Banking Sector of Kyrgyz Republic

Kyrgyz banking system constitutes a dynamically developing sector of the country’s economy. Analysts usually consider 2002, a year which followed three years of stagnation, to be the turning point of the Kyrgyz banking sector development. The year 2003 is described as the start of the current banking renaissance. The year 2004-2005, then, shall be remembered as the years when the Kyrgyz banking sector started to gain considerable force while bank capital started to find its way into every sector of the Kyrgyz economy.

During 2005, the Kyrgyz banking sector continued to march down the path of successful development despite political unrest in March, which is predicted to have a continued impact on the course of the nation’s economy development. However, the timely taken stabilization measures helped to prevent the economic recession and ensure the macroeconomic stability in the country. The financial services market remained stable and commercial banks not merely continued to operate normally but rather demonstrated a successful growth as evidenced by financial indicators. It is worth noting that the banking sector’s growth shall be marked as both quantitative and qualitative as evidenced by the sector’s financial performance and better capitalization of Kyrgyz bank in the reported year.

In 2005, the number of commercial bank increased with the launch of one more commercial bank which evidences the increase in competitiveness in the Kyrgyz banking sector.

The banking system of the Kyrgyz Republic includes the National Bank of the Kyrgyz Republic, 19 commercial banks, one branch of a foreign bank and one specialized banking institution (as of January 01, 2006). These figures do not include those banks whose licenses have been revoked.

In 2005, virtually every financial institution in the Kyrgyz Republic (with the exception of the branch of a foreign bank) increased its asset base as well as its shareholder capital. The combined assets of Kyrgyz financial institutions grew by 33.3% year-to-year and amounted to 21.9 billion soms. The composite deposit base increased by 54.7% and amounted to 12.6 billion soms. Deposits from legal entities comprised the majority of the total reported deposit base - 80% of the deposits as of the year-end. Kyrgyz financial institutions launched a number of new products and introduced quality improvement measures to augment the existing product portfolios. The combined loan volume reported by Kyrgyz banks increased by 29% and totalled 9.2 billion soms as of January 1, 2006.

The reported year is marked by the active capitalization of Kyrgyz banks with the composite shareholders equity reported by the nation’s financial institutions increasing by 30.8% from past year.

In 2005, virtually every bank in Kyrgyzstan closed its fiscal year with a significant increase in net profit. The combined net income reported by Kyrgyz banks totalled 591.2 millions soms (a 39.2% increase from past year).

One of the major issues, challenging the further development of the Kyrgyz banking system is the historical prevalence of cash-based settlements between the individuals and the legal entities operating in the Kyrgyz Republic. The greatest share of the legal entities’ payments is either executed as cash-based settlements or incoming transfers to the bank accounts at the date of payments.

The flow of foreign direct investments into the country’s financial sector has been slower than previously estimated. The Kyrgyz Republic has not ratified the Hague Apostille Convention, which greatly complicates the procedure of establishing accounts for non-residents, as well as their day-to-day commercial activities.

The demand for international banking services, such as trade finance and documentary services is rapidly growing. Therefore, Kazakh and Russian banks are actively entering the Kyrgyz financial services market. However, many banking products, which are readily available worldwide, remain either unavailable or not demanded on the domestic market.

In 2004-2005, Kyrgyzstan hosted the Bishkek International Banking Conferences, which was lead-sponsored by AUB. The very fact that such a reputable event was organized in Kyrgyzstan serves as evidence of the consolidation and development of the Kyrgyz banking sector. The event served a great purpose for the integration of the Kyrgyz banking sector into the international financial community, as it afforded representatives from Kyrgyz financial institutions a unique chance to establish valuable contacts and be noticed by their colleagues from around the world.