Kyrgyz Banking Shows Promise

The Kyrgyz banking sector has great potential but is being held back by the substantial grey economy and the high level of corruption, say NBCentralAsia economic observers.



“Kyrgyzstan is a country of immense potential interest to major investors,” according to a statement by the Union of Banks of Kyrgyzstan and the Moscow International Monetary Association, which are jointly organising a July 26-28. banking conference that will draw participants from the Commonwealth of Independent States.



NBCentralAsia economic observers agree with this premise, but add the proviso that the sheer size of Kyrgyzstan’s shadow economy is holding back the development of banking.



Although the Kyrgyz banking sector is now the second most attractive in Central Asia after Kazakstan, the grey economy is equivalent in size to 40 per cent of gross domestic product, according to figures from Investment Roundtable, a non-government association.



“Kyrgyzstan has substantial capacity to develop its banking sector,” said Bolotbek Baikhojaev, chairman of the board of Issyk-Kul Invest Bank. “To achieve that, we must root out corruption, reform the tax base and remove the shadow economy.”



Chinara Seidakhmatova, who heads the Congress of Business Associations, sees a direct correlation between the bank’s assets and the funds held as part of the grey economy. She notes that when Kazakstan offered an amnesty for such capital, it resulted in a significant increase in money deposited in the banks. That has not happened in Kyrgyzstan yet, although parliament passed a law on June 18 allowing people to “legalise” real estate and other assets by paying the government five per cent of the capital value.



Seidakhmatova says that even if shadow-economy businessmen are not yet rushing to invest their money legally, Kyrgyzstan does have an open and liberal banking system which is already having some success in winning foreign investors.



Investment from Kazak banks makes up 40 per cent of the total assets in Kyrgyzstan’s banking system, and the trend is expected to grow after the two countries agreed to set up a joint 120 million US dollar investment fund earlier this month.



Kemal Izmailov, director of the Institute for Public Policy Studies and Analysis, adds that the Kyrgyz banking system proved its strength by maintaining stability during the March 2005 revolution, when the then President Askar Akaev was ousted.



“The banking sector proved to more stable… than other sectors of the economy, which failed,” said Izmailov.



He explained that banking is focused on commerce, which did not grind to a halt despite the instability.



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)