Uzbekistan - Financial Sector Assessment

Overview & Synopsis

Uzbekistan’s financial system has been undergoing significant changes since 2017. Reforms were underpinned by the modernization of the legal framework in 2019, which encompassed the adoption of new laws for the central bank and banking sector. The 2020 banking sector strategy aimed to increase the role of private banks and improve the operations of the remaining state-owned commercial banks (SOCBs), including by shifting their lending to market terms, strengthening risk management, and improving corporate governance. At the same time, the authorities encouraged the growth of the non-bank financial sector and tasked the National Agency for Perspective Projects (NAPP) to oversee insurance and capital markets. The transformation of the financial sector is an important part of broader economic reforms, which include exchange rate unification, price liberalization, and privatizations. Looking ahead, financial stability and development objectives need to be carefully balanced to support sustainable, private sector-led economic growth. The authorities have strengthened the institutional and operational frameworks in support of financial stability; however, concerns about the build-up of credit risk in the banking system require attention and maintaining independence of the CBU and NAPP is crucial. While enhancing financial inclusion is a worthy objective, the authorities are encouraged to use more market-friendly mechanisms rather than directed and preferential lending given its limited effectiveness and trade-off with financial stability. Such market-enabling mechanisms can include stronger reliance on wholesale lending and partial credit guarantees through reformed DFIs. Combined with SOCB privatization efforts and further reform of SOEs, this would support private sector-led growth. In addition, financial inclusion and deepening can be enhanced by further developing the non-bank financial sector, using the payments system to increase efficiency, and developing long-term sources of financing. Combined, these reforms can all play important roles in supporting sustainable economic growth.