To anyone interested in our banking system

[The Banker]

Hi everyone! Let's discuss something real.

On March 21st the government issued a decree titled "A decree by the President of the Republic of Uzbekistan on measures to further liberalize and reform the banking system."

The following is the brief content of the decree under the decree, "a special fund is to be set up by commercial banks to give preferential loans to small and medium-size businesses and peasant farms. With the aim of furthering reforming the banking system, a Central Bank floating refinancing rate is to be introduced effective 1st April 2000, which to be adjusted monthly in line with inflation and supply and demand on the currency market. An international centre for banking and financial services is to be set up, tasked with studying the financial and money market, improving the banking system and liberalizing currency policy. Further, a special fund to protect the population's deposits is to be created. Commercial banks are responsible for managing their own business risk, under the supervision of the Central Bank; government officials and law-enforcement agencies are prohibited from intervening in the way commercial banks manage their business risk and form their credit portfolios and assets." (source www.uzreport.com. Full text of the decree is also there)

What do you think of the effectiveness / usefulness of this decree? Is it going to change anything?

I personally think this directive will not achive its goal. Would you agree? Why?

[mustafa]

Hi Banker

It is a very hard task to perform and highly unlikely to be implemented subject to l market indicators. Government beleives in its own money market where it operates but the outside effects are not considered much.
On the other hand it could be good step to forming a new basis to banking system ie making funds flow in an organised way. But it is clear that it is very difficult to gain confidence of people to our banking system. So the money of that special fund by commercial banks will flow out of the system and it is less likely that most of it will return to banks unless it was stated in the loan provision agreement ie to show businessmen how to spend their money. What business they can do with that constraint? By the way multiplier will not work here as well, even if it does its effect will be very small. Then we don't have credit expansion as well (Thank's god) otherwise it would only lead to higher spending and inflation.
I wonder where that money for special fund will come from?
I think it would be much better if government could induce interest sensitivity of all kind of assets, perhaps by advocating leasing, mortgages and at the same time savers ( for which it takes lots of time).

Mustafa

[Sanatullo]

Hi,
It seems you guyz have to learn something about our banking system. I think the above mentioned decree will achieve its goals, and I don't want to discuss "why". :))Just tell ya"Learn, learn and learn about our banks".:))
Regards
Sanatullo

[Sanatullo]

Oops, probably I made a mistake writing that message under this topic. Hmm, I didn't know that The Banker and Shum_Bola are the same person. I found out that after I have read the other message.
Again, I don't wanna argue. Just advise Learn, learn and learn about our banks to know more and more about us.

[Shum_Bola]

Assalomu Alaykum

I tried to read this decree as careful as possible, due to suggestion of one of my friends:)

Banker , i agree with You. There is a little probability of success of this decree. Reading this decree I found that one of the main objectives is to encourage local businesses. But do we have conditions for local business development and prosperity?

Let us assume that it became too easy and cheap to take a loan. Of course, the funds obtained have to be invested. If obtained funds are to be invested in operating capital only (since there exist conversion problems to import technologies) it may cause inflationary processes to start. Simly the amount of money in economy for given products will increase.
More than that , the taxation of producers does not look like too atractive as well. I have heard that if you pay all stated taxes it may account up to 80%, which is unacceptable for developing economy.

So, what should be done.
I do not know exactly whether there is any special conversion sources for small and medium range businesses to import equipment, but it has to be implemented.

The tax treatment of producers has to be revised. OK, some may say that there are tax shelters for new organised companies, but do you know what is really happening with them? They simply open, exist tax shelter period and close to be reopened under other name. :)

In general, the decree sounds very optimistic. Esp. I liked the parts concerning decrese control of Commercial Banks, do not demand the origin sources of private deposits and cash them on first demand, creation of deposits insurance fund.
But I also wonder like Mustafa, what is source of providing that additional credits?

Xurmat ila
Shum Bola

[Shum_Bola]

Assalomu Alaykum

Sanatullo, maynavozchilik xam evi bilande endi. ja bo'masa IP va message vaqtiga qarang. tilim bor deb valdir-vuldur qilaverish kerak emasde.

If U do not want to argue, do not do it, just discuss and relax. Life is not that complicated as U think. :)
relax, and enjoy:)

Xurmat ila
Shum Bola

[KROK]

Little comment - 1 Great Lesson Learned from the history of the Banking system in the USA

Any regulations of commercial banking do not do any good and create losses to the society

Including FDIC, Community Reinvestment Act, Discrimination in Lending, Glass-Steagal Act... All of these banking regulations proved to be only harming and greating extra costs of doing banking. I think it's about time to greatly deregulate Uzbek Banking and quit dividing the banking sector into "sector banks" like Pahta Bank etc

If you don't agree I could recommend reading some papers by George Benston on the empirical evidence of banking regulation

KROK

[Sanatullo]

Voobshem tushunmadim. Manavi gapni aytgan sizmidingiz?

"Menga ilova qilgan ukaz uchun raxmat, u bo'yicha fikrlarimni "to anyone who interested in our banking system" baxsida topasiz. Xavotir olang, darrov kritikaga o'tmadim, bir oz o'ylab oldim."

Bu maynavozchilikmas. Balkim tushunmovchilik.
A voobsheto yana vaktimni bekorga utkazishga tug`ri keladi. Keyingi messajda menimcha nima uchun Uzbekistondagi bank tizimiga aynan yukoridagi karor kerakligi hakida anik faktlarga asoslangan holda yozaman.

[The Banker]

Thanks everyone for expressing their thoughts.

Shum Bola and Mustafa asked where the money for the "special" fund would come from -- the decree says that the banks should create a special fund "by transfering to the fund up to 25 percent of the banks' profit." This is practically creating a new account in the books of the banks, and everything else remains unchanged including total amount of loanable funds in the bank.

I looked closely at this decree and once again reached a conclusion that whoever wrote it was trying to solve the existing problems by telling the problems "solve," as if he was a magician who can make an object dissappear by saying a magic word. For instance, one problem this decree is attempting to tackle is apparently too low amount of loans given out to the target group (small/medium sized businesses). How did they decide to solve this? The decree suggests that banks allocate 25% of their total funds to a special account. Let's say the banks follow the directive and create a special fund - will this increase the amount of loans to the targeted firms? I don't think so, because the banks are still free in deciding who they will lend. If a bank thinks that the borrower is too risky it won't lend the money to him. The bank would rather keep the funds in its special account and let the inflation burn them slowly, than give them away to someone who probably will not pay back a penny. The decree doesn't say that the banks must lend the entire amount of the special fund. So the money will simply be there as there is no obligation to lend it. The decree only creates a restriction regarding whom this money can be lent.

To me it looks like the government is going the wrong direction regarding this particular problem of insufficient credit for the target group. I think it would be more correct to look at why the banks are not lending to the targeted firms. Mainly the reason is that small start-up businesses have neither credit history nor collateral (zalog) to insure that return from investment will be positive. I think the attention should be directed at how to create incentive for the banks to give loans and not merely instruct them to give loans. And this incentive could be created by somehow eliminating the collateral and credit worthiness issues which I mentioned above.

And this is just one aspect of the decree.

P.S. Sanatullo, what made you think me and Shum Bola are the same person?? Also if you don't want to discuss this why did you write your opinion in the first place?

Take care.

[KROK]

All our banking system needs is MORE FREEDOM, not 100 more new degrees that literally dictate them what to do! DON'T FORGET THAT BANKS ARE THE MOST EFFICIENT WHEN THEY ACTUALLY COMPETE, not when the rulez are set to them!!!

We need some kind of insurance for beginning to bring trust to customers. And some periodic review would be necessary by Central Banking agency. But everything else should be left to the decision of the bank!

People, think of the historical reasons of Bank Regulations!!! Example USA Why have they been regulated at the beginning? If you go back to Civil War, banks were main fund providers of the war and at times banks printer the dollars (BANKNOTE). That's all. Then federal government tried to regulate more and more.. What was the result? Massive failure of Unit banks during the depression, because the banks were heavily regulated and branching was not allowed. Compare it with Canada in 1930s. Recession hit Canada badly too, but not many banks failed because the regulation wasn't that severe.

There is NO RATIONALE whatsoever in excess regulation of the banks. Banks are just same type of firms that exist in economy. No matter how many regulation we will have, smart managers will know how to find the way around. That has been proven in the USA - simple example law that prohibits paying interest on checking account - Banks now have NOW (Negotiable Order of Withdrawal) accounts - same thing as checking but it pays interest

We all have to realize that REGULATION hinders the performance of the banks and creates burdens for society. Instead of thinking how to improve the regulations we have to think how to liberate our banking system....

Any ideas and critique is welcomed!

KROK - liberalist :)

[Sanatullo]

Guyz,

I apoligize that I have confused Shum_Bola with The Banker.

Now I try to give some info on why that decree was important in our banking system.

1)How our banks finance the projects? Since the source of bank's lending closely related with that, it seems to me that most of our discussions above are based on the process of banks' money creation. But, is it the same in our country? As far as I know, most of the banks use "the tranche" financing or they finance the projects through the specific credit lines. For example, take any bank in Uzbekistan and analyze how they finance the projects. I think the current decree would change the situation. It encourages banks to finance projects through their money creation.

2) Everyone knows that the capital control creates the burdens in the economy of a country. No matter in what forms it exists, it was observed that the capital control was the source of the existed parallel market. For example, when the enterprises were banned to withdraw their cash from their accounts, it created the parallel market of cash(nalichniye) and non cash(perechesleniye) money. Up to this moment, Uzbekistan had the full capital control like the above mentioned example. (The officials associated it with the fiscal problems in the economy.BTW,it may be a new topic)The current decree would remove such barriers for the enterprises. Eventually it means that there will be no difference between "SOUM" and "SOUM". :)

3) While the second example was an economic form of capital control, the other forms of capital control is the administrative costs of the borrowing. Based on my talks with many enterprineurs, the main reason for why the enterprises were not borrowing from banks was the high administrative costs of borrowing. In some cases(I was surprized), the administrative costs of borrowing is even higher that the actual cost of borrowing. The current decree would eliminate the administrative cost significantly. Since it restricts different "organ"s involvement in the project financing. (The second and the third arguments are based on IMF's paper on Uzbekistan. They were advising Uzbek government to remove such barriers since the beginning of banking in Uzbekistan.)

4) Today, Uzbek banks have the huge reserves. I think the main source of that is associated with the oppitimism of government to print money.:) My argument is based on the statistical data of interest rates in Uzbekistan. If you know, up to date, CBU's discount rate was 3% a month. It means they had around 42% annually. Here, even I am confused because they say that their discount rate is 36% a year. But they use 3% a month. At the same time, the interbank rate was fluctuating within 21-25% annually.(Sourcewww.daewoobank.com) Here, I assume that the interbank rate was based on the rationality of banks. If you look to the T-bill's data, the situation becomes more apparent. Because T-bills have much lower interest rates than interbank rates. All of these data mean that our banks have high excess reserves since they are willing to lend cheaper than the cheap money of central bank. For analyze, I suggest Hubbard's "Money,the Financial system and the economy." or Mishkin's "Economics of the money, banking and financial markets".
At the same time, the interest rate in the black market was fluctuating around 10-25% monthly, which stands for around 150-280% annually.
The current decree would allow banks to lend to the third party, that is the private sector of the economy.
By this decree, somebody gets something which he/she needed while somebody gets rid of something which he/she didn't need much. (The last sentence is my fantasy. :))

To be continued.

Regards

Sanatullo

[KROK]

1)How our banks finance the projects? Since the source of bank's lending closely related with that, it seems to me that most of our discussions above are based on the process of banks' money creation. But, is it the same in our country? As far as I know, most of the banks use "the tranche" financing or they finance the projects through the specific credit lines. For example, take any bank in Uzbekistan and analyze how they finance the projects. I think the current decree would change the situation. It encourages banks to finance projects through their money creation.


Why aren't our banks financing the projects with non-traditional sources like "the tranche"? Why aren't they using the primary source of funds DEPOSITS??? Overregulated and incompetent banking system has no trustworthy reputation among population and local businesses. Was there any attempts to establish deposit insurance?

3) While the second example was an economic form of capital control, the other forms of capital control is the administrative costs of the borrowing. Based on my talks with many enterprineurs, the main reason for why the enterprises were not borrowing from banks was the high administrative costs of borrowing. In some cases(I was surprized), the administrative costs of borrowing is even higher that the actual cost of borrowing. The current decree would eliminate the administrative cost significantly.

Why is the administrative costs are so high? Again our "bright" banking regulation.. Why a farmer that grows cotton can get credit most likely only in "Pahta Bank" and not "Galla Bank", "Uzmevasabzavotbank", "Promstroybank"? Sectoral segregation created monopolies that only hurt!

KROK

[Sanatullo]

Guyz,

Let me continue my arguments on why the current decree was necessary.

5) Up to day, as KROK mentioned, nobody tried to establish deposit insurance. I fully respect and support KROK's idea on attracting populations money to the banking industry. Because all of the works on retail banking remain on papers, not on the real actions. However, we also should understand the condition and history of our banking. Why?
Because
--From its birth, our banking system inherited the default on populations deposits. (Remember 50 and 100 Soviet roubles).
--When government tried to establish its previous soviet obligations (ZAYEM) in the beginning of 1990s, the condition didn't allow them to continue it as it was during the Soviets. Banks were accused on default.(As far as I know people think that way)
--Deposit of population sharply lost their value. (I have met several people whose deposits, which worth a car in the beginning of 1990s, became nothing at the end of 1990s.)
--In addition to all of these, banks were highly regulated throug capital control etc. I don't ignore that this didn't hurt banks. Again,I support KROK's idea.
But we should also understand that it was their mistake. Did they try to change situation and regain their credibility? They tried but it was ineffective. For example, the government of Uzbekistan was the only government among FSU countries who began to pay the money deposited prior 1991. Among those deposits you can find the first default of government. (RUBLE DEFAULT). Although they tried, due to the value of deposits it was ineffective.

The current decree would change the situation structurally. Under the auspice of CBU, the deposit insurance "OMONAT HIMOYA" would be established. You can read its task in 8th section of the decree. But the problem is not only related with the deposit insurance, the macroeconomics indicators are the main problems as well.

[Sanatullo]

6) According to the decree, a special fund would be established. The main task of the fund is to finance the projects. I think, by this change, banks continue to use "tranche" financing. But at the same time they will create money. To my mind, the reason of their using "the tranche" financing is related with the centralized financing. Because the special fund would lend only to the targeted creditors. I am not arguing that it is the most efficient way. I agree that it will not encourage competition. But I think as far as we would have the corruption in the banking, it would be the reasonable method and argument for the regulators to use "the tranche" financing.

[Sanatullo]

7) As it is known from my previous messages, I am optimistic on this decree. I believe, though the results of the current decree can't be seen in the short run, the situation become under control in the long run. Because if the decree is implemented honestly, it means that you can indirectly control the economy through the monetary policy. I think in order to avoid some external shocks like "high inflation", "too many defaults on loans", we need the active monetary and fiscal policies. I hope the government would stop printing money and began to issue T-Bills in order to stabilize the situation.

Hurmat ila

Sanatullo

[Shum_Bola]

Assalomu Alaykum

KROK,
there are trials to create the deposit insurance funds, from the decree we are dicussing
" 8. The proposal of the Central Bank and the Ministry of Finance of the Republic of Uzbekistan to create a Fund of Collective Insurance of People's Deposits on the basis of the Omonat Himoya [Savings Protection] insurance fund of the association of the banks of Uzbekistan, is to be accepted, and its authorized capital is to be brought up to 500m soms. "
But this has to be more videly explained between population. Otherwise it will not work.

If the confidence of the population is one of the problems, another one is not EXISTANCE of the money to be deposited in most part of Uzbekistan population.
And it seems to me as one of the main problems.

Therefore the banking system of Uz. has to focus on local producers and businesses more. But here the problem raised by The Banker faces our banks, unsufficient collateral.

More than that most of the local businesses are unaware of presenting business plan, to conduct the feasibility study of the projects e.t.c...
Taking that into account, special consultancy companies have to emerge in order to assist the loan takers.

Sanatullo,
Uzb. government was not the only CIS gov. to undertake Deposit return program. Russia, Baltic states and some other gov-s (I can find out the list of them). Probably Uzb. was abong of the less persuasive. Since the amount and the structure of the return was put in a such way, that inflation could swallow everything.

Guys, whoever knows, let me know the information concerning saving ratio and its pattern in Uzbekistan.

Xurmat ila
Shum Bola

[KROK]

Guyz, thx for the further insights

One problem that potentially may arise with the establishment of Deposit Insurance is having banks pay same insurance without taking into fact the quality of their assets.

I really would like study the system first before making any conclusions, but one thing seems obvious is overregulation.


KROK

[Sanatullo]

Shum Bola,
Bir gapni yozishdan oldin avval sal uylab olish kerak. Men ham kovlayversam gap kup. Masalan, Baltic states CISga kirmaydi deyishim ham mumkin edi. Lekin men aytmayman va aytish niyatim ham yuk. Odam bunchalik pastkash bulmaydi. Mard bulging urtok. Pashkashmas.

[Shum_Bola]

Assalomu Alaykum

Sanatullo, I am alredy fed up reminding You not to comment on personalities, but on the topic itself.
REMEMBER WE ARE HERE NOT TO WIN, BUT TO DISCUSS.
DO NOT TAKE EVERYTHING PERSONALLY!

And You are not the only one who can use "beauteful" language.

Dear, WEB master, could You please comment on this issue. Do not regard this as an coplaint, but the basic ethical norms have to be followed.

Xurmat ila
Shum Bola

[Shum_Bola]

By the way,

Sanatullo, if You still have personal problems with me, You are welcome to discuss them one 2 one in Choyhona tonight.
I will be there b-n 22-30 and 00-30 (GMT)

Nick Shum Bola

[Banking]

I would like to comment on KROK's ideas about overregulation.
If you studied the history of bank development in the US, then you can recall that that depositors' paniced and their trust decreased sharply after banks failed (e.g. after the market crash of 1930's). At that time banks were not indeed regulated well enough. In the case of commercial banks and investment companies, it was not observed much of a difference in products they offered. Most of the time, commercial banks would try to shift their focus to investment operations, the area where they were not as sophisticated as investment companies.
Glass-Steagal Act of 1933 separated investment operations from commercial lending in order to gain back depositors trust in banking system of the country. Since commercial banks could no longer compete in investment area they had to compete by developing new products (e.g. NOW accounts, or interest paying savings accounts, and later offer MMMF's, which they fought in order to be able to offer).
In Banking Reform act of 1999, many changes were made however, and now competitions gets even tougher since the spread in what banks can and cannot offer gets even smaller. For example, some financial institutions are restricted to merge if they do not serve poor areas.
My point is that goverment regulation is indeed necessary if its intent is to sustain well-being and growth of the economy. So, I do not agree that in case of the US, acts and regulations had never proved to be effective. The matter is the willingness of banks themselves (as someone mentioned earlier) to survive and grow. Hey, are not banks are the ones who make politics for themselves? Indeed, they are the ones who give financial and other support to politicians who work on acts and regulations. At least, in the US it is common. For example, there are many cases, where banks sued government and won. Recent is the banks' fight against Credit Unions on restricting them to serve broader range of customers and to be limited only to the area of their communities and involved member organizations. Credit Unions are one of the financial institutions who have huge number of members.

might be continued...

[Sher]

Hi,

First, a little note as a moderator I didn't have opportunity to read this topic carefully earlier, and I only skimmed through and seeing such names as Sanatullo and Shum bola I couldn't ever think that moderation would be neceassary here. Unfortunately I was wrong. :( Nevertheless, I hope you'll find the way out and do not discuss personal issues here.

As far as the decree is concerned I'm more in favor of liberalists ;)

Let's analyze why they issued this decree?

This summer I saw the report on the activities of Commercial Banks in Uzbekistan, and investments in T-Bills were more than the 90% of the total investments of Banks. Why Banks invest in T-bills, even if they are not profitable? (Someone mentioned this above already I think.) And why they do not invest in real sector?

In addition to other problems related with real sector like high riskiness, low competence etc, there is a big regulatory problem. Commercial Banks are not allowed to put interest rates higher than the double of the Central Bank's refinancing rate. That's in this rate of interest they do not find any real sector projects attractive, so they do not invest in them. They could raise interest rate and make that investment attractive, but there is that restriction and refinancing rate is very low.

Now they issued new decree which "forces" banks to "increase their funds" by lending to real sector. If it were profitable Banks wouldn't need any "enforcement" to make money ;).

So I'm in favor of liberalists, and I think this decree is not going to bring any welfare gains.

(I'm not very strong in banking, so I hope you'd correct any mistakes I could make in this issue. )

Sher

[Sanatullo]

Shum Bola,

I don't have any personal objections to you. But you are talking based on nothing and keeping on to critisize. Besides, you are still unknown for me. This made me angry.

Sher, I am also "liberalist" in many terms.:) If you have carefully read the recent decree and our discussions, probably you find that the current decree is the source of liberalization for our Banking sector. It is true that the decree creates another regulating body, "Omonat Himoya". But I think 500 mln soums is nothing for our banks to regain their "credibility". :) But I don't know whether this deposit insurance would be helpful in regaining the credibility of banks.

Sher, your argument on the banks porfolio is important. But I think it is useless in analyzing the banks' strength to lend. If you analyze and compare the (refinancing) discount rate of CBU, the interbanking rate and the T-bills rate, you will find that there is the huge excess reserve in our banking sector. The current decree would be "Let it go" for many banks. Because they began to lend to the third sector and minimize their excess reserves.

Respectfully,
Sanatullo

[Sanatullo]

Guyz,
If we don't count the exchange rate system and the convertibility problem, there would be only one main structural problem in our banking sector. It is the allowing enterprises to open bank accounts in only one bank. If the regulators allow businesses to open several accounts in different banks, it would be too complicated to control businesses and collect taxes. Now, do you think it would be OK to remove this barrier?

My opinion on this matter It would be ok, but we need some innovations in our fiscal sector. Because, the revenue part of budget should not decline significantly.

Your opinions are welcomed. Please, try to use examples from the developing countries not from developed countries.

Respectfully,

Sanatullo

[tolerant]

I went thru ur messages about banking. But may I ask you to tell in between the current tax burden of bussinesses in Uzbekistan? I would appreciate very much. Thank you!

[KROK]

If you studied the history of bank development in the US, then you can recall that that depositors' paniced and their trust decreased sharply after banks failed (e.g. after the market crash of 1930's). At that time banks were not indeed regulated well enough. In the case of commercial banks and investment companies, it was not observed much of a difference in products they offered. Most of the time, commercial banks would try to shift their focus to investment operations, the area where they were not as sophisticated as investment companies.

don't forget that branching was not permitted by McFadden-Pepper Act of 1927. Again, if you can't diversify your risks by being dependent on only one unit bank, of course the risk of failure is gonna be greater, don't forget that some geographical areas weren't that affected...

[tolerant]

I went thru ur messages about banking. But may I ask you to tell, in between, how much is the current tax burden of bussinesses in Uzbekistan? I would appreciate it very much. Thank you!

[D.R.E.]

Ok people,
I think this discussion is very strong and all the opinions were very competitive and thoughtful. I agree with most of the points and here are my thoughts on the topic

1. Personal business.
What is REAL business or entrepreneurship in Uzbekistan right now?
-- Ippodrom in Tashkent. Money is made and accumulated there. People, don't put their money in Banks just because it's useless as you'll lose ur deposits with inflation. So, they tend to keep their money at home. Then, this home-kept-money from all over Uzbekistan will go to Ippodrom... most of the time. Where is the role of Banks? Nowhere!!!
Accumulated money will turn to dollars and go overseas to buy new products and new cycle begins. In all this money circulation Banks didn't get a darn.

Problem solving
There is only one actual way to solve the problem... but it's unrealistic right now. i.e. introducing credit and debit cards throughout the Republic so that people could deposit their money and get them any time anywhere. It's unrealistic because costs tooo much and we don't have a good ATM regulations system.

So, Central Bank issues money. Gives it to citizens as paychecks (often 6 month later just like ACCELS to us sometimes) And at the same time Central Bank can't get the money back through taxes and stores... just because there are tooo many regulations on banks so that they can't offer good enough services to people to deposit their money in banks.
What would we have from this?
-- As Banks don't get the money back and people need to be paid their salaries, Central Bank needs to issue new money... New money invites inflation... And the old circle starts rolling again.

I hope, Uzbekistan's government will be smart enough to open the doors of reform to bright, energetic, young people in Finance area... so that they can make some real changes to a prosperity.

2. Convertation.
As long as we don't have open convertation, entrepreneurs can't do business !!! It's as simple as that. Of course for the first years it would be a hard process. But it will give its fruit later on.

Regards,
Dr DRE

[Sanatullo]

Tolerant,
I agree with you (it is just my opinion)that most of businesses are under the tax burden. But something should be done.