertible currency which became an important instrument for the further development of over-the-counter exchange market in Uzbekistan.

Collaboration of banking sphere with private sector showed itself more appreciable. The important factors favored that collaboration development were: gradual improvement of the quality of banking service performance, origination of competition in banking environment, tendency to support entrepreneurial sector of the country. That period marked the beginning of the balanced policy on bank crediting, searching of customer inquiry and quick reaction to the requirement of their business.

 In whole that stage was characterized by important achievement in strengthening of banking system of Uzbekistan.  It was realized the formation of effective banking sector with modern infrastructure.

The strategic tasks were put at the banking system of Uzbekistan, which should determine the perspectives of the banking sector development. The first one was to support financial steadiness of the banks and enlarge the range of financial service in domestic market. The second one was activization of the banks of the republic in international exchange market.

In that period the President of the Republic Uzbekistan paid still more attention to the issues of the development of financial banking system of the country, its strengthening and qualitative improvement of the activity so that its stability should be able to withstand crisis. In connection with it the important decisions made to raise the level of capitalization of a number of leading banks (Uzindustrialconstructionbank, Asakabank). The decree of the President of Uzbekistan about increasing of statuary fund of “Microcreditbank” made a qualitative change of the activity of that bank that it became  one of the main credit centers  of financing of small-scale business and private enterprise.

Every year of that period became as a new stage of common progressive development of the banking financial system of the country.

Carrying out further liberalization of international monetary policy, Uzbekistan worked out and introduced the mechanism of foreign exchange sale in over-the-counter foreign exchange market.

Such mechanism proposes purchase of exchange by authorized banks from their clients on a contractual basis at free exchange rate on the basis of supply and demand in foreign exchange market.

The banks acquired enough power to be able to work in compliance with Basel recommendations.

On the basis of Basel recommendations on banking supervision and international practice it was worked out the package of  the statutory acts regulating the activity of the commercial banks within the framework of international standards of financial statements. There it was used the principles of advance revelation of the issues on commercial bank balance  and taking measures to stave off running out of capital as well as decrease of banking liquidity for the purpose to support financial steadiness of commercial banking organizations.

One of the strategic directions of the reform was stimulation of private capital inflow to banking sector. This process became more active  after the issued decree of the President of the Republic Uzbekistan “About the arrangements on motivation to form private commercial banks” in 1997, that specified  immunity grant to institute the banks with the share of capital of natural persons not below 50%. 1977 year went down in the history of the development of banking sphere in connection with information systems implementation  in banking activity. Before that time practically all accounts on the territory of the republic were done during a day. Since March, 1997 a new software and  conversion of all accounts to automatic regime were introduced.  That allowed to realize payments during 15 minutes all over the territory of the republic and within the range of Tashkent - during 3 minutes.  

It was worked out the mechanism of calculation and introduced the modern system of inter-banking  electronic payment. The banks were given the unique possibilities to fit out  the departments by modern computer and telecommunication equipment. They were exempted from a number of  taxes to direct exempted means to modernize equipment.

The qualitative new consumers of financial and economic information – home and foreign investors - appeared  in the country.

The law of the Republic Uzbekistan “About banks and banking activity”, adopted that year, concretized the legal  framework of the activity of the second level banking structure – commercial banks.

At carrying out the basic laws “About the Central bank of the Republic Uzbekistan” and “About the banks and banking activity” it was taken into account the experience of the countries with the developed financial system. These laws as well as the law “About the stock companies and protection of the rights of the shareholders” created favorable legal conditions to form private and corporate commercial form of the non-state banks. At present time the following factors have special effect on the development of banking sphere: first, as a result of realized reforms in 1996, the CBRU became an authorized body of monetary regulation and banking supervision; secondly,   the law of the Republic Uzbekistan “About the banks and banking activity” concretely defined the legal  framework of the actions of the second level banking structure – commercial banks. It specified principles of formation of universal commercial banks on the base of diversification of banking assets and attraction of foreign capital.

Peculiarities of that period were the formation of credit and financial institutions served definite brunches of the economy. Such specialization was due to necessity to finance the definite brunches and sectors of the economy (automobile industry, aircraft building, agriculture and others). Further specialized banks widened the range of activity and their clients in accordance with the requirements of business circumstances and new level of the  development of the economy of the Republic.

Process of establishment of the CBRU as a regulating and supervising body of the banking sector  was gone on.  Is was carried out qualitative renewal of the legislative base, clauses of which were adjusted in according with international banking practice.

1995 year was characterized by improvement of banking legal system. The historical important law “About the Central bank of Republic  Uzbekistan” added not only legal foundation of banking system, but clearly determined the new special state and powers of the CBRU setting its paramount goals and tasks. Simultaneously, it was created the necessary conditions for improvement of quality service provision to population  as well as creation of competitive circumstances in credit and deposit markets. After abrogation of the regulations restricted the sum of involved capital of people by amount of private capital of the bank, the opportunity of banking establishments was efficiency expanded and competition grew up. The results didn’t keep waiting. If in the beginning of 1994, 98,5%  of savings of people was the share of Savings bank (today it is Halq bank) and 1,5% - the share of other banks, then at the end of that year the share of the commercial banks went up by 12,8%. Today this indicator is 83,2%.

In 1993-1994 years the reform of banking system went on. Introduction into circulation the national currency so’m since July 1, 1994 became an important landmark in the formation of independent banking system and the development of the economy of Uzbekistan as a whole. In fact it meant that the Central bank became independent completely in its activity and further it could facilitate the effective formation of the national monetary system by market instruments of its regulation.  Just from that time the activity of the CBRU on carrying out the tactics on conduction of monetary and credit policy and currency regulations, regulation of banking activity, then formation of effective payment system was completely targeted at provision of steady national currency.

1991 year made a start to formation of a number of the banks which functioning in changed conditions of the development of the economy of Uzbekistan gradually obtained new features assimilating modern methods of work. 1991-1992 years became a turning period of banking operation. The adoption of the law of Uzbekistan “About the banks and banking activity” was the base to form two-level banking system and created the Central bank of the republic entrusting new functions to it. It was put the tasks of regulation of monetary circulation and payment system as well as the formation of the commercial banking structure before it.  So the formed specialized commercial banks should finance the different brunches of the economy that started to work out the new strategy of their development and form their internal structure on the base of modern principles and requirements.